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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| * ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-64641
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Philipp Brothers Chemicals, Inc.
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant computed by reference to the price at which such voting stock was
sold was $0 as of June 30, 2002.
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2002: 24,488.50
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
* By virtue of Section 15(d) of the Securities Act of 1934, the Registrant
is not required to file this Annual Report pursuant thereto, but has filed
all reports as if so required during the preceding 12 months.
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PHILIPP BROTHERS CHEMICALS, INC.
TABLE OF CONTENTS
Page
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PART I .................................................................... 1
Item 1. Business ................................................... 1
Item 2. Properties ................................................. 19
Item 3. Legal Proceedings .......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ........ 21
PART II ................................................................... 22
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 22
Item 6. Selected Financial Data .................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 24
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk ............................................. 35
Item 8. Financial Statements and Supplementary Data ................ 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 35
PART III .................................................................. 36
Item 10. Directors and Executive Officers of the Registrant ......... 36
Item 11. Executive Compensation ..................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management .......................................... 41
Item 13. Certain Relationships and Related Transactions ............. 41
Item 14. Internal Controls .......................................... 43
PART IV ................................................................... 44
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ..................................... 44
Index to Financial Statements ............................................. F-1
Report of Independent Accountants ......................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and 2001 ............ F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 2002, 2001 and 2000 ........... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2002, 2001 and 2000 .................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, 2001 and 2000 ...................................... F-6
Notes to Consolidated Financial Statements .......................... F-7
Consolidating Financial Statements
Consolidating Balance Sheet as of June 30, 2002 ..................... F-32
Consolidating Statement of Operations for the year ended
June 30, 2002 ..................................................... F-33
Consolidating Statement of Cash Flows for the year ended
June 30, 2002 ..................................................... F-34
Consolidating Balance Sheet as of June 30, 2001 ..................... F-35
Consolidating Statement of Operations for the year ended
June 30, 2001 ..................................................... F-36
Consolidating Statement of Cash Flows for the year ended
June 30, 2001 ..................................................... F-37
Consolidating Statement of Operations for the year ended
June 30, 2000 ..................................................... F-38
Consolidating Statement of Cash Flows for the year ended
June 30, 2000 ..................................................... F-39
SIGNATURES ................................................................ II-1
PART I
Item 1. Business.
General
Philipp Brothers Chemicals, Inc. ("Philipp Brothers" or the "Company") is
a leading diversified global manufacturer and marketer of a broad range of
specialty agricultural and industrial chemicals, which are sold world-wide for
use in numerous markets including animal health and nutrition, agricultural,
pharmaceutical, electronics, wood treatment, glass, construction and concrete.
The Company also provides recycling and hazardous waste services primarily to
the electronics and metal treatment industries. The Company believes it has
leading positions in certain of its end markets, and has global marketing and
manufacturing capabilities. Approximately 38% of the Company's fiscal 2002 net
sales were made outside the United States. Unless the context otherwise
requires, references in this Report to the "Company" refer to the Company and/or
one or more of its subsidiaries, as applicable.
The Company manufactures and markets more than 670 specialty agricultural
and industrial chemicals, of which 50 products accounted for approximately 83%
of fiscal 2002 net sales. The Company focuses on specialty agricultural and
industrial chemicals for which it has a strong market position or an advantage
in product development, manufacturing or distribution. Many of the Company's
products provide critical performance attributes to its customers' products,
while representing a relatively small percentage of total end-product costs.
The Company reported in its third quarter Form 10-Q that due to lower
levels of economic activity and increased global competition, the Company was in
a position where cash flows from operations and available borrowing arrangements
may not have provided sufficient working capital to operate existing businesses,
to make budgeted capital expenditures and to service interest and current
principal coming due on outstanding debt over the ensuing twelve month period.
As of June 30, 2002 the Company was not in compliance with certain covenants
under its senior credit facility and certain provisions of the Company's
Norwegian subsidiary's revolving credit facilities. To alleviate this situation,
the Company's management has undertaken actions to improve the Company's
operating performance and overall liquidity in order to reduce debt levels and
bring the Company into compliance with those agreements.
Subsequent to March 31, 2002, the Company made significant changes in
senior management as a new Chief Executive Officer, Chief Financial Officer and
President of Specialty Chemicals Division have been appointed. Actions taken by
this team to improve liquidity and address the agreements in default include:
negotiating an amended senior credit facility with amended covenants that are
based on the Company's 2003 operating plan, restructuring of bank debt at the
Company's Norwegian subsidiary, negotiations with Pfizer, Inc. for the deferral
and forbearance of certain contingent purchase price payments relating to the
acquisition of the Medicated Feed Additives business of Pfizer (see Note 3 of
the Notes to Consolidated Financial Statements included in this Report), the
shutdown of unprofitable operations, the announced intention to sell the
Company's Prince Manufacturing operations and a U.K. operation which
manufactures and sells chemical intermediates to the pharmaceutical industry,
further consideration on the sale of additional businesses and other assets, and
the implementation of working capital improvement programs. These efforts are
ongoing and will continue to be a primary focus of management during fiscal
2003. In the event of adverse operating results and resultant violation of
covenants during fiscal 2003, the Company can not be certain it will be able to
obtain waivers, provide sufficient working capital to operate existing
businesses, make budgeted capital expenditures and to service interest and
current principal coming due on outstanding debt.
In the fourth quarter of fiscal 2001, the Company sold its Agtrol business
to Nufarm, Inc. ("Nufarm"). Agtrol developed, manufactured and marketed crop
protection products, including copper fungicides. The sale included inventory
and intangible assets to Nufarm, but did not include the manufacturing
facilities.
On November 30, 2000, the Company purchased the Medicated Feed Additives
business of Pfizer, Inc. Operating results of this business, Phibro Animal
Health ("PAH"), are included in operating results from the date of acquisition
and are reflected in the Animal Health and Nutrition segment. PAH produces
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and sells a broad range of medicated feed additive products to the global
poultry and livestock industries, either directly to large integrated livestock
producers or through a network of independent distributors.
The Company has four operating segments--Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other.
The Company's Animal Health and Nutrition segment manufactures and markets
a broad range of feed additive products including antibacterials,
anticoccidials, vitamins, vitamin premixes, trace minerals and other animal
health products to the animal feed, poultry and pet food industries. The Company
distributes its products through major multinational life science and animal
health companies.
The Company's Industrial Chemicals segment manufactures and markets
pigments and other mineral products for use in the chemical, catalyst,
pharmaceutical, construction, concrete, wood treatment, automotive, aerospace,
glass and coal mining industries. Certain of these products are produced from
the Company's recycling operations, mainly copper chemicals. The Company
supplies mineral oxides, such as iron and manganese compounds, which are used as
colorants and for other purposes in the brick, masonry, glass and other
industries. The Company also manufactures and recycles alkaline etchants in the
United States and sells fresh etchant to printed circuit board manufacturers.
The Company's Distribution segment markets a variety of industrial,
specialty and fine organic chemicals and intermediates. Most of these products
are manufactured by third parties, with certain products being purchased from
affiliates.
The Company's All Other segment manufactures and markets a variety of
specialty custom chemicals, primarily for the polymer and pharmaceutical
industries. In addition, the Company provides management and recycling of coal
combustion residues, including fly ash and bottom ash, and also mineral
processing residues. Typically, these products are provided to customers
directly from a utility's site or through the Company's terminals.
ANIMAL HEALTH AND NUTRITION
Through its subsidiary, Phibro Animal Health, Inc., the Company
manufactures and markets a broad range of medicated feed additive products to
the global poultry and livestock industries, either directly to large integrated
producers or through a network of independent distributors. PAH products include
antibacterials, anticoccidials, anthelmintics and other feed additives.
The use of these medicated feed additives assists the producer in
maintaining healthy and productive animals to better ensure the consumer of a
safe, healthy and wholesome meat supply. Virginiamycin, an antibiotic marketed
under the Stafac(R), Eskalin(R) and V-Max(R) brand names, is used to prevent and
control diseases in poultry, swine and cattle, including necrotic enteritis in
poultry, dysentary in swine and liver abscesses in cattle. Antibacterials,
including Terramycin(R), and Neo-Terramycin(R) which are derived from the active
ingredient oxytetracycline, are effective against a range of diseases including:
fowl cholera in chickens; airsacculitis in turkeys; bacterial enteritus in
swine; and bacteria diarrhea and liver abscesses in cattle. Carbadox
antibacterial is sold under the brand name Mecadox(R) for use in swine feeds to
control salmonellosis and swine dysentery in young and growing swine.
Anticoccidial products are marketed under the Aviax(R), Coxistac(R) and
Posistac(R) brand names and are sold to integrated poultry producers and feed
companies. Banmith(R), Oxibendazole(R) and Rumatel(R) are anthelmintics that are
used to control internal parasites in cattle, sheep and goats.
PAH manufactures active ingredients at facilities located in Guarulhos,
Brazil and Rixensart, Belgium. Other active ingredients are supplied by Pfizer
to PAH under a transition supply agreement. Alternate sources of these products
have been identified and are being qualified. Also under a transition agreement,
for many markets, Pfizer is formulating these active ingredients into the lower
concentration products that are sold to feed mills and producers. PAH is in the
process of transferring these operations to alternate sites. This effort is
expected to be completed during 2002 and 2003.
2
PAH has established sales and technical offices in 15 countries including:
U.S., Canada, Mexico, Costa Rica, Venezuela, Brazil, Argentina, Chile,
Australia, Japan, China, Thailand, Malaysia, South Africa and Belgium.
Additional offices will be opened as the business grows. Sales in the U.S.,
Australia, Brazil, China, South East Asia and Mexico accounted for 80% of PAH's
global sales in fiscal 2002. The business is not dependent on any one customer.
The use of medicated feed additives is controlled by regulatory
authorities that are specific to each country (e.g., the Food and Drug
Administration ("FDA") in the U.S.; Health Canada in Canada, etc.). Each product
is registered separately. In most countries, these registrations have already
been transferred from Pfizer to the Company. The transfers are continuing in
several countries and under the PAH asset purchase agreement, Pfizer will
continue to support the registration transfer effort.
Currently, new product development at PAH is focused on geographical
expansion of the present product line, new label claims and applications for
existing active ingredients and new formulations. This effort is coordinated by
product development personnel located in Belgium, Brazil, and the U.S. PAH also
has an active program to identify and license new products and new technologies.
Through its subsidiary, Prince Agriproducts, Inc. ("Prince Agri"), the
Company manufactures and markets trace minerals, trace mineral and selenium
premixes and other ingredients to the animal and poultry feed and pet food
industries, predominantly in the United States. These products generally
fortify, enhance or make more nutritious or palatable the animal and poultry
feeds and pet foods with which they are mixed. The Company is a basic producer
of trace minerals for the U.S. animal feed industry. The majority of the other
ingredients the Company sells are nutrients that are used as supplement for
animal feed. The Company serves customers in major feed segments, including
swine, dairy, poultry and beef as well as pet food and aquaculture. The Company
customizes trace mineral and selenium premixes at its blending facilities in
Marion, Iowa, Bremen, Indiana and Bowmanstown, Pennsylvania, and markets a
diverse line of other trace minerals and macro-minerals. The Company's major
customers for these products are medium-to-large feed companies, co-ops,
blenders, integrated poultry operations and pet food companies. The Company
sells other ingredients, such as buffers, yeast, palatants, vitamin K and amino
acids, including lysine, tryptophan and threonine. The Company also markets
copper sulfate as an animal feed supplement.
The Company's Israeli subsidiary, Koffolk (1949) Ltd. ("Koffolk Israel"),
is a producer and distributor of vitamins and premixes for the animal feed and
poultry industries in Israel, and also sells such products worldwide. Koffolk
Israel also provides a wide range of services to the animal feed industry in
Israel including mobile computer units for on-the-spot feed information,
comprehensive feed laboratory services for both chemical and microbiological
assay, and an experimental farm for field testing of feed additives and animal
health products.
Koffolk Israel also produces fine chemicals and other intermediates used
in the manufacture of certain pharmaceuticals, cosmetics and films. Koffolk
Israel's plant in Ramat Hovav, Israel operates under the FDA's GMP regulations,
and has received FDA approval for some of its processes and production
operations.
Through Koffolk Israel and its Brazilian subsidiary, Planalquimica
Industrial Ltda. ("Planalquimica"), the Company produces nicarbazin. Through
Koffolk Israel, the Company also produces amprolium for distribution to the
world-wide poultry industry through major multinational life science and
veterinary companies. The Company believes it is the sole world-wide producer of
amprolium, and the largest volume world-wide producer of nicarbazin through its
facilities in Israel and Brazil. The Company is the sole Latin American producer
of nicarbazin. Modern, large scale poultry production is based on intensive
animal management practices. This type of animal production requires routine
prophylactic medications in order to prevent health problems. Coccidiosis is one
of the critical disease challenges which poultry producers face globally.
Coccidiosis is an infection of coccidia, a microscopic parasite which routinely
infects chickens. Nicarbazin and amprolium are among the most effective
medications for the prevention of coccidiosis in chickens when used in rotation
with other coccidiostats. In the United States, PAH markets nicarbazin under the
trademark Nicarb(R) and amprolium under the trademark of Amprol(R).
3
INDUSTRIAL CHEMICALS
The Company manufactures and markets a number of inorganic and organic
specialty chemicals for use in the chemical catalyst, construction, printed
circuit board, semiconductor, automotive, aerospace, glass and agricultural
industries. Some of these products are produced from raw materials derived from
the Company's recycling operations. The Company also purchases copper metal and
crude ores and processes these in various grades to produce chemicals and
industrial minerals for sale to manufacturers. These manufacturers incorporate
the resultant products into their finished products in various industrial
markets.
Through its U.S. subsidiaries comprising The Prince Manufacturing Group
("Prince"), the Company manufactures and markets various mineral oxides,
including iron compounds and manganese compounds. Iron compounds include red
iron oxide (Hematite) (sold to the brick, masonry, glass, foundry, electrode,
abrasive, feed, and other chemical industries); black iron oxide (Magnetite)
(sold under the Magna Float brand name to the heavy media, coal, steel foundry,
electrode, abrasive, colorant, fertilizer, and various other chemical
industries); iron chromite (sold under the Chromox brand as a colorant or
additive to the glass industry). Manganese compounds include manganese dioxide
(sold under the Brickox brand name, which is considered a standard color in many
applications to the brick, masonry, glass, and other chemical industries); and
manganous oxide (sold to customers requiring an acid soluble form of manganese,
such as animal feed, fertilizer and chemical manufacturers).
Through Phibro-Tech, the Company manufactures and recycles alkaline
etchants in the United States. The Company's four active facilities involved
with these products have RCRA Part B hazardous waste treatment and storage
permits (See "Environmental Matters"). The Company's etchants are used to remove
copper from printed circuit boards, leaving the desired circuit pattern. The
Company sells fresh etchant to printed circuit board manufacturers and recycles
spent etchants. Phibro-Tech generates revenue from the sale of fresh etchants as
well as the recovery of the dissolved copper contained in the spent etchants,
which are processed into saleable copper-based products. The Company believes
that it is the only national recycler of spent etchants generated principally
from the printed circuit board industry, with an etchant plant in every major
geographic area except New England. These plants generally allow the Company to
distribute product and transport spent etchant, a freight intensive product
which is classified as hazardous waste, over relatively short distances.
Beginning in early fiscal 2001, and continuing to the present, the U.S. printed
circuit board industry has incurred a severe reduction in volume, with a
resulting reduction in the Company's sales volumes in this market.
Phibro-Tech also manufactures and sells the following major products:
Copper Oxide. Copper oxide is used as an ingredient in the production of
water-borne wood preservatives. The Company also sells copper oxide to the
catalyst, dye, ceramic and feed industries.
Copper Sulfate. The Company sells multiple grades of copper sulfate. The
Company sells a high purity copper sulfate to worldwide producers of electroless
copper. Industrial uses of copper sulfate include the manufacturing of pigments,
electroplating, catalysts and chemical intermediates in water treatment. The
Company markets copper sulfate solution to the mining and wood treatment
industries. The Company sells copper sulfate to the animal feed industry,
primarily through Prince Agri. In addition, the Company also sells copper
sulfate SP, a super pure product to the semiconductor industry.
Copper Carbonate. Copper carbonate is used in certain wood treatment
compounds and water treatment applications. The Company produces copper
carbonate and believes that it is the largest producer in the world today.
Phibro-Tech is a leading recycler in the United States of hazardous
chemical waste streams that contain copper or nickel. Four of its facilities are
permitted to handle hazardous waste. These waste streams are generated
principally by printed circuit board manufacturers and metal finishers. The
metal finishing and printed circuit board industries also generate other spent
chemicals, which are raw material sources of acid, copper and nickel, and the
Company charges fees for processing such materials based on metal content. The
Company also recycles a variety of other metal-containing chemical waste,
including spent catalysts, pickling solutions and metal strippers containing
brass, cobalt, copper, nickel, iron, tin and zinc,
4
in liquid, solid or slurry form. The Company also uses these recovered materials
to produce copper and nickel chemicals for use as raw materials in certain of
its products.
The Company recycles and processes metal-containing hazardous chemical
waste streams using hydrometallurgical technology. This technology involves the
reclamation of various metals and the production of finished chemical products
using chemical reactions such as leaching, extraction and precipitation. The
Company determines the precise chemical process required to treat each batch of
hazardous waste based on the type and amount of the waste as well as the
proportion of useful raw materials it contains.
Through its Norwegian subsidiary, Odda Smelteverk AS ("Odda"), which it
acquired in October 1998 together with certain related distribution business
assets, the Company manufactured and distributed dicyandiamide and calcium
carbide. Dicyandiamide is used in several applications, including as a fire
retardant for fiber, wood and paint, for producing epoxy laminates for circuit
boards and adhesives, for producing paper chemicals, and as a dye fixative for
textiles. The principal uses of calcium carbide are in the production of
acetylene for welding and cutting, as a desulphurization agent in the steel and
foundry industry, and in the manufacture of chemicals. In the fourth quarter of
fiscal 2002, Odda ceased manufacturing calcium carbide. In the first quarter of
fiscal 2003, Odda reduced production of dicyandiamide pending market acceptance
of its calcium oxide, a by-product of the manufacturing process.
Odda also manufactured and distributed hydrogen cyanimide ("CY-50"). In
the fourth quarter of fiscal 2002, the Company ceased manufacturing CY-50.
DISTRIBUTION
The Company's PhibroChem division markets and distributes fine and
specialty chemicals to manufacturers of health and personal care products. Among
the Company's major products for such applications are sodium fluoride and
stannous fluoride, DL Panthenol and selenium disulfide. Sodium fluoride is the
active anti-cavity ingredient in fluoride toothpaste, powders and mouthwashes.
Selenium disulfide is used as a dandricide in shampoo and hair care
preparations.
Through its U.K. subsidiary, Ferro Metal & Chemical Ltd. ("Ferro"), the
Company markets dicyandiamides and calcium carbides. Ferro also markets fine and
specialty chemicals to customers in the steel, gas production, chemical
intermediates, health and personal care industries.
ALL OTHER
Through its subsidiary, Mineral Resource Technologies, Inc. ("MRT"), the
Company manages combustion and mineral by-products. MRT provides management and
recycling of coal combustion residues, including fly ash and bottom ash, and
also mineral processing residues. Fly ash is the fine residual product and
bottom ash is the heavier particles that result from the combustion of coal in
the electric power industry. Fly ash is a pozzolan; that is, a mixture that, in
the presence of water, combines with an activator, such as portland cement, to
produce a cement-like material. This allows fly ash to be used as a less
expensive substitute for other cementious materials, primarily portland cement.
MRT typically provides these products to its customers directly from a utility's
site or through its own terminals.
In connection with its fly ash management operations, MRT has entered into
long-term sales and distribution agreements with utilities providing for minimum
payments and/or purchase obligations by MRT of varying durations. Certain of
these contracts also require MRT to construct (at its expense) facilities to
store and/or process ash. MRT's ability to achieve long-term revenue growth and
profitability is dependent upon securing additional long-term ash management
contracts with utilities and developing fly ash processing facilities.
Consistent with industry practice, in connection with its long-term contracts,
the Company has furnished and expects to furnish performance bonds or guarantees
to such utilities.
Through an English subsidiary, the Company develops and markets a wide
range of halogenated organic compounds, mainly brominated and fluorinated. These
chemical intermediates are sold primarily into the pharmaceutical industry as
building blocks for further synthesis. The Company is able to tailor the
5
quality and supply characteristics of these chemicals to those desired by its
customers by close coordination with the customer at an early stage in the
customer's product development. In certain cases the product supplied is novel
and included in the customer's regulatory submissions.
In the fourth quarter of fiscal 2001, the Company sold its Agtrol business
to Nufarm, Inc. ("Nufarm"). Agtrol developed, manufactured and marketed crop
protection products, including copper fungicides. The sale included inventory
and intangible assets to Nufarm, but did not include the manufacturing
facilities. The Company, through its Phibro-Tech subsidiary, also entered into
agreements to supply copper fungicide products to Nufarm from its Sumter, South
Carolina plant for five years, and from its Bordeaux, France plant for three
years.
Nufarm is obligated, during the terms of the agreements, to purchase all
of its requirements for products and substitute products, up to the capacity of
the facilities. The product price will be the Company's full standard cost plus
margin, as defined in the agreements. The agreements provide for minimum
payments to the Company during each contract year equal to 70% of base volume
multiplied by the product price.
Sales, Marketing And Distribution
The Company sells a broad range of specialty agricultural and industrial
chemicals for use in numerous markets including animal health and nutrition,
agricultural, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company has approximately 3,800 customers. Sales to the top
ten customers represented approximately 15% of the Company's fiscal 2002 net
sales and no single customer represented more than 4% of the Company's fiscal
2002 net sales.
The Company's world-wide sales and marketing network consists of
approximately 163 employees, 26 independent agents and 117 distributors who
specialize in particular markets.
The Company's products are often critical to the performance of its
customers' products while representing a relatively small percentage of the
total end-product cost. Management believes the three key factors to marketing
its products successfully are high quality products, a highly trained and
technical sales force, and customer service.
Raw Materials
The raw materials used in the Company's business consist chiefly of copper
metal and a wide variety of organic intermediates and inorganic chemicals that
are purchased from manufacturers in the United States, Europe and Asia. In
fiscal 2002, no single raw material accounted for more than 3% of the Company's
cost of goods sold. Total raw materials cost was approximately $166 million or
42% of net sales in fiscal 2002.
The Company believes that for most of its raw materials alternate sources
of supply are available to the Company at competitive prices. In addition, the
Company's ability to recycle hazardous waste streams allows the Company to
recover certain metals and other raw materials that it substitutes in its
products for virgin materials, thereby reducing the Company's cost of goods and
its reliance on suppliers of certain virgin materials.
Research and Development
Research, development and technical service efforts are conducted by 170
chemists and technicians at the various facilities of the Company. The Company
operates a Research and Development Center in Sumter, South Carolina, relating
to inorganic chemicals and crop protection products, and at Stradishall,
England, relating to organic chemical intermediates. In addition, Koffolk Israel
conducts research and development at its Ramat Hovav facility. The Company also
conducts research and development at its MRT Technology center in Atlanta, GA
for concrete and cement products. PAH's Rixensart, Belgium facility provides a
base for fermentation development in the areas of micro-biological strain
improvement as well as process scale-up. Most of the Company's plants have
chemists and technicians on staff involved in product development, quality
assurance, quality control and also providing technical services to customers.
Technical assurance is an important aspect of the Company's overall sales
effort.
6
Technology is an important component of the Company's competitive
position, providing the Company with a low cost position and enabling the
Company to produce high quality products. Patents protect some of the Company's
technology, but a great deal of the Company's competitive advantage revolves
around know-how built up over many years of commercial operation.
The Company entered into a research and development joint venture
agreement with IMI (TAMI) Institute for R&D Ltd. ("IMI") to develop custom made
specialty fine chemicals. As part of the agreement, the parties have also
entered into an agreement with the Israel-U.S. Binational Industrial Research
and Development ("BIRD") Foundation, whereby development costs, subject to a cap
of $1.7 million, are reimbursed 50%. On commercialization of developed products,
royalties will be due to BIRD based on achieved sales levels. Should
commercialization not occur, receipts from BIRD need not be returned.
The Company and its predecessors have over 25 years experience in the use
of hydrometallurgical technology for recycling metal-containing by-products and
a strong technological position in the production of metal-containing chemicals.
Patents, Trademarks and Product Registrations
The Company owns certain patents, tradenames, trademarks and product
registrations, and uses know-how, trade secrets, formulae and manufacturing
techniques which assist in maintaining the competitive positions of certain of
its products. Product registrations are required to manufacture and sell
medicated feed additives. Formulae and know-how are of particular importance in
the manufacture of a number of the products sold in the Company's specialty
chemical business. The Company believes that no single patent, trademark or
product registration is of material importance to its business and, accordingly,
that the expiration or termination thereof would not materially affect its
business. See "Government Regulation".
Customers
The Company does not consider its business to be dependent on a single
customer or a few customers, and the loss of any of its customers would not have
a material adverse effect on the Company's results. No single customer accounted
for more than 4% of the Company's fiscal 2002 net sales. The Company typically
does not enter into long-term contracts with its customers. However, the Company
has entered into certain long-term contracts with respect to nicarbazin and
amprolium, as well as its ferric chloride recycling, copper MEA carbonate and
fly ash management activities.
Competition
The Company is engaged in highly competitive industries and, with respect
to all of its major products, faces competition from a substantial number of
global and regional competitors. Some of the companies with which the Company
competes have greater financial, research and development, production and other
resources than the Company. The Company's competitive position is based
principally on customer service and support, product quality, manufacturing
technology, facility location and price. The Company has competitors in every
market in which it participates. Many of the Company's products face competition
from products that may be used as an alternative or substitute.
Employees
As of June 30, 2002, the Company had approximately 1,423 employees
worldwide. Of these, 267 employees were in management and administration, 163 in
sales and marketing, 170 were chemists or technicians, and 823 were in
production. Approximately 8% of the Company's domestic employees were covered by
collective bargaining agreements with two unions. These agreements expire in
2005 and 2006. Certain employees are covered by individual employment
agreements. Koffolk Israel continues to operate under the terms of Israel's
national collective bargaining agreement, portions of which expired in 1994. In
Norway, approximately 74% of employees are covered by collective bargaining
agreements.
The Company considers its relations with both its union and non-union
employees to be good.
7
Environmental Matters
Like similar companies, the Company and its subsidiaries are subject to a
wide variety of complex and stringent federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials and wastes, the manufacture, sale and use of pesticides and
the health and safety of employees. Pursuant to environmental laws, subsidiaries
of the Company are required to obtain and retain numerous governmental permits
and approvals to conduct various aspects of their operations, any of which may
be subject to revocation, modification or denial under certain circumstances.
Under certain circumstances, the Company or any of its subsidiaries might be
required to curtail operations until a particular problem is remedied. Known
costs and expenses under environmental laws incidental to ongoing operations are
generally included within operating budgets. Potential costs and expenses may
also be incurred in connection with the repair or upgrade of facilities to meet
existing or new requirements under environmental laws or to investigate or
remediate potential or actual contamination and from time to time the Company
establishes reserves for such contemplated investigation and remediation costs.
In many instances, the ultimate costs under environmental laws and the time
period during which such costs are likely to be incurred are difficult to
predict.
Subsidiaries of the Company have, from time to time, implemented
procedures at their facilities designed to respond to obligations to comply with
environmental laws. The Company believes that its operations are currently in
material compliance with such environmental laws, although at various sites the
Company's subsidiaries are engaged in continuing investigation and/or
remediation efforts to address contamination associated with their historic
operations. As many environmental laws impose a strict liability standard,
however, there can be no assurance that future environmental liability will not
arise.
In addition, the Company cannot predict the extent to which any future
environmental laws may affect any market for the Company's products or services
or its costs of doing business. For instance, if governmental enforcement
efforts should lessen, the market for Phibro-Tech's recycling services could
decline. Alternatively, changes in environmental laws might increase the cost of
the Company's products and services by imposing additional requirements on the
Company. States that have received authorization to administer their own
hazardous waste management programs may also amend their applicable statutes or
regulations, and may impose requirements which are stricter than those imposed
by the U.S. Environmental Protection Agency (the "EPA"). No assurance can be
provided that such changes will not adversely affect the Company's ability to
provide products and services at competitive prices and thereby reduce the
market for the Company's products and services.
As such, the nature of the current and former operations of the Company
and its subsidiaries exposes them to the risk of claims with respect to such
matters and there can be no assurance that material costs and liabilities will
not be incurred in connection with such claims. Based upon its experience to
date, the Company believes that the future cost of compliance with existing
environmental laws, and liability for known environmental claims pursuant to
such environmental laws, will not have a material adverse effect on the Company.
However, future events, such as new information, changes in existing
environmental laws or their interpretation, and more vigorous enforcement
policies of regulatory agencies, may give rise to additional expenditures or
liabilities that could be material. For all purposes of the discussion under
this caption, under "Legal Proceedings" and elsewhere in this Report, it should
be noted that the Company takes and has taken the position that neither the
parent company, Philipp Brothers Chemicals, Inc., nor any of its subsidiaries is
liable for environmental or other claims made against one or more of its other
subsidiaries or for which any of such other subsidiaries may ultimately be
responsible. Accordingly, references to the Company should not be read or
interpreted as a statement or admission that Philipp Brothers or any of its
subsidiaries is liable for activities of or claims made against any of its other
subsidiaries.
Federal Regulation
The following summarizes the principal federal environmental laws
affecting the business of the Company:
8
Resource Conservation and Recovery Act of 1976, as amended ("RCRA").
Congress enacted RCRA to regulate, among other things, the generation,
transportation, treatment, storage and disposal of solid and hazardous wastes.
RCRA required the EPA to promulgate regulations governing the management of
hazardous wastes, and to allow individual states to administer and enforce their
own hazardous waste management programs as long as such programs were equivalent
to and no less stringent than the federal program.
The EPA's regulations, and most state regulations in authorized states,
establish categories of regulated entities and set standards and procedures
those entities must follow in their handling of hazardous wastes. The three
general categories of waste handlers governed by the regulations are hazardous
waste generators, hazardous waste transporters, and owners and operators of
hazardous waste treatment, storage and/or disposal facilities. Generators are
required, among other things, to obtain identification numbers and to arrange
for the proper treatment and/or disposal of their wastes by licensed or
permitted operators and all three categories of waste handlers are required to
utilize a document tracking system to maintain records of their activities.
Transporters must obtain permits, transport hazardous waste only to properly
permitted treatment, storage or disposal facilities, and maintain required
records of their activities. Treatment, storage and disposal facilities are
subject to extensive regulations concerning their location, design and
construction, as well as the operating methods, techniques and practices they
may use. Such facilities are also required to demonstrate their financial
responsibility with respect to compliance with RCRA, including closure and
post-closure requirements.
The Federal Water Pollution Control Act, as amended (the "Clean Water
Act"). The Clean Water Act prohibits the discharge of pollutants to the waters
of the United States without governmental authorization. Like RCRA, the Clean
Water Act provides that states with programs approved by the EPA may administer
and enforce their own water pollution control programs. Pursuant to the mandate
of the Clean Water Act, the EPA has promulgated "pre-treatment" regulations,
which establish standards and limitations for the introduction of pollutants
into publicly-owned treatment works.
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws,
the Company and its subsidiaries may have strict and, under certain
circumstances, joint and several liability for the investigation and remediation
of environmental pollution and natural resource damages associated with real
property currently and formerly-owned or operated by the Company or a subsidiary
and at third-party sites at which the Company's subsidiaries disposed of or
treated, or arranged for the disposal of or treatment of, hazardous substances.
Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA").
FIFRA governs the manufacture, sale and use of pesticides, including the
copper-based fungicides sold by the Company. FIFRA requires such products and
the facilities at which they are formulated to be registered with the EPA before
they may be sold. If the product in question is generic in nature (i.e.,
chemically identical or substantially similar to a previously registered
product), the new applicant for registration is entitled to cite and rely on the
test data supporting the original registrant's product in lieu of submitting
data of its own. Should the generic applicant choose this citation option, it
must offer monetary compensation to the original registrant and must agree to
binding arbitration if the parties are unable to agree on the terms and amount
of compensation. The Company has elected this citation option in the past and
intends to use the citation option in the future should it conclude it is, in
some instances, economically desirable to do so. While there are cost savings
associated with the opportunity to avoid one's own testing and demonstration to
the EPA of test data, there is, in each instance, a risk that the level of
compensation ultimately required to be paid to the original registrant will be
substantial.
Under FIFRA, the EPA also has the right to "call in" additional data from
existing registrants of a pesticide, should the EPA determine, for example, that
the data already in the file need to be updated or that a specific issue or
concern needs to be addressed. The existing registrants have the option of
submitting data separately or by joint agreement. Alternatively, if one
registrant agrees to generate and submit the data, the other(s) may meet their
obligations under the statute by making a statutory offer to jointly develop or
9
share in the costs of developing the data. In that event, the offering party
must, again, agree to binding arbitration to resolve any dispute as to the terms
of the data development arrangement.
The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and
Amendments to the Clean Air Act ("Clean Air Act Amendments"), and corresponding
state laws regulate the emissions of materials into the air.
Such laws affect the coal industry both directly and indirectly and,
therefore, MRT. The coal industry is directly affected by the Clean Air Act
permitting requirements and/or emissions control requirements relating to
particulate matter (such as "fugitive dust"), and may also be impacted by future
regulation of fine particulate matter. Every five years, the EPA reviews and
revises, if necessary, its National Ambient Air Quality Standards ("NAAQS"),
which is a set of national air quality standards relating to fine particulate
matter and ozone, among other criteria air pollutants. In July 1997, the EPA
adopted stringent new NAAQS, and the impact of such new standards on the coal
industry will depend on the policies and control strategies associated with the
state implementation process under the Clean Air Act, as well as on pending
legislative proposals to delay or eliminate aspects of the new NAAQS.
The Clean Air Act indirectly affects operations of the Company and its
subsidiaries by extensively regulating the air emissions of sulfur dioxides and
other compounds emitted by coal-fired utility power plants. Title IV of the
Clean Air Act Amendments places limits on sulfur dioxide emissions from electric
power generation plants, setting baseline emission standards for such
facilities. The effect of the Clean Air Act Amendments on MRT cannot be
completely ascertained at this time.
The Clean Air Act Amendments also require utilities that currently are
major sources of nitrogen oxides in moderate or higher ozone NAAQS nonattainment
areas to install reasonably available control technology for nitrogen oxides,
which are precursors to the atmospheric formation of ozone. In October 1998, the
EPA released a ruling (the "NOx SIP Call") requiring 22 eastern states to revise
their state implementation plans to substantially reduce emissions of nitrogen
oxide. The EPA expects that states will achieve these reductions by requiring
power plants to make substantial reductions in their nitrogen oxide emissions.
Installation of reasonably available control technology and additional control
measures required under the NOx SIP Call will make it more costly to operate
coal-fired utility power plants and, depending on the requirements of individual
state implementation plans and the development of revised new source performance
standards, could make coal a less attractive fuel alternative in the planning
and building of utility power plants in the future. Numerous states,
municipalities, industry trade groups, manufacturers and utilities have filed
petitions in federal court challenging the NOx SIP Call. The effect of the NOx
SIP Call and other regulations or requirements that may be imposed in the future
on the coal industry in general and on MRT in particular cannot be predicted
with certainty. No assurance can be given that the implementation of the Clean
Air Act Amendments, state implementation plans or any future regulatory
provisions will not materially adversely affect MRT.
In addition, the Clean Air Act Amendments require a study of utility power
plant emissions of certain toxic substances, including mercury, and direct the
EPA to regulate these substances, if warranted. Future federal or state
regulatory or legislative activity may seek to reduce mercury emissions and such
requirements, if enacted, could result in reduced use of coal if utilities
switch to other sources of fuel.
Phibro-Tech is also impacted by the Clean Air Act and has various air
quality permits, including a Title V operating air permit at its Sumter, South
Carolina facility.
State and Local Regulation
In addition to those federal programs described above, a number of states
and some local governments have also enacted laws and regulations similar to the
federal laws described above governing hazardous waste generation, handling and
disposal, emissions to the water and air and the design, operation and
maintenance of recycling facilities.
10
Foreign Regulation
The Company's foreign subsidiaries are subject to a variety of foreign
environmental laws relating to pollution and protection of the environment,
including the generation, handling, storage, management, transportation,
treatment and disposal of solid and hazardous materials and wastes, the
manufacture and processing of pesticides and animal feed additives, emissions to
the air, discharges to land, surface water and subsurface water, human exposure
to hazardous and toxic materials and the remediation of environmental pollution
relating to their past and present properties and operations.
Regulation of Recycling Activities
The Company's recycling activities may be broken down into the following
segments for purposes of regulation under RCRA or equivalent state programs: (i)
transport of wastes to the Company's facilities; (ii) storage of wastes prior to
processing; (iii) treatment and/or recycling of wastes; and (iv) corrective
action at its RCRA facilities. Although all aspects of the treatment and
recycling of waste at its recycling facilities are not currently the subject of
federal RCRA regulation, subsidiaries of the Company made decisions to permit
its recycling facilities as RCRA regulated facilities. Final RCRA "Part B"
permits to operate as hazardous waste treatment and storage facilities have been
issued at its facilities in Santa Fe Springs, California; Garland, Texas;
Joliet, Illinois; Sumter, South Carolina; and Sewaren, New Jersey. Part B
renewal applications have been submitted for the Santa Fe Springs, Garland and
Sumter sites. The applications are being reviewed.
In connection with RCRA Part B permits for the waste storage and treatment
units of various facilities, the Company's subsidiaries have been required to
perform extensive site investigations at such facilities to identify possible
contamination and to provide regulatory authorities with plans and schedules for
remediation. Soil and groundwater contamination has been identified at several
plant sites and has required and will continue to require corrective action and
monitoring over future years. In order to maintain compliance with RCRA Part B
permits, which are subject to suspension, revocation, modification or denial
under certain circumstances, the Company has been, and in the future may be,
required to undertake additional capital improvements or corrective action.
Subsidiaries of the Company are required by the RCRA and their Part B
permits to develop and incorporate in their Part B permits estimates of the cost
of closure and post-closure monitoring for their operating facilities. In
general, in order to close a facility which has been the subject of a RCRA Part
B permit, a RCRA Part B closure permit is required which approves the
investigation, remediation and monitoring closure plan, and requires
post-closure monitoring and maintenance for up to 30 years. Accordingly,
additional costs are incurred in connection with any such closure. These cost
estimates are updated annually for inflation, developments in available
technology and corrective actions already undertaken. The Company has, in most
instances, chosen to provide the regulatory guarantees required in connection
with these matters by means of its coverage under an environmental impairment
liability insurance policy. There can be no assurance that such policy will
continue to be available in the future at economically acceptable rates, in
which event other methods of financial assurance will be necessary.
In addition to certain operating facilities, the Company or its
subsidiaries have been and will be required to investigate and remediate certain
environmental contamination at shutdown plant sites. The Company or its
subsidiaries are also required to monitor such sites and continue to develop
controls to manage these sites within the requirements of RCRA corrective action
programs.
Based upon available information, accruals for management estimates of the
cost of further environmental investigation and remediation at operating,
curtailed and closed sites are approximately $2.6 million as of June 30, 2002.
Waste Byproducts
In connection with the Company's subsidiaries' production of finished
chemical products, limited quantities of waste by-products are generated.
Depending on the composition of the by-product, the subsidiaries of the Company
either sell it, send it to smelters for metal recovery or send it for treatment
or disposal to regulated facilities.
11
Particular Facilities
The following is a description of certain environmental matters relating
to certain facilities of certain subsidiaries of the Company. References
throughout to the Company are intended to refer only to the applicable
subsidiary unless the context otherwise requires. These matters should be read
in conjunction with the description of litigation matters below under Item 3,
certain of which involve such facilities, and Note 13 to the Company's
Consolidated Financial Statements.
In 1984, Congress enacted certain amendments to RCRA under which
facilities with RCRA permits were required to have RCRA facility assessments
("RFA") by the EPA or the authorized state agency. Following an RFA, a RCRA
facility investigation, a corrective measures study, and corrective measure
implementation must, if warranted, be developed and implemented. As indicated
below, the Company's subsidiaries are in the process of developing or completing
various actions associated with these regulatory phases at certain of their
facilities.
Sewaren, New Jersey. In April 1989, the New Jersey Department of
Environmental Protection, Division of Waste Management and Division of Water
Resources (collectively the "DEP"), issued an Administrative Order and Notice of
Civil Administrative Penalty Assessment against C.P. Chemicals, Inc. ("CP"), a
subsidiary of the Company, relating to CP's recycling and manufacturing facility
in Sewaren, New Jersey. This proceeding resulted in an Administrative Consent
Order (the "ACO") mandating the development and implementation of an
environmental remediation plan. CP has substantially completed its investigation
and remediation efforts which included installation of a hydraulic control
system and pre-treatment of ground water on the site and capping to address soil
contamination concerns and satisfy storm water management requirements. Such
efforts remain subject to continuing review by the DEP.
In 1998, operations at the Sewaren facility were curtailed. In June 2000,
CP transferred title to the Sewaren property to the local township. At the same
time, CP entered into a 10-year lease with the township, providing for lease
payments aggregating $2,000,000, and covering certain areas of the property, in
order to allow it to conduct operations relating to its RCRA Part B Facility
Permit. While the township took title to the property and assumed basic property
related obligations, including the operation and maintenance of the ground water
control system called for by the ACO, the Company retained other environmental
obligations under the ACO and also entered into an indemnification agreement
with the township regarding environmental conditions existing at the time of the
transfer.
Sumter, South Carolina. In 1991, in connection with the RCRA Part B permit
for its Sumter, South Carolina facility, Phibro-Tech undertook the closure of
certain waste water treatment impoundments pursuant to RCRA closure requirements
and installed a waste water treatment system at the plant and is engaged in an
additional phase of facility investigation at the site. Phibro-Tech has
completed remedial action to remove material from an area used by a former owner
of the site. The South Carolina Department of Health and Environmental Control
("SCDHEC") has requested additional sampling in this area. Separately,
Phibro-Tech and certain adjacent land owners have entered into a consent
agreement to conduct an environmental investigation regarding certain property
located next to the Sumter facility, including a small portion of the Sumter
facility property, which has been identified as containing debris, and to remove
such debris. An engineering firm has been hired to investigate the situation and
to make recommendations. Phibro-Tech has also received certain notices of
violations from SCDHEC alleging certain permit violations. Phibro-Tech does not
believe that these claims are material and fully expects these claims to be
resolved in a mutually acceptable manner.
Santa Fe Springs, California. In connection with its request for renewal
of its RCRA Part B permit for its Santa Fe Springs, California facility, and the
administrative order noted below for this facility, Phibro-Tech has implemented
various phases of environmental investigation and corrective measure study and
assessments. It is currently in a continuing investigation and corrective
measure phase, which will involve additional sampling to determine the level of
corrective action. At this time, it is anticipated that this will involve a pump
and treat system through an existing on-site pre-treatment plant. Phibro-Tech is
also subject to an investigative and enforcement order, the ultimate scope and
disposition of which is currently being discussed with the California Department
of Toxic Substances Control ("DTSC"). The principal outstanding issue under the
order was the requirement of further soil investigation and the development of a
12
remediation plan, if necessary, beyond that already covered by the facility
investigation originally conducted. The study has been completed and
Phibro-Tech's consulting environmental engineers have recommended to DTSC no
further action in this regard. Separately, Phibro-Tech has reached an accord
with Communities for a Better Environment regarding allegations that Phibro-Tech
violated Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of
1985, and the California Health and Safety Code.
Phibro-Tech has also received a summary of violations from the DTSC for
its Santa Fe Springs facility alleging certain permit violations as well as
violations of the California Health and Safety Code and corresponding
regulations. Phibro-Tech is in contact with the DTSC with regard to these
claims, in an attempt to determine whether they can be resolved through a
mutually acceptable compliance schedule.
Union City, California. Phibro-Tech's Union City, California facility has
been shut down and a closure plan has been submitted to the California DTSC. It
is presently under review.
Joliet, Illinois. In connection with the RCRA Part B permit for this
facility, Phibro-Tech completed an initial RCRA facility investigation and an
additional sampling and investigative phase. The results of such sampling and
investigation were submitted to the Illinois Environmental Protection Agency
and, based on the agency's response, Phibro-Tech will develop a plan for further
investigation or monitoring, or, if necessary, corrective action.
Garland, Texas. In connection with the RFA for its Garland, Texas
facility, no action was recommended. However, during a subsequent inspection
some discoloration of soil was noted. Accordingly, Phibro-Tech developed a
corrective action plan to address discolored top soil at the site. The project
included the upgrading of pollution control equipment. The next phase is
additional site characterization, which is presently being undertaken. A renewal
application for the Part B permit has been submitted to the Texas authorities.
It is presently under review.
Powder Springs, Georgia. Phibro-Tech's facility in Powder Springs, Georgia
has been operationally closed since 1985. Phibro-Tech retains environmental
compliance responsibility for this facility and has effected a RCRA closure of
the regulated portion of the facility, a surface impoundment. Post-closure
monitoring and the implementation of a corrective measures plan are required.
Phibro-Tech has submitted and received Georgia Department of Environmental
Protection approval for a remedial investigation plan, and has granted
Phibro-Tech's Part B permit renewal application. The permit calls for a Phase II
work plan for corrective action. Certain corrective action, primarily
groundwater treatment has begun.
Union, Illinois. Phibro-Tech's facility in Union, Illinois has also been
operationally closed since 1986. Phibro-Tech has performed additional soil
sampling and submitted a closure plan to the Illinois EPA, which is under
review.
Rixensart, Belgium and Guarulhos, Sao Paulo, Brazil. In connection with
the acquisition of the medicated feed additives business from Pfizer, Inc., the
Company acquired manufacturing and laboratory facilities in Rixensart, Belgium
and Guarulhos, Sao Paulo, Brazil. Both of these facilities operate pursuant to
the environmental and related laws of their respective countries as well as, in
the case of Rixensart, the EU. The Company is not aware of any material
environmental liabilities in connection with these sites and further believes
that indemnification agreements from Pfizer, Inc. are adequate to protect the
Company in the event of discovery of covered environmental liabilities at the
respective sites.
Third Party Sites. The Company has, and certain of the Company's
subsidiaries have, sent products to customers at chemical processing or
manufacturing sites and sent wastes from their operations to various third party
waste disposal sites. In addition to the litigation described in Item 3 - Legal
Proceedings with respect to the Jericho, South Carolina site and the Casmalia,
California site, from time to time the Company or a subsidiary receives notice
from representatives of governmental agencies and private parties, or is named
as a potentially responsible party in legal proceedings, in which claims are
made that it is potentially liable for a portion of the investigation and
remediation costs and natural resource damages at such third party sites. Such
claims are for strict liability and carry with them the possibility of joint and
several liability under applicable Environmental Laws such as CERCLA, regardless
of the relative fault or level of involvement of the Company and other
potentially responsible parties. Although there can be no assurance, the Company
does not believe that liabilities in connection with such third party sites as
to which claims
13
have been received to date will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Ramat Hovav, Israel. Koffolk Israel's Ramat Hovav plant produces a wide
range of organic chemical intermediates for the chemical, pharmaceutical,
fragrance and veterinary industries. Israeli legislation enacted in 1997 amended
certain environmental laws by authorizing the relevant administrative and
regulatory agencies to impose certain sanctions, including issuing an order
against any person that violates such environmental laws to remove the
environmental hazard. In addition, such law imposes criminal liability on the
officers and directors of a corporation that violates such environmental related
laws, and increases the monetary sanctions that such officers, directors and
corporations may be ordered to pay as a result of such violations. The Ramat
Hovav plant operates under the supervision of the Ministry of Environment of the
State of Israel. The sewage system of the plant is connected to the Ramat Hovav
Local Industrial Council's central installation, where Koffolk Israel's sewage
is treated together with sewage of other local plants. Owners of the plants in
the area, including Koffolk Israel, have been required by the Israeli Ministry
of Environment to build facilities for pre-treatment of their sewage.
Odda, Norway. Like other Norwegian companies, Odda has to ensure that the
activities of the enterprise are planned, organized, performed and maintained in
conformity with requirements laid down in or pursuant to Norwegian health,
environmental and safety legislation. Norwegian law requires the person
responsible for an enterprise to ensure compliance with the requirements of,
among other laws, the Working Environment Act, the Pollution Control Act, the
Products Control Act, the Civil Defense Act and the Electrical Installations and
Electrical Equipment Act.
The applicable supervisory authority pursuant to such legislation is
responsible for supervising and providing guidance on implementation of and
compliance with such regulations. The supervisory authorities can respond to
violations of health, environmental and safety legislation with various
sanctions, including orders, fines, pollution charges and/or notification to the
police.
Norwegian legislation requires that Odda produce its products according to
its discharge permit and implementation system for environmental control and
improvements. Both local and central authorities have focused on the
environmental situation in the fjord at Odda and on waste disposal there by the
three primary manufacturers in the area, including Odda. In Odda's case, the
focus has been on the reduction of discharge of polynucleated aromatic
hydrocarbons ("PAHY") from the Venturi scrubber in the calcium carbide plant and
the nitrogen content in the filtercake (1%) discharge from the dicyandiamide
plant. In June 2002, the Company ceased manufacturing calcium carbide and,
therefore, the discharge of PAHY.
Government Regulation
Most Animal Health and Nutrition Group products offered by the Company
require licensing by a governmental agency before marketing. In the United
States, governmental oversight of animal nutrition and health products is shared
primarily by the United States Department of Agriculture ("USDA") and the Food
and Drug Administration. A third agency, the Environmental Protection Agency,
has jurisdiction over certain products applied topically to animals or to
premises to control external parasites.
The issue of the potential for increased bacterial resistance to certain
antibiotics used in certain food producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotics in these food producing animals. The sale
of feed additives containing antibiotics is a material portion of the Company's
business. Should regulatory or other developments result in restrictions on the
sale of such products, it could have a material adverse impact on the Company's
financial position, results of operations and cash flows.
The FDA is responsible for the safety and wholesomeness of the human food
supply. It regulates foods intended for human consumption and, through The
Center for Veterinary Medicine, regulates the manufacture and distribution of
animal drugs, including feed additives and drugs that will be given to animals
from which human foods are derived, as well as feed additives and drugs for pet
(or companion) animals.
14
To protect the food and drug supply for animals, the FDA develops
technical standards for animal drug safety and effectiveness and evaluates data
bases necessary to support approvals of veterinary drugs. The USDA monitors the
food supply for animal drug residues.
The Office of New Animal Drug Evaluation ("NADE") is responsible for
reviewing information submitted by drug sponsors who wish to obtain approval to
manufacture and sell animal drugs. A new animal drug is deemed unsafe unless
there is an approved new animal drug application ("NADA"). Virtually all animal
drugs are "new animal drugs" within the meaning of the term in the Federal Food,
Drug, and Cosmetic Act. Although the procedure for licensing products by the
USDA are formalized, the acceptance standards of performance for any product are
agreed upon between the manufacturer and the NADE. A NADA in animal health is
analogous to a New Drug Application ("NDA") in human pharmaceuticals. Both are
administered by the FDA. The drug development process for human therapeutics can
be more involved than that for animal drugs. However, for food-producing
animals, food safety residue levels are an issue, making the approval process
longer than for animal drugs for non-food producing animals, such as pets.
The FDA may deny a NADA if applicable regulatory criteria are not
satisfied, require additional testing or information, or require postmarketing
testing and surveillance to monitor the safety or efficacy of a product. There
can be no assurances that FDA approval of any NADA will be granted on a timely
basis or at all. Moreover, if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for NADA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to GMP regulations. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to ensure compliance.
For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing
investigation, clinical trials and marketing approval for animal drugs. The
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above. Currently, in the European Union ("EU"), feed
additives which are successfully sponsored by a manufacturer are assigned to an
Annex. Initially, they are assigned to Annex II. During this period, member
states may approve the feed additive for local use. After five years or earlier,
the product passes to Annex I if no adverse reactions or trends develop over the
probationary period.
The Company currently markets nicarbazin in the EU. Nicarbazin holds an
Annex I registration. This means that the compound must be registered in each of
the member states and can be used legally by customers in the EU. Any
manufacturer, including generic producers, is permitted to sell nicarbazin in
the EU on the basis of a Certificate of Analysis. The distributor selling the
product warrants that it contains what is indicated on the label. The
registration may not be transferred in a manner similar to an FDA registration.
The originator of the registration, however, retains certain rights. For one,
the originator or a successor to the rights of the originator may refer to the
data file of the originator and any predecessors when making a submission.
The EU is in the process of centralizing the regulatory process for animal
drugs for member states. In 1997, the EU drafted new regulations requiring the
re-registration of feed additives, including coccidiostats. Part of these
regulations include a provision for manufacturers to submit quality data for
their own formulation, in effect adopting a Product License procedure similar to
that of the FDA. The provision is known as Brand Specific Approval ("BSA"), and
provides manufacturers with the opportunity to register their own unique brands,
instead of simply the generic compound. The BSA process is being implemented
over time. The new system is more like the U.S. system, where regulatory
approval is for the formulated product or "brand." A number of manufacturers,
including the Company, have completed dossiers in order to re-register various
anticoccidials for the purpose of obtaining regulatory approval from the
European Commission. As a result of its review of said dossiers, the Commission
withdrew marketing authorization of a number of anticoccidials, including
nicarbazin, as the Commission did not consider the submissions to be in full
compliance with its new regulations. The Company has subsequently completed the
necessary
15
data and resubmitted its nicarbazin dossier. Feasibility and timetable for new
registration will depend on the nature of demands and remarks from the
Commission.
The Company estimates that the loss of sales of nicarbazin as a result of
the ban in the EU will be partially compensated by increased sales of other
anticoccidials containing nicarbazin which had received a BSA and are not
subject to the ban.
16
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that
could affect the Company's Israeli subsidiary, Koffolk Israel. As of June 30,
2002 and for the year then ended, Israeli operations (excluding Koffolk Israel's
non-Israeli subsidiaries) accounted for approximately 13% of the Company's
consolidated assets and approximately 14% of its consolidated net sales. The
Company is, therefore, directly affected by the political, military and economic
conditions in Israel.
Political and Military Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with certain Arab countries and the Palestinian Authority,
since October 2000 there has been a significant increase in violence and
terrorist activity in Israel. During the last year the state of hostility has
increased in intensity. In April 2002, and from time to time thereafter, Israel
undertook military operations in several Palestinian cities and towns. The
Company cannot predict whether the current violence and unrest will continue and
to what extent it will have an adverse impact on Israel's economic development
or on Koffolk Israel's or the Company's results of operations. The Company also
cannot predict, particularly considering the current tensions between the United
States and Iraq, whether or not any further hostilities will erupt in Israel and
the Middle East and to what extent such hostilities, if they do occur, will have
an adverse impact on Israel's economic development or on Koffolk Israel's or the
Company's results of operations.
Certain countries, companies and organizations continue to participate in
a boycott of Israeli firms and other companies doing business in Israel or with
Israel companies. The Company does not believe that the boycott has had a
material adverse effect on the Company, but there can be no assurance that
restrictive laws, policies or practices directed toward Israel or Israeli
businesses will not have an adverse impact on the operation or expansion of the
Company's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 54 are, unless exempt, obligated to perform certain military duty
annually. Additionally, all such residents are subject to being called to active
duty at any time under emergency circumstances and since July 2001 some
reservists have been called to active duty. Some of the employees of Koffolk
Israel currently are obligated to perform annual reserve duty. While Koffolk
Israel has operated effectively under these and similar requirements in the
past, no assessment can be made of the full impact of such requirements on
Koffolk Israel and the Company in the future, particularly if emergency
circumstances occur and employees of Koffolk Israel are called to active duty.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and security incidents. Further disruptions to the Israeli economy as a result
of these or other factors could have a material adverse affect on Koffolk
Israel's and the Company's results of operations.
Koffolk Israel receives a portion of its revenues in U.S. dollars while
its expenses are principally payable in New Israeli Shekels. An increase in the
rate of inflation in Israel without a devaluation of the New Israeli Shekel,
could have an adverse effect on Koffolk Israel's results of operations.
17
Investment Incentives
Certain of the Israeli production facilities of the Company have been
granted Approved Enterprise status pursuant to the Law for the Encouragement of
Capital Investments, 1959, and consequently may enjoy certain tax benefits and
investment grants. Taxable income of Koffolk Israel derived from these
production facilities is subject to a lower rate of company tax than the normal
rate applicable in Israel. Dividends distributed by Koffolk Israel out of the
same income are subject to lower rates of withholding tax than the rate normally
applicable to dividends distributed by an Israeli company to a non-resident
corporate shareholder. The grant available to newly Approved Enterprises was
decreased throughout recent years. Certain of the Israeli production facilities
of the Company further enjoyed accelerated depreciation under regulation
extended from time to time and other deductions. There can be no assurance that
the Company will, in the future, be eligible for or receive such or similar
grants.
18
Item 2. Properties.
The Company maintains its principal executive offices and a sales office
in Fort Lee, New Jersey. The Company has 21 company-owned manufacturing
facilities and utilizes third party toll manufacturers. The chart below sets
forth the locations and sizes of the principal manufacturing and other
facilities operated by the Company and uses of such facilities for
non-manufacturing purposes, all of which are owned, except as noted.
Approximate
Location Square Footage Uses
-------- -------------- ----
Atlanta, Georgia (a) 34,000 All Other; Administrative, Sales, Research
and Distribution Center
Bowmanstown, Pennsylvania 56,500 Industrial Chemicals
Bordeaux, France 141,000 All Other; Administrative and Sales
Braganca Paulista, Brazil 35,000 Animal Health and Nutrition; Administrative and Sales
Bremen, Indiana 50,000 Animal Health and Nutrition; Warehouse
Fairfield, New Jersey (a) 9,600 Animal Health and Nutrition; Administrative
Fort Lee, New Jersey (a) 23,500 Corporate Headquarters
Garland, Texas 20,000 Industrial Chemicals
Guarulhos, Brazil 1,234,000 Animal Health and Nutrition; Administrative, Sales and
Warehouse
Joliet, Illinois 34,500 Industrial Chemicals
Kuala Lumpur, Malaysia (a) 7,300 Animal Health and Nutrition; Warehouse and Office
Ladora, Iowa 9,500 Animal Health and Nutrition; Warehouse
Lee Summit, Missouri (a) 1,500 Animal Health and Nutrition; Administrative and Sales
Marion, Iowa 32,500 Animal Health and Nutrition
Odda, Norway 364,000 Industrial Chemicals; Warehouse,
Administrative and Sales
Petach Tikva, Israel 60,000 Animal Health and Nutrition; Administrative and Sales
Phenix City, Alabama 6,000 Industrial Chemicals
Pretoria, South Africa (a) 3,200 Animal Health and Nutrition; Administrative and Sales
Quincy, Illinois (b) 187,000 Animal Health and Nutrition; Warehouse,
Administrative and Sales
Ramat Hovav, Israel (a) 140,000 Animal Health and Nutrition; Research
Reading, Berks, United Kingdom (a) 3,100 Distribution; Administrative and Sales
Rixensart, Belgium 865,000 Animal Health and Nutrition, Sales,
Administrative and Research
Santa Fe Springs, California (c) 90,000 Animal Health and Nutrition; Industrial Chemicals
Santiago, Chile (a) 6,500 Animal Health and Nutrition; Administrative and Sales
Scunthorpe, United Kingdom (a) 93,000 Industrial Chemicals; Warehouse
Stradishall, United Kingdom 20,000 Industrial Chemicals; Administrative,
Sales and Research
Sumter, South Carolina 123,000 Industrial Chemicals; Research
The Woodlands, Texas (a) 12,100 All Other; Administrative, Sales and Research
Tokyo, Japan (a) 2,100 Animal Health and Nutrition; Administrative and Sales
Valencia, Venezuela (a) 1,100 Animal Health and Nutrition; Administrative and Sales
Wilmington, Illinois 119,000 Industrial Chemicals; Warehouse
19
----------
(a) This facility is leased. The Company's leases expire through 2027. For
information concerning the Company's rental obligations, see Note 13 to
the Company's Consolidated Financial Statements included herein.
(b) Comprises six facilities, including three warehouses, two manufacturing
and one sales facility.
(c) The Company leases the land under this facility from a partnership owned
by Jack Bendheim, Marvin Sussman and James Herlands. See "Certain
Relationships and Related Transactions".
The Company's subsidiary, C.P. Chemicals, Inc., leases portions of a
previously owned inactive, former manufacturing facility in Sewaren, New Jersey,
and another subsidiary of the Company owns inactive, former manufacturing
facilities in Powder Springs, Georgia and Union, Illinois. MRT leases property
and operates terminal facilities in Atlanta, Georgia, South Beloit, Illinois,
Pittsburg, California and Corona, California, and operates loading and storage
facilities in Pryor, Oklahoma, Joppa, Illinois, St. John, Arizona, Gentry,
Arkansas, Labadie, Missouri, Rush Island, Missouri and Presque Isle, Michigan.
The Company believes that its existing and planned facilities are and will
be adequate for the conduct of its business as currently conducted and as
currently contemplated to be conducted.
The Company and its subsidiaries are subject to extensive regulation by
numerous governmental authorities, including the FDA and corresponding state and
foreign agencies, and to various domestic and foreign safety standards.
Manufacturing facilities of the Company in Ramat Hovav and Brazil manufacture
products that conform to the FDA's GMP regulations. Four domestic facilities
involved with recycling have final RCRA Part B hazardous waste storage and
treatment permits. The Company's regulatory compliance programs include plans to
achieve compliance with international quality standards known as ISO 9000
standards, which became mandatory in Europe in 1999 and environmental standards
known as ISO 14000. The FDA is in the process of adopting the ISO 9000 standards
as regulatory standards for the United States, and it is anticipated that these
standards will be phased in for U.S. manufacturers over a period of time. The
Company's plants in Bowmanstown, Pennsylvania and Petach Tikva, Israel have
achieved ISO 9000 certification. The Company does not believe that adoption of
the ISO 9000 standards by the FDA will have a material effect on its financial
condition, results of operations or cash flows.
Item 3. Legal Proceedings.
Reference is made to the discussion above under "Environmental Matters" in
Item 1 for information as to various environmental investigation and remediation
obligations of the Company's subsidiaries associated principally with their
recycling and production facilities and to certain legal proceedings associated
with such facilities.
In addition to such matters, the Company or certain of its subsidiaries is
subject to certain litigation described below.
On or about April 17, 1997, CP and the Company were served with a
complaint filed by Chevron USA, Inc. ("Chevron") in the United States District
Court for the District of New Jersey, alleging that operations of CP at its
Sewaren plant affected adjoining property owned by Chevron and that Philipp
Brothers, as the parent of CP, is also responsible to Chevron. In July 2002, a
phased settlement agreement was reached under which the Company and another
defendant will, subject to certain conditions, take title to the property,
subject to a period of due diligence investigation of the property. The
Company's portion of the settlement for past costs and expenses was $495,000 and
is included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income. The payable of $495,000 is
included in accrued expenses and other current liabilities as of June 30, 2002
and was subsequently paid in July 2002. The Company and the other defendant
will, if the sale becomes final, share equally in the costs of remediation.
While the costs cannot be estimated at this time, the Company believes the costs
will not be material and insurance recoveries will be available to offset some
of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under CERCLA by
the EPA, involving a former third-party fertilizer manufacturing site in
Jericho, South Carolina. An agreement has been reached under which the Company
has agreed to contribute up to $900,000 of which $500,000 has been paid as of
June 30, 2002.
20
Some recovery from insurance and other sources is expected. The Company has also
accrued its best estimate of any future costs.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposed of at a licensed Casmalia, California disposal site,
including a business, assets of which were originally acquired by a subsidiary
of the Company in 1984. A settlement has been reached in this matter and the
Company has paid $171,103 of the settlement amount.
The Company and its subsidiaries are party to a number of claims and
lawsuits arising out of the normal course of business including product
liabilities and governmental regulation. Certain of these actions seek damages
in various amounts. In most cases, such claims are covered by insurance. The
Company believes that none of the claims or pending lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended June 30, 2002.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information. There is no public trading market for the
Company's common equity securities.
(b) Holders. As of June 30, 2002, there was one holder of the Company's
Class A Common Stock and two holders of the Company's Class B Common Stock.
(c) Dividends. The Company did not declare dividends on any of its common
stock during the two years ended June 30, 2002.
Item 6. Selected Financial Data.
The following table sets forth summary consolidated financial data for the
Company for the past five years ended June 30, 2002. The summary consolidated
financial data for the five years are derived from the Company's audited
consolidated financial statements. The consolidated financial data set forth
below should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained herein.
SUMMARY OF CONSOLIDATED FINANCIAL DATA
Year Ended June 30,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Income Statement Data:
Net sales ........................................... $ 388,813 $ 364,410 $ 323,026 $ 302,057 $ 275,577
Net (loss) income before extraordinary items ........ (51,770) (14,895) 10,053 (466) (7,065)
Extraordinary items ................................. -- -- -- -- (1,962)
Net (loss) income ................................... (51,770) (14,895) 10,053 (466) (9,027)
Balance Sheet Data:
Total assets ........................................ $ 296,444 $ 330,019 $ 258,451 $ 238,779 $ 192,196
Debt ................................................ 187,027 173,331 150,772 140,103 104,296
Redeemable Preferred Stock .......................... 56,602 48,980 -- -- --
Notes to Summary Consolidated Financial Data:
----------
(a) Fiscal 2002 includes charges totaling $24.5 million related to accelerated
depreciation and restructuring costs associated with the shutdown of two
product lines of the Company's Odda subsidiary, and the fixed asset and
intangible writedowns related to the Company's Odda and Carbide Industries
subsidiaries' ongoing operations.
(b) Fiscal 2002 includes a charge of $12.2 million for an increased valuation
allowance for deferred tax assets recorded in previous years. In addition,
a full valuation allowance of $13.6 million was recorded for deferred tax
assets relating to fiscal year 2002 operating losses.
(c) Included in net sales is shipping and handling income of $7.2, $6.1, $5.4
and $4.8 million for the fiscal years ended June 30, 2002, 2001, 2000 and
1999, respectively. The amount for 1998 is not readily determinable and a
restatement has not been made.
(d) Results of operations include the PAH business from the November 30, 2000
date of acquisition.
(e) The Company sold its Agtrol crop protection business in the fourth quarter
of fiscal 2001 and recognized a pre-tax gain of $1.5 million.
(f) The Company issued redeemable preferred securities in connection with the
acquisition of the Pfizer medicated feed additives business in 2001.
(g) Fiscal 2001 and 1999 include $1.3 and $1.5 million charges, respectively,
related to the severance of senior executives.
(h) Fiscal 2000 includes a $13.7 million gain resulting from Odda's sale of
its minority equity interest in a local Norwegian hydroelectric power
company and related power rights.
(i) Fiscal 2000 includes $1.5 million of income resulting from the transfer of
title of property in Sewaren, New Jersey.
22
(j) Fiscal 2000 and 1999 includes $.9 million and $3.7 million, respectively,
of property damage insurance gains as a result of a fire at the
Bowmanstown, Pennsylvania facility.
(k) Fiscal 1998 includes a $10 million nonrecurring plant curtailment charge
and $5.6 million for the forgiveness of limited recourse notes receivable
from certain executives of the Company and payment for related income
taxes resulting from the cancellation.
(l) Debt is equal to loans payable to banks, long-term debt and current
portion of long-term debt.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This information should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto, contained in
this Report.
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of specialty agricultural and industrial chemicals, which are sold
world-wide for use in numerous markets, including animal health and nutrition,
agriculture, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company also provides recycling and hazardous waste services
primarily to the electronics and metal treatment industries. These operations
are classified into four segments--Animal Health and Nutrition, Industrial
Chemicals, Distribution and All Other.
During fiscal 2002, the Company reported a net loss of $51.8 million. This
was primarily due to: worsening economic conditions in both domestic and foreign
markets; acceleration of depreciation of $14.5 million related to the
discontinuance of production for certain products at the Odda, Norway facility;
writedown of long-lived assets of $6.8 million at the Odda and Carbide, U.K.
operations; restructuring charges of $3.2 million at the Odda facility; and
deferred income tax asset valuation allowances (based on evaluation of the
recoverability of prior period operating loss carryforwards and other deferred
tax assets) of $12.2 million.
On November 30, 2000, the Company purchased the medicated feed additives
business of Pfizer, Inc. ("Pfizer"). The operating results of this business, now
called Phibro Animal Health ("PAH"), are included in the Company's consolidated
statements of operations from the date of acquisition and are included in the
Animal Health and Nutrition segment.
In the fourth quarter of fiscal 2001, the Company sold its Agtrol business
to Nufarm, Inc. ("Nufarm"). Agtrol developed, manufactured and marketed crop
protection products, including copper fungicides. The sale included inventory
and intangible assets to Nufarm, but did not include the manufacturing
facilities. The Company, through its Phibro-Tech subsidiary, also entered into
agreements to supply copper fungicide products to Nufarm from its Sumter, South
Carolina plant for five years, and from its Bordeaux, France plant for three
years. The operating results of Agtrol are included in the Company's
consolidated statements of operations up to the date of disposition and are
included in the All Other segment.
During fiscal 2002, the Company elected to include warehousing and freight
costs in cost of sales. Such costs were previously included in selling, general
and administrative expenses. Prior periods have been reclassified to conform to
the current year presentation. See Note 1 of the Consolidated Financial
Statements.
Results of Operations
Sales
($000's)
Year Ended June 30,
-----------------------------------
Operating Segments: 2002 2001 2000
--------- --------- ---------
Animal Health and Nutrition .......... $ 243,436 $ 202,573 $ 135,088
Industrial Chemicals ................. 90,897 97,227 99,712
Distribution ......................... 36,880 44,452 49,254
All Other ............................ 39,407 46,979 69,198
Intersegment ......................... (21,807) (26,821) (30,226)
--------- --------- ---------
$ 388,813 $ 364,410 $ 323,026
========= ========= =========
24
Operating Income (Loss)
($000's)
Year Ended June 30,
-----------------------------------
Operating Segments: 2002 2001 2000
--------- --------- ---------
Animal Health and Nutrition .......... $ 28,298 $ 17,562 $ 11,539
Industrial Chemicals ................. (34,079) (3,350) 5,355
Distribution ......................... 1,391 3,936 3,817
All Other ............................ (2,678) (7,086) 4,045
Corporate expenses and adjustments ... (14,596) (10,086) (9,082)
--------- --------- ---------
$ (21,664) $ 976 $ 15,674
========= ========= =========
Comparison of Fiscal Year Ended June 30, 2002 to Fiscal Year Ended
June 30, 2001.
Net Sales. Net sales increased by $24.4 million, or 7%, to $388.8 million
in 2002, as compared to the prior year. The increase was primarily due to a full
year of operations of the PAH business in 2002 offset in part by the sale of the
Company's Agtrol operations in the fourth quarter of 2001.
The Animal Health and Nutrition segment's net sales increased by $40.9
million, or 20%, to $243.4 million in 2002, as compared to the prior year. The
net sales increase was due to increased unit volume primarily as a result of the
PAH purchase. Excluding PAH, sales for the segment in 2002 approximated the
prior year. The Company's domestic operations reported higher net sales of $6.2
million due to increased unit volume sales of vitamin, mineral and other pre-mix
products offset in part by lower average selling prices and other product mix
changes. The adverse business climate in Israel and the discontinuation of sales
of vitamin exports by the Company's Koffolk Israel operations lowered
international net sales by a comparable amount.
The Industrial Chemicals segment's net sales decreased by $6.3 million, or
7%, to $90.9 million in 2002, as compared to the prior year. Sales by the
Company's Phibro-Tech subsidiary declined by $6.0 million due to volume declines
in the recycling and sale of etchant related to the contraction of the U.S.
printed circuit board industry. Sales price declines at the Company's Prince
operations, partially offset by volume improvements of iron and manganese
oxides, decreased revenues by $1.0 million. Favorable exchange rates, offset in
part by lower unit volumes at the Company's Odda subsidiary, increased revenues
by $.7 million. Odda discontinued production and sale of the CY-50 and calcium
carbide product lines in the fourth quarter of 2002.
Net sales for the Distribution segment decreased by $7.6 million, or 17%,
to $36.9 million in 2002, as compared to the prior year. The net sales decrease
was primarily due to lower unit volumes of carbide, dicyandiamide and cyanide
products during the current year.
Net sales for the All Other segment decreased by $7.6 million, or 16%, to
$39.4 million in 2002, as compared to the prior year. This decrease is related
to lower sales of crop protection chemicals. The Company's Agtrol crop
protection business was sold during the fourth quarter of fiscal 2001 and sales
of certain crop protection chemicals are currently being made under supply
agreements to Nufarm. Excluding Agtrol, sales for the segment in 2002 were $4.0
million above the prior year. The Company's fly ash business increased by $2.7
million primarily due to improved average selling prices and also increased unit
volume as a result of additional contracts with utilities in Missouri and
Michigan. The remaining $1.3 million improvement in sales was due to an increase
in specialized lab projects and formulations at the segment's U.K. operations.
25
Gross Profit. Gross profit decreased by $6.8 million, or 9%, to $66.5
million in 2002, as compared to the prior year. Purchase accounting adjustments
relating to inventory acquired in the PAH acquisition resulted in an increase to
cost of goods sold of $3.2 million and $8.9 million for the years 2002 and 2001,
respectively. Excluding the results of PAH, gross profit declined by $29.6
million as compared to the prior year.
Gross profit in the Animal Health segment increased $21.4 million
principally as a result of a full year of operations of PAH in 2002. Excluding
the results of PAH, gross profit declined by $1.4 million due to the adverse
business climate in Israel, offset in part by improved performance of the
segment's domestic operations.
The Industrial Chemicals segment's gross profit declined by $22.7 million
as compared to the prior year primarily due to a charge of $14.5 million
recorded during fiscal 2002 for the acceleration of depreciation related to the
Company's decision to cease production of two products and a related $2.1
million restructuring charge (primarily inventory writedowns and production
personnel severance costs) at the Company's Odda facility. Excluding the charges
for acceleration of depreciation and restructuring, lower production volumes
reduced profits at the Company's Odda facility by $.7 million. Furthermore,
lower production volumes and environmental recovery services revenues at the
Company's Phibro-Tech facilities reduced gross profits by $5.4 million.
Gross profit in the Distribution segment declined $1.1 million as compared
to the prior year primarily as a result of lower unit volume.
All Other segment's gross profit declined by $4.0 million primarily due to
sales of crop protection products sold to Nufarm under a supply agreement in the
current year as opposed to higher margin sales to third parties in the prior
period of $2.5 million, unfavorable operating performance at the Company's fly
ash operations of $2.0 million offset in part by the impact on gross margin of
higher revenues at the segment's U.K. facility of $.5 million.
Elimination of inter-company profit in inventory accounted for the balance
of the decline in gross profit.
Selling, General and Administrative Expenses. Costs increased by $9.0
million to $81.3 million in 2002, as compared to the prior year. Costs increased
by $11.6 million over the prior period at PAH due to a full year of operations
versus seven months in 2001, increased staffing levels, and increased
advertising and research and development costs associated with the transition of
operations from Pfizer. In addition, a full year of management advisory fees to
Palladium Equity Partners, LLC ($.9 million), write-offs of unamortized permit
fees at closed facilities ($.7 million) and additional environmental remediation
reserves ($.9 million) increased 2002 expense. The prior period included an
accrual for severance costs ($1.3 million) associated with the termination of
employment of an executive of the Company. The 2001 divestiture of Agtrol
reduced costs by $8.0 million. In addition, the prior period included a $3.1
million non-cash gain to reflect the decrease in repurchase value of redeemable
common stock of a minority shareholder, as compared to the gain in the current
period of $.4 million. Other general spending accounted for the balance of the
increase ($1.5 million).
Asset writedown. During fiscal 2002, the Company recorded a charge of $6.8
million related to the impairment of long-lived assets at the Company's Odda,
Norway and Carbide, UK operations. (See Note 2 to the Consolidated Financial
Statements).
Operating Income (Loss). Operating income decreased by $22.6 million to an
operating loss of $21.7 million in 2002, as compared to the prior year. The
Animal Health and Nutrition segment increased primarily due to the inclusion of
PAH for the entire period offset by the adverse business climate in Israel.
Operating income declined in the Industrial Chemicals segment primarily due to
the accelerated depreciation, restructuring and long-lived asset impairment
charges at Odda. In addition, Odda also experienced lower sales and production
volumes. Reduced sales volumes from printed circuit board customers resulted in
a further decrease in the segment's operating income. The Distribution segment
was
26
below the prior year primarily due to sales volume declines and a charge for
intangible asset impairment at the Company's Carbide operations. The improvement
in operating income of the All Other segment is primarily the result of the sale
of Agtrol in 2001.
Interest Expense, Net. Costs increased by $.1 million to $17.8 million in
fiscal 2002 as compared to the prior year primarily due to debt incurred in
connection with the PAH acquisition and higher levels of average bank
borrowings, offset in part by lower interest rates.
Other (Income) Expense, Net. Other (income) expense, net principally
reflects foreign currency transaction gains and losses of the Company's foreign
subsidiaries. The Company also recorded a loss of $1.2 million on a power
purchase derivative instrument at its Odda facility. In addition, the Company
recognized a gain of $.7 million resulting from a settlement of a class action
against European vitamin manufacturers.
Gain from Sale of Assets. During 2001, a gain from sale of assets ($1.5
million) resulted from the Company's sale of its Agtrol crop protection
business, a division of the Company's Phibro-Tech, Inc. subsidiary, to Nufarm
Inc. In addition, the Company's Odda subsidiary sold real estate resulting in a
gain ($1.0 million).
Income Taxes. An income tax provision of $13.7 million was reported on a
consolidated pre-tax loss of $38.1 million in fiscal 2002 primarily due to
income tax provisions in profitable foreign jurisdictions and an increase of
$25.8 million in the valuation allowance related to net deferred tax assets of
domestic and Norwegian operations. The Company has incurred domestic losses in
recent years and a reassessment of the likelihood of recovering net domestic
deferred tax assets resulted in the recording of a full domestic valuation
allowance of $15.4 million, including $12.2 million related to prior year
deferred tax asset balances. In addition, through fiscal 2001, the Company's
Odda subsidiary had a net deferred tax liability. However, significant losses in
fiscal 2002 have resulted in a net deferred tax asset and a full valuation
allowance has been provided due to the uncertainty of future profitability of
this operation. The Company's position with respect to the recoverability of
these deferred tax assets will continue to be evaluated each reporting period
based on actual and expected operating performance.
Comparison of Fiscal Year Ended June 30, 2001 to Fiscal Year Ended
June 30, 2000.
Net Sales. Net sales increased by $41.4 million, or 13%, to $364.4 million
in 2001, as compared to the prior year. The increase was primarily due to the
purchase of the PAH business offset in part by the sale of the Company's Agtrol
operations.
The Animal Health and Nutrition segment's net sales increased by $67.5
million, or 50%, to $202.6 million in 2001, as compared to the prior year. The
net sales increase was due to increased unit volume primarily as a result of the
PAH purchase. Excluding PAH, sales for the segment in 2001 were slightly above
the prior year. Increased volumes contributed to an increase in sales, but were
offset by lower average sales prices, including the impact of foreign exchange
in 2001.
The Industrial Chemicals segment's net sales decreased by $2.5 million, or
2%, to $97.2 million in 2001, as compared to the prior year. Sales of
Phibro-Tech, excluding recycling fees, were down by $2.8 million due to volume
declines related to the printed circuit board industry. Lower sales of Odda's
carbide and dicyandiamide products also accounted for the decrease. These
decreases were offset in part by higher recycling fees ($2.4 million) due to
increased demand.
Net sales for the Distribution segment decreased by $4.8 million, or 10%,
to $44.5 million in 2001, as compared to the prior year. The net sales decrease
was due to lower average sales prices, including foreign exchange, offset in
part by higher unit volume. The Company experienced sharp declines in selling
prices for carbide, dicyandiamide and copper cyanide products during fiscal
2001.
27
Net sales for the All Other segment decreased by $22.2 million, or 32%, to
$47.0 million in 2001, as compared to the prior year. The net sales decrease was
due to lower unit volume primarily as a result of the sale of the Agtrol crop
protection business, which was sold during the fourth quarter of 2001. The crop
protection business is highly seasonal and most of the sales are normally in the
Company's fourth quarter. Excluding Agtrol, sales for the segment in 2001 were
slightly above the prior year. Unit volume of the Company's fly ash business
increased approximately 36% and was offset by lower average sales prices of 10%
due to product and customer mix in 2001 compared to the prior year. The fly ash
volume increase was the result of additional contracts with utilities in
Missouri and Michigan. During the fourth quarter, the Company began
commercialization of its cement business. Revenues at the segment's U.K.
facility decreased $2.4 million due to a decline in specialized lab projects and
formulations.
Gross Profit. Gross profit decreased by $.1 million, to $73.3 million in
2001. The increase was primarily due to the purchase of the PAH business offset
in part by the sale of the Company's Agtrol operations during their major
selling season. Purchase accounting adjustments relating to inventory resulted
in an increase to cost of goods sold of $8.9 million during fiscal 2001. Higher
costs for petroleum and metallurgical coke, which are used as raw materials at
Odda, adversely affected margins in the Industrial Chemical segment. In
addition, the declines in average selling prices described above further reduced
the Company's margin.
Selling, General and Administrative Expenses. Costs increased by $13.1
million to $72.3 million in 2001, as compared to the prior year. Excluding PAH,
costs were up approximately $.6 million principally due to management advisory
fees to Palladium ($1.3 million), severance costs ($1.3 million), higher
depreciation and amortization ($.5 million), and research and development
expenditures ($.7 million) offset by a reduction in the repurchase value of
redeemable common stock of a minority shareholder ($4.3 million). Other general
spending accounted for the balance of the increase.
Operating Income. Operating income decreased by $14.7 million to $1.0
million in 2001, as compared to the prior year. Operating income would have been
$8.9 million higher than reported if not for purchase accounting adjustments to
the sale of inventory acquired from Pfizer. Operating income declined in the
Industrial Chemicals segment primarily due to lower selling prices and volumes.
The Company's All Other segment declined due to the sale of Agtrol and decreases
in average selling prices offset in part by higher sales volumes of fly ash. The
Distribution segment approximated the prior year despite a reduction in sales
due to changes in product mix. The Animal Health and Nutrition segment increased
due to the inclusion of PAH for the period and higher unit volumes.
Interest Expense, Net. Costs increased by $3.6 million or 25.3% to $17.7
million in fiscal 2001 as compared to the prior year primarily due to debt
incurred in connection with the PAH acquisition and higher levels of average
bank borrowings.
Other Expense, Net. Other expense, net principally reflects foreign
currency transaction losses of the Company's foreign subsidiaries.
Gain from Sale of Assets. During 2001, a gain from sale of assets ($1.5
million) resulted from the Company's sale of its Agtrol crop protection
business, a division of the Company's Phibro-Tech, Inc. subsidiary, to Nufarm
Inc. In addition, the Company's Odda subsidiary sold real estate resulting in a
gain ($1.0 million).
Income Taxes. The effective tax rate differs from the U.S. statutory rate
due to the relationship of each domestic and international subsidiary's
individual income or loss position to the statutory tax rates in each country.
Valuation allowances ($1.0 million in fiscal 2001) have been provided against
deferred tax assets that are deemed by management as not likely of recovery in
future periods. The 2000 tax expense includes a provision related to the gain on
sale of assets at the Norwegian statutory rate of 28%.
28
Liquidity and Capital Resources
Net Cash Used In Operating Activities. Cash used in operations for the
year ended June 30, 2002 was $4.7 million. The increase in cash from the
collection of receivables from the Company's crop protection business was
partially offset by a planned increase in higher inventories at the PAH business
unit. This build up of inventories was considered necessary to ensure an
adequate availability of product as the Company continues to refine its supply
chain and expand into new markets.
Net Cash Used by Investing Activities. Net cash used in investing
activities for the year ended June 30, 2002 was $17.4 million. Capital
expenditures of $11.3 million were mostly for maintaining the Company's existing
asset base and for environmental, health and safety projects. The remainder of
the net cash used by investing activities primarily relates to contingent
purchase price payments from the PAH acquisition.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities totaled $13.7 million. Borrowings under the domestic revolving credit
agreement were partially offset by paydowns of debt at several of the Company's
international subsidiaries and a $2.5 million payment on long-term debt related
to the PAH acquisition.
Liquidity. As of June 30, 2002, the Company was not in compliance with the
financial covenants included in its senior credit facility ("credit agreement"
or "facility") with its lending banks, for which PNC Bank serves as agent. As a
result, the credit agreement was amended in October 2002 to: waive noncompliance
with financial covenants as of June 30, 2002; amend financial covenants
prospectively until maturity; amend the borrowing base formula and also reduce
maximum availability under the revolving credit portion of the facility from $70
million to $55 million; limit borrowings under the capital expenditure line of
the facility to the current outstanding balance of $5.8 million; and revise the
interest rate to 1.5% to 1.75% per annum over the base rate (as defined in the
agreement). Management believes that the reduced maximum availability and the
revised borrowing base formula under the revolving credit portion of the
facility will not adversely affect the Company's ability to meet its cash
requirements during fiscal 2003.
The Company's ability to fund its fiscal 2003 operating plan relies upon
continued availability of the credit agreement, which in turn, requires the
Company to maintain compliance with the amended financial covenants. The
financial covenants require certain ratios of consolidated interest coverage and
a minimum level of domestic cash flows (each, as defined in the agreement). The
Company believes it will be able to comply with the terms of the amended
covenants based on its forecasted operating plan for fiscal 2003. In the event
of adverse operating results and resultant violation of the covenants during
2003, the Company can not be certain it will be able to obtain such waivers or
amendments on favorable terms, if at all.
In addition, the Company's credit agreement and its note payable to Pfizer
(see Notes 3 and 7) mature in November 2003 and March 2004, respectively. The
Company's management has undertaken actions to improve the Company's operating
performance and overall liquidity in order to reduce debt levels and allow for
ultimate refinancing of this debt in fiscal 2004. These actions include cost
reduction activities, working capital improvement programs, shutdown of
unprofitable operations, and possible sale of certain business operations and
other assets. The Company has announced its intention to sell its Prince
Manufacturing operations, part of the Prince Manufacturing Group, and also a
U.K. operation which manufactures and sells chemical intermediates to the
pharmaceutical industry. These actions are ongoing and will continue to be
re-evaluated during fiscal 2003. In addition, the Company entered into an
agreement with Pfizer whereby Pfizer agreed to defer until March 1, 2004,
without interest, unpaid contingent purchase price amounts existing at May 31,
2002 and to waive contingent purchase price payments on future net revenues from
June 1, 2002 through March 1, 2004.
As a result of the partial shutdown of Odda's operations and
non-compliance with the financial covenants of its credit facilities, Odda has
entered into an agreement with its Norwegian banks to restructure these loans
and to obtain a waiver for the non-compliance. The agreement establishes a
periodic payment schedule through November 30, 2003 (see Note 7). Philipp
Brothers Chemicals, Inc. is the guarantor of this debt.
29
Working capital as of June 30, 2002 and 2001 was $50.5 million and $74.0
million, respectively. Due to the nature and terms of the revolving credit
agreement, which includes both a subjective acceleration clause and a
requirement to maintain a lockbox arrangement, all borrowings against this
facility are classified as a current liability. At June 30, 2002, the amount of
credit extended under this agreement totaled $38.0 million and the Company had
$4.5 million available under the borrowing base formula in effect under this
agreement. In addition, certain of the Company's foreign subsidiaries also had
availability under their respective credit facilities totaling $10.6 million.
Management's efforts to improve liquidity has resulted in a decrease in
borrowings under the revolving credit agreement to $28.8 million as of September
30, 2002.
The Company's contractual obligations (in millions) at June 30, 2002
mature as follows:
Years
----------------------------------------------------------------
Within 1 Over 1 to 3 Over 3 to 5 After 5 Total
-------- ----------- ----------- ------- -----
Loans payable to banks (1) ............. $ 3.5 $ 38.0 $ -- $ -- $ 41.5
Lease commitments ...................... 2.2 3.8 2.1 1.6 9.7
Long-term purchase commitments ......... 7.5 13.3 9.2 31.9 61.9
Long-term debt (including current
portion) ............................. 8.9 33.8 .9 101.9 145.5
------ ------ ------ ------ ------
Total contractual obligations ...... $ 22.1 $ 88.9 $ 12.2 $135.4 $258.6
====== ====== ====== ====== ======
(1) Includes $38.0 million outstanding under the Company's senior credit
facility which matures in November 2003 (see Note 7).
On November 30, 2000, the Company issued $25 million of redeemable Series
B preferred stock and $20 million of redeemable Series C preferred stock. Each
Series 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
(Liquidation Value). The Preferred C stock is entitled to the Liquidation Value
plus a percentage of the equity value of the Company, as defined in the amended
Certificate of Incorporation. The equity value is calculated as a multiple of
the earnings before interest, tax, depreciation and amortization of the Company
(Equity Value). The Company may, at the date of the annual closing anniversary,
redeem the Preferred B in whole or in part at the Liquidation Value, for cash,
provided that if the Preferred B stock is redeemed separately from the Preferred
C stock 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 the
holders of the shares. Redemption in part of the Preferred B shares is only
available if at least 50% of the outstanding Preferred B shares are redeemed. On
the third closing anniversary and on each closing anniversary thereafter, the
Company may redeem for cash only in whole the Preferred C shares, at the
Liquidation Value plus the Equity Value payment. At any time after the
redemption of the Company's Senior Subordinated Notes due 2008, the holders of
both series have the right to require the Company to redeem for cash all such
preferred shares outstanding.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure
guidance for "critical accounting policies". The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to
the Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, management of the Company is required to make certain
estimates and assumptions during the preparation of consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America. These estimates and assumptions impact the reported
amount of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements. Estimates
and assumptions are reviewed
30
periodically and the effects of revisions are reflected in the period they are
determined to be necessary. Actual results could differ from those estimates.
Following are some of the Company's critical accounting policies impacted by
judgments, assumptions and estimates.
Revenue Recognition
Revenues are recognized when title to products and risk of loss are
transferred to customers. Additional conditions for recognition of revenue are
that collection of sales proceeds is reasonably assured and the Company has no
further performance obligations. Net sales are comprised of total sales billed,
net of goods returned, trade discounts and customer allowances.
Litigation
The Company is subject to legal proceedings and claims arising out of the
normal course of business. The Company routinely assesses the likelihood of any
adverse judgments or outcomes to these matters as well as ranges of probable
losses. A determination of the amount of the reserves required for these
contingencies is based on an analysis of the various issues, historical
experience, other third party judgments and outside specialists, where required.
The required reserves may change in the future due to new developments in each
matter. For further discussion, see Note 13 to the Consolidated Financial
Statements.
Environmental Matters
The Company determines the costs of environmental remediation of its
facilities and formerly owned properties on the basis of current law and
existing technologies. Uncertainties exist in these evaluations primarily due to
unknown conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies. The liabilities are adjusted
periodically as remediation efforts progress or as additional information
becomes available. The Company has recorded liabilities of $2.6 million at June
30, 2002 for such activities.
Long Lived Assets
Long-lived assets, including plant and equipment, and other intangible
assets are reviewed for impairment when events or circumstances indicate that a
diminution in value may have occurred, based on a comparison of undiscounted
future cash flows to the carrying amount of the long-lived asset. If the
carrying amount exceeds undiscounted future cash flows, an impairment charge is
recorded based on the difference between the carrying amount of the asset and
its fair value.
The assessment of potential impairment for a particular asset or set of
assets requires certain judgments and estimates by the Company, including the
determination of an event indicating impairment; the future cash flows to be
generated by the asset, including the estimated life of the asset and likelihood
of alternative courses of action; the risk associated with those cash flows; and
the Company's cost of capital or discount rate to be utilized.
Useful Lives of Long-Lived Assets
Useful lives of long-lived assets, including plant and equipment and other
intangible assets are based on management's estimates of the periods that the
assets will be productively utilized in the revenue-generation process. Factors
that affect the determination of lives include prior experience with similar
assets and product life expectations and management's estimate of the period
that the assets will generate revenue.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
on a first-in, first-out (FIFO) and average methods for most inventories;
however certain subsidiaries of the Company use the last-in, first-out (LIFO)
method for valuing inventories. The determination of market value to compare to
cost involves assessment of numerous factors, including costs to dispose of
inventory and estimated selling prices. Reserves are recorded for inventory
determined to be damaged, obsolete, or otherwise unsaleable.
31
Income Taxes
Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets when appropriate to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation allowance,
certain judgments are made relating to recoverability of deferred tax assets,
use of tax loss carryforwards, level of expected future taxable income and
available tax planning strategies. These judgments are routinely reviewed by
management. At June 30, 2002, the Company had net deferred tax assets of $4.6
million, net of valuation allowances of $27.3 million. For further discussion,
see Note 12 to the Consolidated Financial Statements.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141") and No. 142, "Goodwill and Other Intangibles" ("SFAS No. 142"). SFAS No.
141 and No. 142 are effective for the Company on July 1, 2002. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill
and requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. SFAS No. 142 primarily addresses the accounting for goodwill
and intangible assets subsequent to their acquisition. The statement requires
that goodwill and indefinite lived intangible assets no longer be amortized and
be tested for impairment at least annually. The amortization period of
intangible assets with finite lives will no longer be limited to forty years.
The Company has no goodwill, but is currently assessing the useful lives of its
amortizable intangible assets.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 is effective for the Company on July
1, 2002. The statement establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. The Company is currently assessing the impact of this
statement.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 is effective for
the Company on July 1, 2002. The statement addresses significant issues relating
to the implementation of FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"), and the development of a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company is currently
assessing the impact of this statement.
In May 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS 13, and Technical Corrections" ("SFAS No. 145"). Under the
current rules, SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," requires that all gains and losses from the extinguishment of debt be
classified as extraordinary on the Company's consolidated statement of
operations, net of applicable taxes. SFAS No. 145 rescinds the automatic
classification as extraordinary and requires that the Company evaluate whether
the gains or losses qualify as extraordinary under Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 145 is effective for the Company on
July 1, 2002. The Company is currently assessing the impact of this statement.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred rather than
at the date of a commitment to an exit or disposal plan. Costs covered by SFAS
No. 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing
or
32
other exit or disposal activity. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
assessing the impact of this statement.
Seasonality of Business
Prior to the divestiture of the crop protection business, the Company's
sales were typically highest in the fourth fiscal quarter due to the seasonal
nature of the agricultural industry. With the sale of this business, as well as
the acquisition of the non-seasonal PAH business, the Company's sales are
expected to be less seasonal. However, some seasonality in the Company's results
will remain as sales of certain industrial chemicals to the wood treatment
industry as well as sales of coal fly ash are typically highest during the peak
construction periods of the first and fourth fiscal quarters.
Effect of Inflation; Foreign Currency Exchange Rates
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. The Company does not believe that inflation has had
any material effect on the Company's business over the last two years.
The Company's substantial foreign operations expose it to risk of exchange
rate fluctuations. Balance sheet accounts of the Company's foreign subsidiaries,
with the exception of the Brazilian and Israeli subsidiaries of Koffolk Israel,
are translated at current rates of exchange and income and expense items are
translated at the average exchange rate for the year. The resulting translation
adjustments are reflected as a separate component of stockholders' equity. The
Brazilian and Israeli subsidiaries of Koffolk Israel transact substantially all
of their business in U.S. dollars. Accordingly, the U.S. dollar is designated as
the functional currency of these operations and translation gains and losses are
included in net income.
Net exchange gains and losses resulting from the translation of foreign
financial statements and the effect of exchange rates on intercompany
transactions of a long-term investment nature are reflected as a separate
component of stockholders' equity. Translation (gains) and losses relating to
intercompany debt of a short-term investment nature are included in other
expense, net in the amounts of ($2.8) million, $2.7 million and $2.1 million in
the accompanying consolidated statements of operations for the years ended June
30, 2002, 2001 and 2000, respectively. Other foreign currency transaction gains
and losses are not material.
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 foreign
currency forward contracts as a means of hedging exposure to foreign currency
risks. The Company also utilizes, on a limited basis, certain commodity
derivatives, primarily on copper used in its manufacturing processes, to hedge
the cost of its anticipated purchase requirements. The Company does not utilize
derivative instruments for trading purposes. The Company does not hedge its
exposure to market risks in a manner that completely eliminates the effects of
changing market conditions on earnings, cash flows and fair values. The Company
monitors the financial stability and credit standing of its major
counterparties.
Interest Rate Risk
The Company uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined for
these purposes as the potential change in the fair value resulting from an
adverse movement in interest rates.
The Company's debt portfolio is comprised of fixed rate and variable rate
debt of approximately $187.0 million as of June 30, 2002. Approximately 33% of
the debt is variable and would be interest rate sensitive. For further details,
see Note 7, to the Consolidated Financial Statements of the Company appearing
elsewhere herein.
33
For the purposes of the sensitivity analysis, an immediate 10% change in
interest rates would not have a material impact on the Company's cash flows and
earnings over a one year period.
As of June 30, 2002, the fair value of the Company's senior subordinated
debt is estimated based on quoted market rates at $51.0 million and the related
carrying amount is $100 million.
Foreign Currency Exchange Rate Risk
A significant portion of the financial results of the Company is derived
from activities conducted outside the U.S. and denominated in currencies other
than the U.S. dollar. Because the financial results of the Company are reported
in U.S. dollars, they are affected by changes in the value of the various
foreign currencies in relation to the U.S. dollar. Exchange rate risks are
reduced, however, by the diversity of the Company's foreign operations and the
fact that international activities are not concentrated in any single non-U.S.
currency. Short-term exposures to changing foreign currency exchange rates are
primarily due to operating cash flows denominated in foreign currencies. The
Company covers known and anticipated operating exposures by using purchased
foreign currency exchange option and forward contracts. The primary currencies
for which the Company has foreign currency exchange rate exposure are the Euro
and Japanese yen.
The Company uses sensitivity analysis to assess the market risk associated
with its foreign currency transactions. Market risk is defined for these
purposes as the potential change in fair value resulting from an adverse
movement in foreign currency exchange rates. The fair value associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date. At June 30, 2002, the fair market value was equal to the carrying amount
due to the Company's adoption of SFAS 133 at July 1, 2000 which requires that
all derivatives be recorded on the balance sheet at fair value. Based on the
limited amount of foreign currency contracts at June 30, 2002, the Company does
not believe that an instantaneous 10% adverse movement in foreign currency rates
from their levels at June 30, 2002, with all other variables held constant,
would have a material effect on the Company's results of operations, financial
position or cash flows.
Other
The Company obtains third party letters of credit and surety bonds in
connection with certain inventory purchases and insurance obligations. At June
30, 2002, the contract values of these letters of credit and surety bonds were
$1.8 million and their fair values did not differ materially from their carrying
value.
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, 2002 would not be
material when compared to the Company's operating results and financial
position.
The Company's Odda subsidiary utilizes power supply swaps to mitigate
exposure to rate movements in local electric supply markets. Assuming a 10%
change in the underlying power price, the potential change in the fair value of
the power supply swaps held at June 30, 2002 would not be material when compared
to the Company's operating results and financial position.
The foregoing market risk discussion and the estimated amounts presented
are Forward-Looking Statements that assume certain market conditions. Actual
results in the future may differ materially from these projected results due to
developments in relevant financial markets and commodity markets. The methods
used above to assess risk should not be considered projections of expected
future events or results.
34
Certain Factors Affecting Future Operating Results
This Form 10-K 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; and the uncertain impact of the Company's divestiture plans. See also
the discussion under "Risks and Uncertainties" in Note 1 of the Notes to
Consolidated Financial Statements included in this Report.
In addition, the issue of the potential for increased bacterial resistance
to certain antibiotics used in certain food producing animals is the subject of
discussions on a worldwide basis and, in certain instances, has led to
government restrictions on the use of antibiotics in these food producing
animals. The sale of feed additives containing antibiotics is a material portion
of the Company's business. Should regulatory or other developments result in
further restrictions on the sale of such products, it could have a material
adverse impact on the Company's financial position, results of operations and
cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Information regarding quantitative and qualitative disclosures about
market risk is set forth in Item 7 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The financial statements are set forth commencing on page F-1 hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No response required.
35
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following sets forth the name, age, and position of the Company's
directors and executive officers:
Name Age Position
---- --- --------
Jack C. Bendheim 55 Director; Chairman of the Board
Gerald K. Carlson 59 Chief Executive Officer
Marvin S. Sussman 55 Director; Vice Chairman;
President, Animal Health Group
James O. Herlands 60 Director and Executive Vice President;
President, PhibroChem Group
Richard G. Johnson 53 Chief Financial Officer
Joseph M. Katzenstein 60 Treasurer and Secretary
Steven L. Cohen 58 Vice President, General Counsel and Assistant
Secretary
Peter A. Joseph 50 Director
Timothy P. Mayhew 34 Director
JACK C. BENDHEIM -- Director and Chairman of the Board. Mr. Bendheim was
President from 1988 to 2002. He was Chief Operating Officer from 1988 to 1998,
and was appointed Chief Executive Officer in 1998. He has been a director since
1984. Mr. Bendheim joined the Company in 1969 and served as Executive Vice
President and Treasurer from 1983 to 1988 and as Vice President and Treasurer
from 1975 to 1983. Mr. Bendheim is also a director of The Berkshire Bank in New
York, New York, and Empire Resources, Inc., a metals trading company in Fort
Lee, New Jersey.
GERALD K. CARLSON -- Chief Executive Officer. Mr. Carlson joined the
Company in May 2002 and has served as its Chief Executive Officer since then.
Prior to joining the Company, Mr. Carlson served as the Commissioner of Trade
and Development for the State of Minnesota from January 1999 to March 2001. Mr.
Carlson served as Senior Vice President - Corporate Planning and Development
from June 1996 to his retirement in October 1998 from Ecolab, Inc. During his
thirty-two year career at Ecolab, Mr. Carlson also served as Senior Vice
President of International as well as Senior Vice President and General Manager
- Institutional North America.
MARVIN S. SUSSMAN -- Director, Vice Chairman and President of the
Company's Animal Health Group. He has been a director since 1988 and was Chief
Operating Officer from 1998 to 2002. Mr. Sussman joined the Company in 1971.
Since then, he has served in various executive positions at the Company and at
the Prince Group. Mr. Sussman was President of the Company's Prince Group from
1988 to 2002. Mr. Sussman is the brother-in-law of Jack Bendheim.
JAMES O. HERLANDS -- Director and Executive Vice President, and President
of PhibroChem. Mr. Herlands joined the Company in 1964. Since then, he has
served in various capacities in sales/marketing and purchasing. He has been a
director since 1988. Since 1992, Mr. Herlands has been President of the
Company's PhibroChem Group. From 1988 to 1992, Mr. Herlands was Senior Vice
President of the Company. Mr. Herlands is the first cousin of Jack Bendheim.
RICHARD G. JOHNSON -- Chief Financial Officer. Mr. Johnson joined the
Company in September 2002 and has served as its Chief Financial Officer since
then. Prior to joining the Company, Mr. Johnson served as Vice President -
Planning and Control, Latin America for Ecolab, Inc. from 1992 to 1999. In
addition, Mr. Johnson served in various senior financial positions at Ecolab
over a fifteen year period.
36
JOSEPH M. KATZENSTEIN -- Treasurer and Secretary. Mr. Katzenstein joined
the Company in 1962. Since 1982, he has been Secretary and Treasurer of the
Company. Mr. Katzenstein served as corporate controller from 1966 to 1985.
STEVEN L. COHEN -- Vice President and General Counsel. Mr. Cohen joined
the Company in October 2000 and has served as its Vice President - Regulatory
and General Counsel since then. Prior to joining the Company, Mr. Cohen was,
from 1997 to 2000, General Counsel of Troy Corporation, a multi-national
chemical company. From 1994 to 1997, Mr. Cohen was in the private practice of
law.
PETER A. JOSEPH -- Director. Mr. Joseph has served as Director of the
Company since February 2001. From 1998 to present, he has been a member of
Palladium Equity Partners, LLC. From 1986 to 1997, Mr. Joseph was a general
partner of Joseph Littlejohn & Levy.
TIMOTHY P. MAYHEW -- Director. Mr. Mayhew has served as Director of the
Company since March 2002. Mr. Mayhew co-founded Palladium in 1997 and serves as
a member. Prior to forming Palladium, Mr. Mayhew was a principal of Joseph,
Littlejohn & Levy, which he joined in 1993.
Item 11. Executive Compensation.
The following table sets forth the cash compensation paid by the Company
and its subsidiaries for services during fiscal 2002, 2001, and 2000 to each of
the Company's most highly compensated executive officers:
Annual Compensation
------------------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation**
------------------ ---- ------ ----- ------------ --------------
Jack C. Bendheim .................... 2002 $1,500,000 $265,000 $ -- $6,000
Chairman 2001 $1,640,000 $600,000 $ -- $5,300
2000 $1,500,000 $ -- $ -- $5,362
Gerald K. Carlson*** ................ 2002 $ 49,350 $ -- $ -- $ --
Chief Executive Officer
Marvin S. Sussman* .................. 2002 $1,000,000 $ -- $ -- $6,000
Director and Vice Chairman; 2001 $ 733,500 $710,000 $ -- $5,300
President of Animal Health Group 2000 $ 467,000 $667,600 $ -- $5,362
James O. Herlands ................... 2002 $ 400,000 $150,000 $ -- $6,000
Executive Vice President; 2001 $ 395,000 $382,500 $ -- $5,300
President of Phibrochem 2000 $ 382,000 $252,500 $ -- $5,362
David C. Storbeck**** ............... 2002 $ 195,000 $ -- $ -- $2,690
Former Chief Financial Officer 2001 $ 88,625 $ -- $ -- $ --
Steven L. Cohen**** ................. 2002 $ 175,000 $ -- $ -- $1,650
Vice President & General Counsel 2001 $ 131,250 $ -- $ -- $ --
----------
* Pursuant to a Stockholders Agreement between Mr. Sussman and the Company,
the Company is required to purchase, at book value, all shares of the
Company's Class B Common Stock owned by Mr. Sussman in the event of his
retirement, death, disability or the termination of his employment by the
Company. Should Mr. Sussman elect to sell his shares, the Company has a
right of first offer and an option to purchase the shares. See "Certain
Relationships and Related Transactions." As a result, each year, the
Company is required to record as compensation to Mr. Sussman the change in
the book value of the Company attributable to Mr. Sussman's shares. For
2002, 2001 and 2000, the amount attributable to Mr. Sussman's shares was
($378,000), ($3,135,000) and $1,137,000, respectively. No distributions
have been made to Mr. Sussman under this agreement.
** Represents contributions by the Company under its 401(k) Retirement and
Savings Plan. See "Compensation Pursuant to Plans."
*** Salary is since date of employment for 2002.
**** Salary is since date of employment for 2001. Mr. Storbeck terminated
employment as an officer of the Company in September 2002.
37
In fiscal 2002, the Company granted no options to the named executive
officers and no options were held or exercised by any of the named executive
officers.
Employment and Severance Agreements
The Company entered into an employment agreement with Gerald K. Carlson in
May 2002, whereby Mr. Carlson will serve as the Company's Chief Executive
Officer. The agreement provides for a base salary of $500,000 during the first
year of its term. Mr. Carlson is eligible to receive an annual bonus of up to
150% of his base salary based on the Company's achievement of certain specified
EBITDA growth targets. If Mr. Carlson is terminated without Cause (as defined)
or he voluntarily terminates the agreement with Good Reason (as defined), he is
entitled to receive the accrued portion of the target annual bonus, as well as
an amount ranging from two to eight months of base salary depending on when such
termination occurs. If, within six months after a change of control (as
defined), Mr. Carlson is terminated without cause or he voluntarily terminates
the agreement with Good Reason, he will be entitled to receive a lump sum
payment equal to the amount of annual target bonus accrued to the date of
termination, plus 100% of base salary and 50% of annual target bonus. The
Company is obligated under the agreement to provide separate indemnification
insurance to Mr. Carlson in the amount of the current coverage provided to the
Company's current board of directors.
The Company entered into a severance agreement and release with David C.
Storbeck in September, 2002. Under the terms of the agreement, Mr. Storbeck is
entitled to receive $200,000 payable over a twelve-month period. In addition,
the Company entered into a three month consulting agreement with Mr. Storbeck at
the rate of $1,000 per day.
The Company entered into an employment agreement with Marvin S. Sussman in
December 1987. The term of employment is from year-to-year, unless terminated by
the Company at any time or by his death or permanent disability.
In 1995, James O. Herlands purchased stock in Phibro-Tech. In connection
therewith, the Company entered into a severance agreement with him. The
agreement provides that, upon his Actual or Constructive Termination or a Change
in Control Event (as such terms are defined), he is entitled to receive a cash
Severance Amount (as defined therein), based upon a multiple of Phibro-Tech's
pre-tax earnings (as defined therein). In addition, if an Extraordinary Event
(as defined) occurs within 12 months after the occurrence of an Actual or
Constructive Termination, the executive is entitled to receive an additional
Catch-up Payment (as defined). At June 30, 2002, no severance payments would
have been due to Mr. Herlands if he were terminated. See "Certain Relationships
and Related Transactions."
Compensation Pursuant to Plans
401(k) Plan. The Company maintains for the benefit of its employees a
401(k) Retirement and Savings Plan (the "Plan"), which is a defined
contribution, profit sharing plan qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"). Employees of the Company are
eligible for participation in the Plan once they have attained age 21 and
completed a year of service (in which the employee completed 1,000 hours of
service). Up to $200,000 (indexed for inflation) of an employee's base salary
may be taken into account for Plan purposes. Under the Plan, employees may make
pre-tax contributions of up to 60.0% of such employee's base salary, and the
Company will make non-matching contributions equal to 1% of an employee's base
salary and matching contribution equal to 50.0% of an employee's pre-tax
contribution up to 3.0% of such employee's base salary and 25.0% of such
employee's pre-tax contribution from 3.0% to 6.0% of base salary. Participants
are vested in employer contributions in 20% increments beginning after
completion of the second year of service and become fully vested after five
years of service. Distributions are generally payable in a lump sum after
termination of employment, retirement, death, disability, plan termination,
attainment of age 59 1/2, disposition of substantially all of the Company's
assets or upon financial hardship. The Plan also provides for Plan loans to
participants.
38
The accounts of Messrs. Bendheim, Carlson, Sussman, Herlands, Storbeck,
and Cohen were credited with employer contributions of $6,000, $0, $6,000,
$6,000, $2,690 and $1,650, respectively, for fiscal 2002.
Retirement Plan. The Company has adopted The Retirement Plan of Philipp
Brothers Chemicals Inc. and Subsidiaries and Affiliates, which is a defined
benefit pension plan (the "Retirement Plan"). Employees of the Company are
eligible for participation in the Retirement Plan once they have attained age 21
and completed a year of service (which is a Plan Year in which the employee
completes 1,000 hours of service). The Retirement Plan provides benefits equal
to the sum of (a) 1.0% of an employee's "average salary" plus 0.5% of the
employee's "average salary" in excess of the average of the employee's social
security taxable wage base, times years of service after July 1, 1989, plus (b)
the employee's frozen accrued benefit, if any, as of June 30, 1989 calculated
under the Retirement Plan formula in effect at that time. For purposes of
calculating the portion of the benefit based on "average salary" in excess of
the average wage base, years of service shall not exceed 35. "Average salary"
for these purposes means the employee's salary over the consecutive five year
period in the last ten years preceding retirement or other termination of
employment which produces the highest average; or, if an employee has fewer than
five years of service, all such years of service. An employee becomes vested in
his plan benefit once he completes five years of service with the Company. In
general, benefits are payable after retirement or disability in the form of a
50%, 75% or 100% joint or survivor annuity, life annuity or life annuity with a
five or ten year term. In some cases benefits may also be payable under the
Retirement Plan in the event of an employee's death.
The following table shows estimated annual benefits payable upon
retirement in specified compensation and years of service classifications,
assuming a life annuity with a ten year term.
Years of Service
-------------------------------------------------------
Average Compensation 15 20 25 30 35
-------------------- ------- ------- ------- ------- -------
$25,000 ............ $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
$50,000 ............ $ 7,500 $10,000 $12,500 $15,000 $17,500
$75,000 ............ $11,850 $15,120 $18,750 $22,500 $26,250
$100,000 ........... $17,480 $22,620 $27,790 $32,990 $38,430
$150,000 ........... $28,730 $37,620 $46,540 $55,490 $64,680
$200,000 ........... $33,230 $43,620 $54,040 $64,490 $75,180
As of June 30, 2002, Messrs. Bendheim, Carlson, Sussman, Herlands, and
Cohen had 33, 0, 31, 38, and 2 estimated credited years of service,
respectively, under the Retirement Plan. The compensation covered by the
Retirement Plan for each of these officers as of June 30, 2002 is $200,000. Such
individuals, at age 65, will have 43, 6, 41, 43, and 9 credited years of
service, respectively. The annual expected benefit after normal retirement at
age 65 for each of these individuals, based on the compensation taken into
account as of June 30, 2002, is $109,380, $13,880, $124,900, $122,510, and
$19,510, respectively.
Most of the Company's foreign subsidiaries have retirement plans covering
substantially all employees. Contributions to these plans are generally
deposited under fiduciary-type arrangements. Benefits under these plans are
primarily based on levels of compensation. Funding policies are based on
applicable legal requirements and local practices.
Deferred Compensation Plan. In 1994, the Company adopted a non-qualified
Deferred Compensation Plan and Trust, as an incentive for certain executives.
The plan provides for (i) a Retirement Income Benefit (as defined), (ii) a
Survivor's Income Benefit (as defined), and (iii) Deferred Compensation Benefit
(as defined). Three employees currently participate in this plan. A trust has
been established to provide the benefits described above.
The following table shows the estimated benefits from this plan as of June
30, 2002.
39
Annual Survivor's Deferred
Retirement Income Compensation
Income Benefit Benefit Benefit
-------------- ------- -------
Jack C. Bendheim ............ $23,342 $1,500,000 $259,941
James O. Herlands ........... $23,342 $ 780,000 $232,975
Marvin S. Sussman ........... $23,342 $1,500,000 $ 87,998
The Retirement Income Benefit is determined by the Company based upon the
employee's salary, years of service and age at retirement. At present, it is
contemplated that a benefit of 1% of each participant's eligible compensation
will be accrued each year. The benefit is payable upon retirement (after age 65
with at least 10 years of service) in monthly installments over a 15 year period
to the participant or his named beneficiary. The Survivor's Income Benefit for
the current participants is two times annualized compensation at the time of
death, capped at $1,500,000, payable in 24 equal monthly installments. The
Deferred Compensation Benefit is substantially funded by compensation deferred
by the participants. Such benefit is based upon a participant making an election
to defer no less than $3,000 and no more than $20,000 of his compensation in
excess of $150,000, payable in a lump sum or in monthly installments for up to
15 years. The Company makes a matching contribution of $3,000. The plan is
substantially funded. Participants have no claim against the Company other than
as unsecured creditors. To assist in providing benefits, the Company has
obtained a life insurance policy on each participant.
Executive Income Program. On March 1, 1990, the Company entered into an
Executive Income Program to provide a pre-retirement death benefit and a
retirement benefit to certain of its executives. The Program consists of a
Split-Dollar Agreement and a Deferred Compensation Agreement with Jack Bendheim,
Marvin S. Sussman and James O. Herlands (the "Executives"). The Split Dollar
Agreement provides for the Company to own a whole life insurance policy in the
amount of $1,000,000 (plus additions) on the life of each Executive.
Each policy also contains additional paid-up insurance and extended term
insurance. On the death of the Executive prior to his 60th birthday or his
actual retirement date, whichever is later: (i) the first $1,000,000 of the
death benefit is payable to the Executive's spouse, or issue; (ii) the excess is
payable to the Company up to the aggregate amount of premiums paid by the
Company; and (iii) any balance is payable to the Executive's spouse or issue.
The Split-Dollar Agreement terminates and no benefit is payable if the Executive
dies after his retirement from the Company. The Deferred Compensation Agreement
provides that upon the Executive's retirement, at or after attaining age 65, the
Company will make a monthly retirement payment to the Executive during his life
for 10 years or until he or his beneficiaries have received a total of 120
monthly payments. The Company intends to fund the payments using the cash value
or the death benefit from the life insurance policy insuring each Executive's
life. The monthly retirement benefits are as follows: Jack Bendheim $2,500;
Marvin S. Sussman $2,500; and James O. Herlands $1,666.
Meetings and Compensation of Directors
During fiscal 2002, the Board of Directors took certain actions by both
written consent and at regular meetings. Directors are elected annually and
serve until the next annual meeting of Shareholders or until their successors
are elected and qualified. The Company's directors do not receive any cash
compensation for service on the Board of Directors, but directors may be
reimbursed for certain expenses in connection with attendance at board meetings.
The Company has entered into certain transactions with certain of the directors.
See "Certain Relationships and Related Transactions."
Committees of the Board of Directors
The Company's Board of Directors has not created any committees.
40
Report of Board of Directors as to Compensation
The Company does not have a Compensation Committee or other Board
Committee performing equivalent functions. Executive compensation is determined
by the Board as a whole. During fiscal 2002, Messrs. Bendheim, Sussman,
Herlands, Joseph and Adam Karr (prior to his resignation in March 2002) and
Mayhew (after his appointment in March 2002) participated in deliberations
regarding compensation of the Company's officers.
Compensation Committee Interlocks and Insider Participation
Jack Bendheim, Marvin S. Sussman and James O. Herlands are Members of the
Board of Directors and executive officers of the Company. No executive officer
of the Company serves as a member of the Board of Directors of any other
non-Company entity which has one or more members serving as a member of the
Company's Board of Directors. Messrs. Bendheim, Sussman and Herlands have
participated in certain transactions with the Company and its subsidiaries and
affiliates. See "Certain Relationships and Related Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The table sets forth certain information as of June 30, 2002 regarding
beneficial ownership of the Company's capital stock by each director and named
executive officer of the Company, each beneficial owner of 5% or more of the
outstanding shares of capital stock and all directors and officers as a group.
Number of Shares (Percentage of Class)
--------------------------------------
Name Class A Voting(1) Class B Voting(2)
---- ----------------- -----------------
Jack Bendheim(3)........................ 12,600 (100%) 10,699.65 (90%)(4)
Marvin S. Sussman ...................... -- 1,188.85 (10%)
All other officers and directors(5)..... -- --
All officers and directors as a group... 12,600 (100%) 11,888.50 (100%)
----------
(1) The entire voting power of the Company is exercised by the holders of
Class A Common Stock, except that the holders of Class B Common Stock
elect one director but do not vote on any other matters.
(2) Class B shareholders will receive the entire equity of the Company upon
its liquidation, after payment of preferences to holders of all classes of
preferred stock and Class A Common Stock.
(3) Jack Bendheim also owns 5,207 (100%) shares of Series A Preferred Stock.
(4) Includes 4,414.886 shares owned by trusts for the benefit of Jack
Bendheim, his spouse, his children and their spouses and his
grandchildren.
(5) Peter A. Joseph and Timothy P. Mayhew have been designated as directors of
the Company by Palladium Equity Partners, LLC which beneficially owns
25,000 and 20,000 shares of the Company's Class B and Class C Preferred
Stock, respectively.
Item 13. Certain Relationships and Related Transactions.
Phibro-Tech leases the property underlying its Santa Fe Springs,
California facility from First Dice Road Company, a California limited
partnership ("First Dice"), in which Jack Bendheim, the Company's President and
principal stockholder, Marvin S. Sussman and James O. Herlands, directors of the
Company, own 39.0%, 40.0% and 20.0% limited partnership interests, respectively.
The general partner, having a 1% interest in the partnership, is Western
Magnesium Corp., a wholly-owned subsidiary of the Company, of which Jack
Bendheim is the president. The lease expires on June 30, 2008. The annual rent
is $250,000. Phibro-Tech is also required to pay all real property taxes,
personal property taxes and liability and property insurance premiums. In June
2001, Jack Bendheim entered into a secured $1.4 million revolving credit
arrangement with First Union National Bank, which replaced a prior loan from
Fleet Bank. Mr. Bendheim reloans borrowings under the First Union credit line to
First Dice on the same terms as his borrowing from First Union. The Company
believes that the terms of such lease and loan are on terms no
41
less favorable to Phibro-Tech than those that reasonably could be obtained at
such time in a comparable arm's-length transaction from an unrelated
third-party.
Pursuant to a Shareholders Agreement dated December 29, 1987 between
Marvin S. Sussman and the Company, the Company is required to purchase, at book
value, all shares of the Company's Class B Common Stock owned by Mr. Sussman, in
the event of his retirement, death, permanent disability or the termination of
his employment by the Company. Should Mr. Sussman elect to sell his shares, the
Company has a right of first offer and an option to purchase the shares.
A Shareholders Agreement initially entered into by Phibro-Tech and three
executives of Phibro-Tech, including James O. Herlands (the "Executives")
provides, among other things, for restrictions on their shares as to voting,
dividends, liquidation and transfer rights. The Shareholders Agreement also
provides that upon the death of an Executive or termination of an Executive's
employment, Phibro-Tech must purchase the Executive's shares at their fair
market value, as determined by a qualified appraiser. In the event of a Change
of Control (as defined), the Executive has the option to sell his shares to
Phibro-Tech at such value. The Shareholders Agreement provides, that, upon the
consent of Phibro-Tech, the Executives and the Company, the Executives' shares
of Phibro-Tech Common Stock may be exchanged for a number of shares of the
Company's Common Stock, which may be non-voting Common Stock, having an
equivalent value, and upon any such exchange such shares of the Company's Common
Stock will become subject to the Shareholders Agreement. The Company and
Phibro-Tech also entered into Severance Agreements with the Executives which
provide, among other things, for certain severance payments. See "Executive
Compensation--Employment and Severance Agreements."
In connection with the retirement of Nathan Z. Bistricer from the Company
and Phibro-Tech in January, 2001, pursuant to the Shareholders Agreement among
the executives and Phibro-Tech, the Company paid $855,000 in connection with the
repurchase of 71.67 shares of his Class B Common Stock of Phibro-Tech. In
addition, in satisfaction of Phibro Tech's severance obligation under a
Severance Agreement between Phibro Tech and Mr. Bistricer, the Company agreed to
pay $516,070 in twenty-four (24) equal monthly installments to Mr. Bistricer.
The Company also agreed to provide certain unspecific out-placement services to
Mr. Bistricer not to exceed $15,000 in total costs and fees.
The Company has periodically advanced funds to Jack Bendheim on a
short-term, non-interest-bearing basis.
The Company has advanced $200,000 to Marvin Sussman and his wife pursuant
to a secured promissory note that is payable on demand and bears interest at the
annual rate of 9%.
Mr. Philip Bendheim, brother of Jack C. Bendheim, received directly, or
through his consulting firm Ceres Advisors, annual aggregate payments of
approximately $115,000 for the fiscal year ended June 30, 2002.
In connection with the sale of the Company's Series B and Series C
Preferred Stock to Palladium Equity Partners LLC and related entities (the
"Palladium Investors"), the Company and Jack Bendheim entered into a
Stockholders Agreement (the "Palladium Stockholders Agreement") dated November
30, 2000 with the Palladium Investors. The Palladium Stockholders Agreement
provides for the Company's Board to be comprised of five Directors, at least two
of whom will be designees of the Palladium Investors. Peter A. Joseph and
Timothy P. Mayhew are designees of the Palladium Investors currently serving as
Directors of the Company. If and for so long as the Company fails to redeem any
share of Series B or Series C Preferred Stock requested for redemption by a
Palladium Investor after the earliest to occur of June 1, 2008 (the maturity
date of the Company's 9 7/8% Senior Subordinated Notes due 2008), the redemption
of such Notes in full prior thereto or a change in control of the Company, then
(x) the Palladium Investors may take control of the Board of Directors of the
Company, and (y) Jack C. Bendheim has agreed to cause all equity securities
owned by him to be voted in the manner directed by the Palladium Investors;
provided, that, the Company must pay Jack Bendheim and Marvin Sussman, whether
or not employed by the Company, an amount not less than their respective annual
base salaries in effect immediately prior to such assumption of control, until
the earlier to occur of the expiration of control by the Palladium Investors and
the fifth anniversary of their assumption of control.
42
The Palladium Stockholders Agreement contains covenants with respect to
the Company which restrict, without the consent of at least one director
designated by the Palladium Investors (or, if no such director is then serving
on the Board, at least one Palladium Investor), among other things, certain (a)
issuances of shares, (b) sales of assets, (c) purchases of businesses and other
investments, (d) the incurrence of indebtedness, including guarantees, (e)
payment of dividends and other restricted payments, including redemptions or
purchases of stock, (f) transactions with affiliates, (g) compensation and
benefits of certain officers, and (h) mergers and acquisitions. The Palladium
Stockholders Agreement also provides that the Company shall furnish the
Palladium Investors certain financial reporting and environmental information
each year and grant to the Palladium Investors registration rights comparable to
any such rights granted to any third party, and requires the Company to maintain
certain key man life insurance on Jack C. Bendheim for the benefit of the
Palladium Investors. The Palladium Stockholders Agreement provides certain
limitations on the ability of Jack C. Bendheim to transfer voting shares of the
Company, and certain limitations on the ability of the Palladium Investors to
transfer their shares of the Company, including a right of first refusal in
favor of the Company and Mr. Bendheim.
Pursuant to the Management and Advisory Services Agreement dated November
30, 2000 between the Company and the Palladium Investors, the Company agreed to
pay, on a quarterly basis, the Palladium Investors an annual management advisory
fee of $2.25 million until such time as all shares of Series B and Series C
Preferred Stock are redeemed.
On January 5, 2000, the United States Bankruptcy Court for the Eastern
District of New York confirmed a Plan of Reorganization for Penick Corporation
and Penick Pharmaceutical, Inc. (collectively, "Penick") which prior to such
confirmation were debtors in proceedings in such Court for reorganization under
Chapter 11 of the Bankruptcy Code, and awarded Penick to Penick Holding Company
("PHC"). PHC is a corporation formed to effect such acquisition by the Company,
PBCI LLC, a limited liability company controlled by Mr. Bendheim, and several
other investors. Pursuant a Shareholders' Agreement among the shareholders of
PHC, Mr. Bendheim has been designated as one of three directors of PHC, and Mr.
Katzenstein, the Secretary and Treasurer of the Company, has been designated as
Secretary and Treasurer of PHC. The Company has invested $1,980,000 for shares
of Series A Preferred Stock of PHC bearing an 8.5 percent annual cumulative
dividend, and PBCI LLC invested approximately $20,000 for 20 percent of the
Common Stock of PHC.
The Company's policy with respect to the sale, lease or purchase of assets
or property of any related party is that such transaction should be on terms
that are no less favorable to the Company or its subsidiary, as the case may be,
than those that could reasonably be obtainable at such time in a comparable
arm's length transaction from an unrelated third party, on the same basis as the
Indenture for the Senior Subordinated Notes and the Company's secured domestic
credit agreement. The Indenture and the credit agreement both include a similar
restriction on the Company and its domestic subsidiaries with respect to the
sale, purchase, exchange or lease of assets, property or services, subject to
certain limitations as to the applicability thereof.
Item 14. Internal Controls.
(a) Evaluation of disclosure controls.
Not applicable.
(b) Changes in internal controls.
None
43
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
3.1 Composite Certificate of Incorporation of Registrant(7)
3.2 By-laws of Registrant(1)
4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors
named therein and The Chase Manhattan Bank, as trustee, relating to the
9 7/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits
thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of
Company(1)
4.1.1 Supplemental Indenture, dated as of November 30, 2000, among
Registrant, the Guarantors named therein and The Chase Manhattan Bank,
as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008
of Registrant(7)
Certain instruments which define the rights of holders of long-term
debt of Registrant and its consolidated subsidiaries have not been
filed as Exhibits to this Report since the total amount of securities
authorized under any such instrument does not exceed 10% of the total
assets of Registrant and its subsidiaries on a consolidated basis, as
of June 30, 2002. For a description of such indebtedness, see Note 7 of
Notes to Consolidated Financial Statements. Registrant hereby agrees to
furnish copies of such instruments to the Securities and Exchange
Commission upon its request.
10.1 Amended and Restated Revolving Credit, Capital Expenditure Line and
Security Agreement, dated November 30, 2000, among Registrant, the
Guarantors thereunder and PNC Bank, National Association ("PNC")(4)
10.1.1 First Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated September 28, 2001 and
effective June 30, 2001, among Registrant, the Guarantors thereunder
and PNC(7)
10.1.2 Second Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated October 18, 2002 among
Registrant, the Guarantors thereunder and PNC(8)
10.2 Manufacturing Agreement, dated May 15, 1994, by and between Merck &
Co., Inc., Koffolk, Ltd., and Registrant(1)+
10.3 Lease, dated July 25, 1986, between Registrant and 400 Kelby
Associates, as amended December 1, 1986 and December 30, 1994(1)
10.4 Lease, dated June 30, 1995, between First Dice Road Co. and
Phibro-Tech, Inc., as amended May 1998(1)
10.5 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel
Land Administration(1)
10.6 Master Lease Agreement, dated February 27, 1998, between General
Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1)
10.7 Stockholders Agreement, dated December 29, 1987, by and between
Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S.
Sussman(1)
10.8 Employment Agreement, dated December 29, 1987, by and between
Registrant and Marvin S. Sussman(1)++
10.9 Stockholders Agreement, dated February 21, 1995, between James O.
Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1)
10.10 Form of Severance Agreement, dated as of February 21, 1995, between
Registrant and James O. Herlands(1)++
10.11 Agreement of Limited Partnership of First Dice Road Company, dated June
1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S.
Sussman and James O. Herlands, as amended November 1985(1)
44
10.12 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred
Compensation Plan Trust, dated as of January 1, 1994, by and between
Registrant on its own behalf and on behalf of C.P. Chemicals, Inc.,
Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers
Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated
March 18, 1994 ("Retirement Income and Deferred Compensation
Plan")(1)++
10.12.1 First, Second and Third Amendments to Retirement Income and Deferred
Compensation Plan.(2)++
10.13 Form of Executive Income Deferred Compensation Agreement, each dated
March 11, 1990, by and between Registrant and each of Jack Bendheim,
James Herlands and Marvin Sussman(1)++
10.14 Form of Executive Income Split Dollar Agreement, each dated March 1,
1990, by and between Registrant and each of Jack Bendheim, James
Herlands and Marvin Sussman(1)++
10.15 Supply Agreement, dated as of September 28, 1998, between BOC Limited
and Registrant(1)
10.16 Administrative Consent Order, dated March 11, 1991, issued by the State
of New Jersey Department of Environmental Protection, Division of
Hazardous Waste Management, to C.P. Chemicals, Inc.(1)
10.17 Agreement for Transfer of Ownership, dated as of June 8, 2000, between
C. P. Chemicals, Inc. ("CP") and the Township of Woodbridge
("Township"), and related Environmental Indemnification Agreement,
between CP and Township, and Lease, between Township and CP(2)
10.18 Stockholders' Agreement, dated as of January 5, 2000, among
shareholders of Penick Holding Company ("PHC"), and Certificate of
Incorporation of PHC and Certificate of Designation, Preferences and
Rights of Series A Redeemable Cumulative Preferred Stock of PHC(2)
10.19 Separation Agreement among Registrant, Phibro Tech, Inc. and Nathan
Bistricer dated as of October 4, 2000(3)
10.20 Stock Purchase Agreement between Phibro Tech, Inc. and Nathan Bistricer
dated as of October 4, 2000(3)
10.21 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer,
Inc., the Asset Selling Corporations (named therein) and Registrant,
and various exhibits and certain Schedules thereto(3)+
10.22 Stock Purchase Agreement, dated as of November 30, 2000, between
Registrant and the Purchasers (as defined therein)(4)
10.23 Stockholders' Agreement, dated as of November 30, 2000, among
Registrant, the Investor Stockholders (as defined therein) and Jack C.
Bendheim(4)
10.24 United States Asset Purchase Agreement between Phibro-Tech, Inc. and
Nufarm, Inc. dated as of May 1, 2001(5)
10.24.1 Amendment No. 1 to United States Asset Purchase Agreement between
Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001(6)
10.25 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of
May 1, 2001(5)
10.26 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as
of May 1, 2001(5)
10.27 Management and Advisory Services Agreement dated November 30, 2000
between Registrant and Palladium Equity Partners, L.L.C.(7)++
10.28 Employment Agreement, dated May 28, 2002, by and between Registrant and
Gerald K. Carlson(8)++
10.29 Agreement and General Release, and Consulting Agreement dated as of
September 11, 2002, by and between Registrant and David C. Storbeck(8)
++
21 List of Subsidiaries(8)
----------
1 Filed as an Exhibit to the Registrant's Registration Statement on Form
S-4, No. 333-64641.
2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
45
3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2000.
4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001.
6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
8 Filed herewith.
+ A request for confidential treatment has been granted for portions of such
document. Confidential portions have been omitted and filed separately
with the SEC as required by Rule 406(b).
++ This Exhibit is a management compensatory plan or arrangement.
(b) Financial Statement Schedules
All supplemental schedules are omitted because of the absence of
conditions under which they are required or because the information is shown in
the financial statements or notes thereto or in other supplemental schedules.
(c) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last quarter of the
fiscal year ended June 30, 2002.
46
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets-June 30, 2002 and 2001 F-3
Consolidated Statements of Operations and Comprehensive
Income-for the years ended June 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Changes in Stockholders'
Equity-for the years ended June 30, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows-for the years ended
June 30, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Philipp Brothers Chemicals, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Philipp Brothers Chemicals, Inc. and its subsidiaries
at June 30, 2002 and June 30, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2002,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
October 9, 2002, except for Notes 1, 3 and 7,
for which the date is October 18, 2002
F-2
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and 2001
(In Thousands, except share and per share amounts)
ASSETS 2002 2001
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 6,419 $ 14,845
Trade receivables, less allowance for doubtful
accounts of $2,927 at June 30, 2002 and
$2,369 at June 30, 2001 65,161 77,910
Other receivables 3,912 4,800
Inventories 93,517 83,796
Prepaid expenses and other current assets 15,965 17,448
--------- ---------
TOTAL CURRENT ASSETS 184,974 198,799
PROPERTY, PLANT AND EQUIPMENT, net 84,730 102,323
INTANGIBLES 13,200 5,594
OTHER ASSETS 13,540 23,303
--------- ---------
$ 296,444 $ 330,019
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 7,767 $ 4,222
Loans payable to banks 41,535 28,463
Current portion of long-term debt 8,851 5,404
Accounts payable 42,280 51,304
Accrued expenses and other current liabilities 34,080 35,378
--------- ---------
TOTAL CURRENT LIABILITIES 134,513 124,771
LONG-TERM DEBT 136,641 139,464
OTHER LIABILITIES 29,877 13,021
--------- ---------
TOTAL LIABILITIES 301,031 277,256
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 56,602 48,980
Common stock -- 378
--------- ---------
TOTAL REDEEMABLE SECURITIES 56,602 49,358
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock-$100 par value, 150,543
shares authorized, none issued at 521 521
June 30, 2002 and 2001; Series A
Preferred Stock-$100 par value, 6%
non-cumulative, 5,207 shares authorized
and issued at June 30, 2002 and 2001
Common stock-$0.10 par value, 30,300 shares 2 2
authorized and 24,488 shares issued at
June 30, 2002 and 2001
Paid-in capital 740 878
Retained earnings (49,652) 9,741
Accumulated other comprehensive income (loss) -
gain on derivative instruments 1,062 --
cumulative currency translation adjustment (13,862) (7,737)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (61,189) 3,405
--------- ---------
$ 296,444 $ 330,019
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended June 30, 2002, 2001 and 2000
(In Thousands)
2002 2001 2000
-------- -------- --------
NET SALES $388,813 $364,410 $323,026
COST OF GOODS SOLD (2002 includes $14,458
of incremental depreciation for planned
asset shutdown - See Note 2) 322,347 291,137 249,582
-------- -------- --------
GROSS PROFIT 66,466 73,273 73,444
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 81,331 72,297 59,251
ASSET WRITEDOWNS 6,799 -- --
CURTAILMENT OF OPERATIONS AT
MANUFACTURING FACILITY -- -- (1,481)
-------- -------- --------
OPERATING (LOSS) INCOME (21,664) 976 15,674
OTHER:
Interest expense 18,158 18,297 14,754
Interest income (356) (566) (600)
Other (income) expense, net (1,243) 2,561 2,230
Gain from property damage claim -- -- (946)
Gains from sale of assets (112) (2,440) (13,763)
-------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES (38,111) (16,876) 13,999
PROVISION (BENEFIT) FOR INCOME TAXES 13,659 (1,981) 3,946
-------- -------- --------
NET (LOSS) INCOME (51,770) (14,895) 10,053
OTHER COMPREHENSIVE INCOME (LOSS) -
Gain on derivative instruments 1,062 -- --
Change in foreign currency
translation adjustment (6,125) (5,146) 55
-------- -------- --------
COMPREHENSIVE (LOSS) INCOME $(56,833) $(20,041) $ 10,108
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2000, 2001 and 2002
(In Thousands)
Preferred Common
Stock Stock Accumulated
--------- ------------------ Other
Class Class Paid-in Retained Comprehensive
Series A "A" "B" Capital Earnings (Loss) Income- Total
--------- ----- ----- ------- -------- -------------- -----
BALANCE, JULY 1, 1999 $ 521 $ 1 $ 1 $ 816 $ 22,755 $ (2,646) $ 21,448
Foreign currency translation
adjustment 55 55
Receivable from principal
shareholder 62 62
Net income 10,053 10,053
-------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2000 $ 521 $ 1 $ 1 $ 878 $ 32,808 $ (2,591) $ 31,618
======== ======== ======== ======== ======== ======== ========
Accretion of redeemable
preferred securities to fair
market value (4,192) (4,192)
Dividends on Series B and C
redeemable preferred stock (3,980) (3,980)
Foreign currency translation
adjustment (5,146) (5,146)
Net loss (14,895) (14,895)
-------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2001 $ 521 $ 1 $ 1 $ 878 $ 9,741 $ (7,737) $ 3,405
======== ======== ======== ======== ======== ======== ========
Dividends on Series B and C
redeemable preferred stock (7,623) (7,623)
Gain on derivative
instruments 1,062 1,062
Foreign currency translation
adjustment (6,125) (6,125)
Receivable from principal
shareholder (138) (138)
Net loss (51,770) (51,770)
-------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2002 $ 521 $ 1 $ 1 $ 740 $(49,652) $(12,800) $(61,189)
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2002, 2001 and 2000
(In Thousands)
2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES:
Net (loss) income $(51,770) $(14,895) $ 10,053
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization 31,548 13,832 11,866
Deferred income taxes 10,972 (7,568) 1,438
Provision for curtailment of operations
at manufacturing facility -- -- (1,481)
Gain from property damage claim -- -- (1,053)
Gains from sale of assets (112) (2,440) (13,763)
Change in redemption amount of
redeemable common stock (378) (3,491) 1,007
Asset writedowns 6,799 -- --
Effects of changes in foreign currency 2,120 -- --
Other 2,161 2,291 727
Changes in operating assets and liabilities,
net of effect of businesses acquired:
Accounts receivable 10,341 (1,409) (8,281)
Inventories (12,140) (1,999) 584
Prepaid expenses and other current assets (1,043) 4,987 (2,282)
Other assets 3,204 2,203 (1,545)
Accounts payable (9,889) 19,469 (3,768)
Accrued expenses and other current
liabilities 3,442 2,161 (1,411)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (4,745) 13,141 (7,909)
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (11,346) (14,544) (22,604)
Acquisition of businesses, net of cash acquired (7,182) (51,700) --
Proceeds from property damage claim 411 -- 3,999
Proceeds from sale of assets 173 26,470 18,750
Other investing 583 (375) (4,203)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (17,361) (40,149) (4,058)
-------- -------- --------
FINANCING ACTIVITIES:
Cash overdraft 3,438 2,654 682
Net increase (decrease) in short-term debt 12,656 (8,006) 4,189
Proceeds from long-term debt 2,322 9,363 18,286
Proceeds from issuance of redeemable preferred
stock -- 45,000 --
Payments of long-term debt (4,739) (4,924) (11,871)
Other financing -- (4,192) 62
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,677 39,895 11,348
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3 (445) --
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (8,426) 12,442 (619)
CASH AND CASH EQUIVALENTS at beginning of period 14,845 2,403 3,022
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of period $ 6,419 $ 14,845 $ 2,403
======== ======== ========
Supplementary Cash Flow Information:
Interest paid $ 17,173 $ 16,810 $ 13,694
======== ======== ========
Income taxes paid $ 2,880 $ 1,320 $ 1,355
======== ======== ========
Summary of significant noncash investing
and financing activities:
Capital lease additions $ -- $ -- $ 1,536
======== ======== ========
Debt issued in connection with acquisition $ -- $ 25,093 $ --
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Summary of Significant Accounting Policies
Description of Business:
Philipp Brothers Chemicals, Inc. is a leading diversified global
manufacturer and marketer of a broad range of specialty agricultural and
industrial chemicals which are sold world-wide for use in numerous markets,
including animal health and nutrition, agriculture, pharmaceutical, electronics,
wood treatment, glass, construction, and concrete. The Company also provides
recycling and hazardous waste services primarily to the electronics and metal
treatment industries. The Company believes it has leading positions in certain
of its end markets and has global marketing and manufacturing capabilities. The
Company's products are manufactured at company-owned and contract manufacturing
facilities in the United States and internationally.
Principles of Consolidation and Basis of Presentation:
The 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
consolidated financial statements.
The fiscal year of the Israeli and Brazilian subsidiaries of Koffolk
(1949) Ltd. ("Koffolk Israel") ends on March 31. Accordingly, the accounts of
these subsidiaries are included in the consolidated financial statements on a
three-month lag.
Risks and Uncertainties:
As a chemical company, the Company is subject to a variety of United
States and foreign laws and regulations relating to pollution and protection of
the environment. In addition, the testing, manufacturing and marketing of
certain products are subject to extensive regulation by several government
authorities in the United States and other countries. The Company is also
required to obtain and retain governmental permits and approvals to conduct
various aspects of its operations. The Company has significant assets located
outside of the United States, and a significant portion of the Company's sales
and earnings are attributable to operations conducted abroad. International
manufacturing, sales and raw materials sourcing are subject to certain inherent
risks, including political instability, price and exchange controls, unexpected
changes in regulatory environments, and potentially adverse tax consequences. In
addition, the Company is affected by social, political and economic conditions
affecting Israel, and any major hostilities involving Israel or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
As of June 30, 2002, the Company was not in compliance with the financial
covenants included in its senior credit facility ("credit agreement" or
"facility") with its lending banks, for which PNC Bank serves as agent. As a
result, the credit agreement was amended in October 2002 to: waive noncompliance
with financial covenants as of June 30, 2002; amend financial covenants
prospectively until maturity; amend the borrowing base formula and also reduce
maximum availability under the revolving credit portion of the facility from $70
million to $55 million; limit borrowings under the capital expenditure line of
the facility to the current outstanding balance of $5.8 million; and revise the
interest rate to 1.5% to 1.75% per annum over the base rate (as defined in the
agreement). Management believes that the reduced maximum availability and the
revised borrowing base formula under the revolving credit portion of the
facility will not adversely affect the Company's ability to meet its cash
requirements during fiscal 2003.
The Company's ability to fund its fiscal 2003 operating plan relies upon
continued availability of the credit agreement which, in turn, requires the
Company to maintain compliance with the amended financial covenants. The Company
believes that it will be able to comply with the terms of the amended covenants
based on its forecasted operating plan for 2003. In the event of adverse
operating results and resultant violation of the covenants during 2003, the
Company cannot be certain it will be able to obtain such waivers or amendments
on favorable terms, if at all.
F-7
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Risks and Uncertainties--(Continued):
In addition, the Company's credit agreement and its note payable to
Pfizer, Inc. (see Notes 3 and 7) mature in November 2003 and March 2004,
respectively. The Company's management has undertaken actions to improve the
Company's operating performance and overall liquidity in order to reduce debt
levels and allow for ultimate refinancing of this debt in fiscal 2004. These
actions include cost reduction activities, working capital improvement programs,
shutdown of unprofitable operations, deferral and forbearance of certain
obligations to Pfizer (see Note 3), and possible sale of certain business
operations and other assets. These actions are ongoing and will continue to be
re-evaluated during fiscal 2003.
The issue of the potential for increased bacterial resistance to certain
antibiotics used in certain food-producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotics in these food-producing animals. The sale
of feed additives containing antibiotics is a material portion of the Company's
business. Should regulatory or other developments result in further restrictions
on the sale of such products, it could have a material adverse impact on the
Company's financial position, results of operations and cash flows.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures at the date of
the financial statements and during the periods reported. Actual results could
differ from those estimates. Significant estimates include reserves for bad
debts, inventory obsolescence, environmental matters, depreciation and
amortization periods of long-lived assets, recoverability of long-lived assets
and realizability of deferred tax assets.
Revenue Recognition:
Revenue is recognized upon transfer of title and risk of loss to the
customer, generally at time of shipment. Net sales are comprised of total sales
billed, net of goods returned, trade discounts and customer allowances.
Shipping and Handling
Included in the revenues shown on the Company's consolidated statement of
operations is shipping and handling income of $7,195, $6,102, and $5,393 for the
fiscal years ended June 30, 2002, 2001, and 2000, respectively.
Beginning in the fiscal year ending June 30, 2002, all shipping and
handling costs were included in cost of goods sold. As a result, shipping and
handling costs of $22,275 and $18,725 for 2001 and 2000, respectively, have been
reclassified to cost of goods sold.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
F-8
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
principally under 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. Obsolete or unsaleable inventory is reflected at its
estimated net realizable value. Inventory costs include materials, direct labor
and manufacturing overhead.
If the LIFO method of valuing certain inventories had not been used, total
inventories at June 30, 2002 and 2001 would have been higher by $521 and $716,
respectively. Inventories valued at LIFO amounted to $3,111 at June 30, 2002 and
$4,142 at June 30, 2001.
Inventories consist of the following at June 30, 2002 and 2001:
2002 2001
------- -------
Raw Materials .......................... $23,524 $22,614
Work in process ........................ 2,098 4,257
Finished goods ......................... 67,895 56,925
------- -------
$93,517 $83,796
======= =======
Property, Plant and Equipment:
Property, plant and equipment are carried at cost less accumulated
depreciation. Major renewals and improvements are capitalized, while maintenance
and repairs are expensed when incurred. Upon retirement or other disposition,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is included in the results of operations. The Company
capitalizes interest expense as part of the cost of construction of facilities
and equipment. Interest expense capitalized in 2002, 2001 and 2000 was $106,
$277 and $0, respectively. Depreciation is calculated using the straight-line
method based upon estimated useful lives as follows:
Building and improvements ...................... 8-20 years
Machinery and equipment ........................ 3-10 years
Deferred Financing Costs:
Deferred financing costs are being amortized using the interest method
over the ten-year life of the notes. Deferred costs relating to the senior
credit facility are being amortized over the three-year life of the agreement.
Intangibles:
Intangible assets are being amortized on a straight-line basis over their
estimated useful lives ranging from 5 to 20 years. Accumulated amortization
amounted to $8,885 and $5,872 at June 30, 2002 and 2001, respectively.
Licensing and Permit Fees:
Licensing and permit fees incurred to obtain the required federal, state
and local hazardous waste treatment, storage and disposal permits are included
in other assets and are amortized over the lives of the licenses, permits and
rights of 5 to 10 years.
Foreign Currency Translation:
Balance sheet accounts of the Company's foreign subsidiaries, with the
exception of the Brazilian and Israeli subsidiaries of Koffolk Israel are
translated at current rates of exchange, and income and expense items are
translated at the average exchange rate for the year. The resulting translation
adjustments are reflected as a separate component of stockholders' equity.
F-9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Foreign Currency Translation--(Continued):
The Brazilian and Israeli subsidiaries of Koffolk Israel transact
substantially all of their business in U.S. dollars. Accordingly, the U.S.
dollar is designated as the functional currency for these operations and
translation gains and losses are included in determining net income or loss. Net
exchange gains and losses resulting from the translation of foreign financial
statements and the effect of exchange rates on intercompany transactions of a
long-term investment nature are reflected as a separate component of
stockholders' equity. Translation gains and losses relating to intercompany debt
of short-term investment nature are included in other income and expense, net in
the accompanying consolidated statements of operations. Net gains were $2,754
and net losses were $2,678 and $2,142 for the years ended June 30, 2002, 2001
and 2000, respectively. Other foreign currency transaction gains and losses are
not material.
Derivative Financial Instruments:
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its related amendment, Statement of Financial Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities ("SFAS No. 133")." These standards require that all derivative
financial instruments be recorded on the consolidated balance sheets at their
fair value as either assets or liabilities. Changes in the fair value of
derivatives will be recorded each period in operations or accumulated other
comprehensive income, depending on whether a derivative is designated and
effective as part of a hedge transaction and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in accumulated
other comprehensive income will be included in operations in the periods in
which operations are affected by the hedged item. The cumulative effect of a
change in accounting principle due to the adoption of SFAS No. 133 was not
material.
Advertising Costs:
Advertising expenditures, expensed when incurred, were $2,086, $800 and
$953 for the years ended June 30, 2002, 2001 and 2000, respectively.
Impairment of Long-Lived Assets:
The Company evaluates the recoverability of long-lived assets, including
intangible assets, when events or circumstances indicate that a diminution in
value may have occurred, using certain financial indicators such as historical
and future ability to generate cash flows from operations. The Company's policy
is to record an impairment loss in the period when it is determined that the
carrying amount of the asset may not be recoverable. This determination is based
on an evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future net cash flows (undiscounted and without interest or income
taxes) are less than the carrying amount of the assets.
Environmental Liabilities:
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures related to improving the condition of property compared with the
condition of that property when constructed or acquired are capitalized. The
Company also capitalizes expenditures that prevent future environmental
contamination, when appropriate. Other expenditures are expensed as incurred.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology, and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors. All available
evidence is considered, including prior experience in remediation of
contaminated sites, other companies' clean-up experience, and data released by
the Environmental Protection Agency or other organizations. When such costs are
incurred over a long-term period and can be reliably estimated as to timing, the
liabilities are included in the consolidated balance sheets at their discounted
amounts.
F-10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Income Taxes:
Income tax expense includes U.S. and foreign income taxes. The tax effect
of certain temporary differences between amounts recognized for financial
reporting purposes and amounts recognized for tax purposes are reported as
deferred income taxes. Deferred tax balances are adjusted to reflect tax rates,
based on current tax laws that will be in effect in the years in which the
temporary differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts more likely
than not to be realized.
Research and Development Expenditures:
Research and development expenditures were $5,274, $2,952 and $2,297 for
the years ended June 30, 2002, 2001 and 2000, respectively, and are expensed as
incurred.
Reclassification:
Certain prior amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to 2002
presentation.
New Accounting Pronouncements:
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No.
141") and No. 142 "Goodwill and Other Intangibles" ("SFAS No. 142"). SFAS No.
141 and No. 142 are effective for the Company on July 1, 2002. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. The statement also establishes
specific criteria for recognition of intangible assets separately from goodwill.
The statement requires that goodwill and indefinite lived intangible assets no
longer be amortized and be tested for impairment at least annually. The
amortization period of intangible assets with finite lives will no longer be
limited to forty years. The Company has no goodwill, but is currently assessing
the useful lives of its intangible assets.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 is effective for the Company on July
1, 2002. The statement established accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. The Company is currently assessing the impact of this
statement.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 is effective for the
Company on July 1, 2002. The statement addresses significant issues relating to
the implementation of FASB Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"),
and the development of a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company is currently
assessing the impact of this statement.
In May 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS 13, and Technical Corrections" ("SFAS No. 145"). Under the
current rules, SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," requires that all gains and losses from the extinguishment of debt be
classified as extraordinary on the Company's consolidated statement of
operations, net of applicable taxes. SFAS No. 145 rescinds the automatic
classification as extraordinary and requires that the Company evaluate whether
the gains or losses qualify as extraordinary under Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 145 is effective for the Company on
July 1, 2002. The Company is currently assessing the impact of this statement.
F-11
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
New Accounting Pronouncements--(Continued):
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred rather than
at the date of a commitment to an exit or disposal plan. Costs covered by SFAS
No. 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing
or other exit or disposal activity. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company is
currently assessing the impact of this statement.
2. Restructuring and Asset Writedowns
The Company's Odda, Norway operation has suffered operating losses during
fiscal years 2002 and 2001. Odda is included in the Industrial Chemicals segment
and had third party revenues of $24,179 and $22,056, and operating losses
(before the effect of the $14,458 incremental depreciation and $5,133 asset
impairment, both discussed below) of $7,165 and $4,014, for the fiscal years
ended June 30, 2002 and 2001, respectively. The Company initiated and completed
a number of cost cutting and efficiency initiatives. However, continued
competitive pricing pressures on Odda's primary products and increasing raw
material and production costs have more than offset the favorable impact of
initiatives undertaken to date.
During the third quarter of fiscal year 2002 the Company decided to cease
production of two of Odda's three primary products as of June 30, 2002, and
focus its resources on the remaining product line. Third party revenues of the
remaining product line were $13,055 for the fiscal year ended June 30, 2002. The
decision to cease production of these two products required the Company to
accelerate the depreciation of the directly related property, plant, and
equipment so these assets were fully depreciated by June 30, 2002. This change
in expected remaining useful life has increased depreciation and amortization by
$14,458 for the fiscal year ended June 30, 2002.
In addition the Company has recorded restructuring charges of $2,075 in
cost of goods sold and $1,157 in other (income) expense, net on the Company's
consolidated statements of operations and comprehensive income. These charges
relate primarily to inventory write-offs of $1,107, production personnel
termination costs of $602 (approximately 124 employees), a loss on a contract to
purchase electricity of $1,157 associated with the Company's decision to cease
production of two of the three primary products, and other costs of $366. As of
June 30, 2002, approximately 120 employees had been terminated. The remaining
terminations are expected to occur by the end of January 2003. An accrual of
$824 for restructuring costs still to be paid at June 30, 2002 remained in
accrued expenses and other current liabilities on the Company's balance sheet at
June 30, 2002. The Company anticipates that substantially all of the remaining
restructuring costs will be paid by the end of January 2003.
During the fourth quarter of fiscal year 2002, due to further
deterioration of the Odda business, the Company reviewed certain long-lived
assets of Odda for impairment under the scenarios of continuing production of
Odda's remaining primary product or complete shutdown of the Odda operation. The
review included an estimate of the future net cash flows under each scenario,
weighted by management's estimate of the probability of realization and
indicated an impairment of Odda's property, plant and equipment (which had a
carrying value of $13,333 prior to impairment charges) at June 30, 2002.
Accordingly, the Company determined the fair value of Odda's property, plant and
equipment using a discounted net cash flow analysis. As a result an impairment
charge of $5,133 was recorded in asset write-downs on the Company's consolidated
statements of operations and comprehensive income.
F-12
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
During the fourth quarter of fiscal year 2002, due to an anticipated
decline in future sales of Odda's carbide product (the result of a possible loss
of a customer) the Company decided to review certain long-lived assets of its
Carbide Industries subsidiary for impairment. Carbide Industries is included in
the Company's Distribution segment. The review included an estimate of the
future net cash flows and indicated an impairment of Carbide Industries'
intangible assets (which had a carrying value of $3,077 prior to impairment
charges) at June 30, 2002. Accordingly, the Company determined the fair value of
Carbide Industries' intangible assets using a discounted cash flow analysis. As
a result, an impairment charge of $1,666 was recorded in asset write-downs on
the Company's consolidated statements of operations and comprehensive income.
3. Acquisitions
On November 30, 2000, the Company purchased the Medicated Feed Additives
("MFA") business of Pfizer, Inc. The operating results of this business, now
called Phibro Animal Health ("PAH"), are included in the Company's consolidated
statements of operations from the date of acquisition and are included in the
Animal Health and Nutrition Segment.
The purchase price of $76,793 (including cost of acquisition) was paid
with cash of $51,700 and the issue of a promissory note to Pfizer for $25,093,
which matures in 2004 with interest payable semi-annually in arrears at 13%. The
Company financed the $51,700 cash payment through the issuance of $40,808 of
redeemable preferred securities ($45,000 of redeemable preferred securities,
less costs connected with the issue of those securities of $4,192), and the
remainder was financed through an amendment to existing bank credit facilities.
In addition, under the terms of the purchase agreement, the Company is required
to pay Pfizer a contingent purchase price based on a percentage of future net
revenues of a particular product. The term of the contingent payments is five
years from November 30, 2000. The maximum contingent purchase price due under
this arrangement is limited to $55,000 with a maximum annual payment of $12,000.
Contingent purchase price paid has been allocated to related production
equipment up to fair value and the remainder is being allocated to product
intangibles. The Company has recorded $7,498, allocated to related production
equipment, and $9,176, allocated to product intangibles, under this agreement as
of June 30, 2002, of which $7,182 has been paid during the year ended June 30,
2002. In October 2002, Pfizer agreed to defer until March 1, 2004, without
interest, unpaid contingent purchase price amounts existing at May 31, 2002 and
to waive contingent purchase price payments on future net revenues from June 1,
2002 through March 1, 2004. The balance sheet as of June 30, 2002 reflects the
revised payment terms from Pfizer.
In addition, the Company is required to pay Pfizer contingent purchase
price up to a maximum of $10,000 over five years on the other products based on
certain gross profit levels of the MFA business. No amounts have been accrued
under this arrangement.
The acquisition was accounted for in accordance with the purchase method
and results of the MFA business have been included since the date of
acquisition. The purchase price has been allocated to inventory, property, plant
and equipment, production intangibles and pension liabilities. Property, plant
and equipment include two facilities, Rixensart, Belgium and Guarulhos, Brazil.
Following the closing, the Company operated under a supply agreement with Pfizer
with respect to the manufacturing facility in Belgium pending regulatory
approval of the transfer of title, which was completed on August 31, 2001. The
Company recorded, as a cost of acquisition, a pension liability of $1,076
relating to the employees of the Belgium plant who elected to transfer their
benefits and the amount of their accumulated benefit obligations on August 31,
2001.
The audited consolidated results of the operation on a pro-forma basis as
if such acquisition had occurred at the beginning of the periods being reported
are as follows:
2001 2000
--------- ---------
Net sales ............................. $ 412,003 $ 477,335
Net (loss) income ..................... (15,722) 26,118
The impact of purchase accounting adjustments to the inventory acquired
from Pfizer increased the net loss in 2002 by $3,257 and in 2001 by $8,889.
F-13
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
4. Property, Plant and Equipment
Property, plant and equipment consists of the following at June 30:
2002 2001
-------- --------
Land ......................................... $ 7,926 $ 8,106
Buildings and improvements ................... 36,697 34,458
Machinery and equipment ...................... 150,381 139,877
-------- --------
195,004 182,441
Less: Accumulated depreciation ............... 110,274 80,118
-------- --------
$ 84,730 $102,323
======== ========
Certain of the buildings of the Company's Israeli subsidiary are situated
on land leased for a nominal amount from the Israel Land Authority. The lease
expires on July 9, 2027.
Depreciation expense amounted to $29,184, $11,887 and $10,343 for the
years ended June 30, 2002, 2001 and 2000, respectively.
5. Related Party Transactions
In January 2000, the principal stockholder of the Company invested $20 in
a pharmaceutical company in exchange for a 20% voting common stock interest.
Additionally, the Company invested $1,980 in preferred stock of the
pharmaceutical company. The preferred stock investment, included in other
assets, is being carried on the equity basis. The Company recorded a loss of
$289 and $218 in other (income) expense, net for the years ended June 30, 2002
and 2001, respectively.
A subsidiary of the Company leases the property underlying its Santa Fe
Springs, California plant from a limited partnership, which is controlled by
shareholders of the Company. The lease requires annual base rent of $250 and
terminates on June 30, 2008. The Company is responsible under the lease
agreement to pay all real property taxes.
The Company has periodically advanced funds to the principal shareholder
on a short-term, non-interest-bearing basis. At June 30, 2002 and 2001, $138 and
$0 was outstanding, respectively.
6. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities at June
30, 2002 and 2001 are as follows:
2002 2001
------- -------
Commissions and rebates .................. $ 811 $ 3,116
Pfizer contingent purchase price ......... -- 6,473
Employee related expenses ................ 9,060 5,577
Other accrued liabilities ................ 24,209 20,212
------- -------
$34,080 $35,378
======= =======
7. Debt
Loan's payable to banks include $38.0 million outstanding under the
revolving credit agreement (refer to (b) below), $1.3 million outstanding of
$8.5 million available under Koffolk's revolving line of credit with interest
payable at 3.5%; $.6 million outstanding of $3.1 million available under La
Cornubia's revolving line of credits with interest payable at 4.6% and 4.85%;
and $1.6 million outstanding of $2.0 million available under Odda's revolving
line of credit with interest payable at the LIBOR or NIBOR rate plus the
applicable margin (refer to (d) below).
F-14
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
7. Debt--(Continued)
Long-term debt consists of the following at June 30, 2002 and 2001:
2002 2001
-------- --------
Domestic:
Senior Subordinated Notes due June 1, 2008 (a) ........ $100,000 $100,000
Bank borrowings (b) ................................... 5,800 3,800
Pfizer Promissory Note (c) ............................ 22,584 25,093
Capitalized lease obligations and other ............... 1,413 1,618
Foreign:
Bank loans with interest at NIBOR plus 2.75%
payable in Norwegian Krone (NOK) maturing
through 2004 (d) ................................... 6,712 5,376
Revolving credit bank loan with interest at NIBOR
plus 2% payable in Norwegian Krone (NOK) maturing
through 2003 (d) ................................... 1,510 1,801
Norwegian Government Loan payable in Norwegian
Krone (NOK) maturing in equal semi-annual
payments through 2013 (e) .......................... 3,557 2,850
Bank loans with interest at LIBOR plus 1 1/4%
repayable with interest in equal quarterly
installments through 2005 (f) ...................... 3,000 4,000
Capitalized lease obligations and other ............... 916 330
-------- --------
145,492 144,868
Less: Current maturities .............................. 8,851 5,404
-------- --------
$136,641 $139,464
======== ========
(a) In June 1998, the Company issued $100 million aggregate principal
amount of 9-7/8% Senior Subordinated Notes due 2008. The Notes are general
unsecured obligations of the Company and are subordinated in right of payment to
all existing and future senior debt (as defined in the indenture agreement of
the Company) and rank pari passu in right of payment with all other existing and
future senior subordinated indebtedness of the Company. The Notes are
unconditionally guaranteed on a senior subordinated basis by the current
domestic subsidiaries of the Company (the "Guarantors"). Additional future
domestic subsidiaries may become Guarantors under certain circumstances.
The Indenture contains certain covenants with respect to the Company and
the Guarantors, which restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of dividends and other restricted
payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain
payment restrictions affecting subsidiaries, and (f) transactions with
affiliates. The Indenture restricts the Company's ability to consolidate, or
merge with or into, or to transfer all or substantially all of its assets to,
another person.
(b) On November 30, 2000, the Company amended its senior credit facility
with its lending banks, for which PNC Bank serves as agent, increasing the
revolving credit portion of the facility to $70 million (from $35 million) and
adding an additional $15 million facility for spending on capital expenditures.
The amended agreement was effective December 1, 2000 and continues until
November 30, 2003.
The amended agreement contains a lock-box requirement and a subjective
acceleration clause. Accordingly, the amounts outstanding under the revolving
credit facility have been classified as short-term in accordance with the
Emerging Issues Task Force Statement No. 95-22 "Balance Sheet Classification of
Borrowings Outstanding Under Revolving Credit Agreements That Include a
Subjective Acceleration Clause and a Lock-Box Arrangement" and are included in
loans payable to banks in the consolidated balance sheet at June 30, 2002 and
2001. Advances under the capital expenditure facility have been classified as
long-term.
As of June 30, 2002, the Company was not in compliance with the financial
covenants included in its senior credit facility. As a result, the credit
agreement was amended in October 2002 to: waive noncompliance with financial
covenants as of June 30, 2002; amend financial covenants prospectively until
maturity; amend the borrowing base formula and also reduce maximum availability
under the revolving credit portion of the facility
F-15
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
from $70 million to $55 million; limit borrowings under the capital expenditure
line of the facility to the current outstanding balance of $5.8 million; and
revise the interest rate to 1.5% to 1.75% per annum over the base rate (as
defined in the agreement). Management believes that the reduced maximum
availability and the revised borrowing base formula under the revolving credit
portion of the facility will not adversely affect the Company's ability to meet
its cash requirements during fiscal 2003.
The credit facility requires, among other things, the maintenance of
certain consolidated interest coverage ratios calculated quarterly, a certain
level of trailing three month domestic cash flows calculated on a monthly basis,
and contains an acceleration clause should a material adverse event (as defined
in the agreement) occur. 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.
The $55 million revolving credit facility is subject to availability under
a borrowing base formula for domestic accounts receivable and inventories (as
defined in the agreement), which also serve as collateral on the borrowings.
Capital expenditure advances are repayable commencing on the first business day
of the month next succeeding the second anniversary date of the closing date
based upon a 60-month amortization table with all outstanding capital advances
being repaid on the last day of the term.
In addition to having $38.0 million outstanding under the revolving credit
facility and $5.8 million outstanding under the facility for spending on capital
expenditures, the Company had $4.5 million available under the borrowing base
formula in effect as of June 30, 2002.
(c) On December 1, 2000, in connection with the Pfizer acquisition, the
Company issued a 13% promissory note to Pfizer in the amount of $25,093 with
interest payable semi-annually. Principal payments, each equal to 10% of the
amount of the loan, were paid December 3, 2001 and are due December 3, 2002. The
remaining 80% of the loan is due March 1, 2004. The note is collateralized by
the Company's facilities in Rixensart, Belgium and Guarulhos, Brazil.
(d) The Company's Norwegian subsidiary (Odda) has entered into two
separate multi-currency revolving facilities as follows: In August 1998, the
subsidiary entered into a five-year multi-currency credit facility, for NOK
(Norwegian Kroner) 90,000 in agreed Euro-currencies. Borrowings under such
facility bear interest at the LIBOR or NIBOR rate (as defined) plus 2.75%. The
subsidiary has agreed to pay a commitment fee of 1/4% on the unused portion of
such facility. In August 1998, the subsidiary entered into a five-year
multi-currency revolving credit facility, for NOK 65,000 in agreed
Euro-currencies. Borrowings under such facility bear interest at the LIBOR or
NIBOR rate (as defined) plus the applicable margin. Such LIBOR or NIBOR margin
shall be subject to adjustment based on the subsidiary's debt service coverage
and equity ratios (which margins could range from 3/4% to 2%). The subsidiary
has agreed to pay a commitment fee equal to 50% of the applicable margin. In
connection with both facilities, the subsidiary may choose the duration (one,
three or six months) for which the interest rate may apply.
In connection with the subsidiary's sale of its minority interest in the
local hydroelectric power company and related contract rights (see Note 19), and
the simultaneous release of collateral in those shares pledged under the
facilities, the subsidiary repaid NOK 80,000 in total under both of the credit
facilities in January 2000 as a permanent reduction in the maximum borrowings
allowed. Indebtedness under both facilities is collateralized by a lien on the
subsidiary's receivables, inventory and property and production facilities.
Philipp Brothers Chemicals, Inc. guarantees both credit facilities.
As a result of the partial shutdown of Odda's operations and
non-compliance with the financial covenants of these credit facilities, Odda
entered into an agreement with its Norwegian banks in October 2002 to
restructure these loans and to obtain a waiver for non-compliance. The agreement
establishes a periodic payment schedule through November 30, 2003. In addition,
there are restrictions on the use of proceeds from the sale of collateralized
assets outside of the normal course of business. As of June 30, 2002, NOK 61,250
($8,222) was outstanding under these credit facilities. This debt has been
classified in the June 30, 2002 balance sheet in accordance with the terms of
the revised agreement.
F-16
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
7. Debt--(Continued)
(e) The Company's Norwegian subsidiary entered into two separate loan
agreements with the Norwegian Bank Industrial and Regional Development Fund. In
September 1999, Odda received a rural development facility for NOK 11,500
($1,544 outstanding at June 30, 2002). The interest rate, 8 1/2% at June 30, is
discretionary by the government with one-week notice. In April 2000, Odda
received an environmental loan facility of NOK 15,000 ($2,013 outstanding at
June 30, 2002), which bears interest at 4.6%. The interest rate is adjustable on
May 1, 2005 based on a formula averaging five-year government borrowing rates.
Both facilities are repayable in 20 equal semi-annual installments beginning in
2002. Indebtedness under both facilities is collateralized by a lien on the
subsidiary's receivables, inventory and property and production facilities.
Under these loan agreements there are restrictions on the use of proceeds from
the sale of collateralized assets outside of the normal course of business.
(f) The bank loans are collateralized by a lien on Koffolk Ltd.'s
receivables and inventory.
The aggregate maturities of long-term debt after June 30, 2002 are as
follows:
Year Ended June 30,
-------------------
2003 ............................ $ 8,851
2004 ............................ 32,114
2005 ............................ 1,725
2006 ............................ 433
2007 ............................ 491
2008 ............................ 101,878
--------
Total ........................ $145,492
========
8. Redeemable Common Stock of Subsidiary
Certain key executives of the Company previously had a 10.7% ownership
interest in common stock of a subsidiary. The subsidiary's shares are redeemable
at fair market value, based on independent appraisal, upon the death, disability
or termination of the key executive. Adjustments to record the shares at their
redeemable value have been charged to compensation expense.
In addition, the Company and its subsidiary entered into severance
agreements with the executives for payments based on a multiple of pre-tax
earnings (as defined), and which are subject to certain restrictions pursuant to
terms of the credit agreement. At June 30, 2002 no aggregate severance payments
would have been due the remaining executive if he were terminated.
In connection with the separation of employment of a senior executive in
the 2001 fiscal year and pursuant to the stock buyback and severance provisions
of the aforementioned agreements, the Company recorded a charge of $1.3 million
in selling, general and administrative expenses and reclassified $0.2 million
from redeemable securities to accrued expenses and other current liabilities.
The stock buyback resulted in a reduction of senior executive ownership in the
subsidiary to 2%.
During fiscal year 2001, the Company's MRT subsidiary was reorganized by
merging Mineral Resource Technologies, L.L.C. into its parent, MRT Management
Corp., which then changed its name to Mineral Resource Technologies, Inc.
("MRT"). Certain of MRT's key employees who held non-voting stock in MRT
Management Corp. retained their shareholdings in MRT. After accounting for the
cancellation of shares of an employee who had previously left the Company, the
remaining key employees own 10.3% of the non-voting common stock of MRT and a
right to contingent "phantom shares" of MRT. The shareholders agreement of MRT
provides for the vesting of shares to the employees over certain periods of
employment and granting of "phantom shares" to the employees based on certain
performance goals. No phantom shares have been earned and accordingly, no
compensation expense has been recorded. The agreement also provides for the
purchase of the minority shares for fair value in connection with termination of
employment.
F-17
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
9. Redeemable Preferred Stock
Redeemable preferred securities were issued on November 30, 2000 to
Palladium Equity Partners LLC and related entities ("Palladium") 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 the Company, as defined in the amended Certificate of
Incorporation. The equity value is calculated as a multiple of the earnings
before interest, tax, depreciation and amortization ("EBITDA") of the Company's
business ("Equity Value"). The Company may, at the date of the annual closing
anniversary, redeem the Preferred B stock, 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 that would generate an internal rate of return
of 20% to Palladium on the Preferred B investment. Redemption in part 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 Preferred C, at
the Liquidation Value plus the Equity Value payment.
At any time after the redemption of the Company's Senior Subordinated
Notes (due 2008), Palladium shall have the right to require the Company to
redeem, for cash, the Preferred B at the Liquidation Value and the Preferred C
at the Liquidation Value plus the Equity Value payment.
In fiscal year ended 2001, the redeemable preferred securities were
initially recorded at $40,808, representing proceeds of $45,000, net of costs of
issuance of $4,192. At that time, the Company recorded a charge of $4,192 to
retained earnings to reflect the accretion of the preferred securities to their
fair market value as at the closing date. Under the applicable formula, no
equity value accretion was required as of June 30, 2002. As of June 30, 2002 and
2001, dividends of $7,623 and $3,980, respectively, were accrued on the
preferred securities and charged to retained earnings.
In addition, an annual management advisory fee of $2,250 is payable to
Palladium until all of the Preferred B and Preferred C shares are redeemed.
Payments are made quarterly in advance and have been charged to general and
administrative expense. The management fees were $2,250 and $1,313 for the years
ended June 30, 2002 and 2001, respectively.
10. Common Stock and Paid-in Capital
Common Stock:
Common stock consisted of the following at June 30, 2002 and 2001:
Authorized
Shares Issued Shares Amount at Par
---------- ------------- -------------
Class A common stock ............ 16,200 12,600 $.10
Class B common stock ............ 14,100 11,888 .10
------ ------
30,300 24,488
====== ======
Holders of Class A common stock have full voting power, except the holders
of class A shall be entitled to elect all but three of the directors and the
holders of Class B shall be entitled to elect one director. No dividends may be
paid to common stockholders until all dividends have been paid to holders of
preferred stock. Thereafter, holders of Class A common stock shall receive
dividends, when and as declared by the directors, at the rate of 5-1/2% of the
par value of such stock (non-cumulative). After all declared dividends have been
paid to Class A
F-18
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
common stockholders, dividends may be declared and paid to the holders of Class
B common stock. In the event of any complete liquidation, dissolution,
winding-up of the business, or sale of all the assets of the Company, and after
the redemption of the preferred stock, the Class A common stockholders are
entitled to a distribution equal to the par value of the stock plus declared and
unpaid dividends. Thereafter, the remaining assets of the Company shall be
distributed to the holders of Class B common stock.
Issued shares include redeemable shares of a minority shareholder (see
below).
Redeemable Common Stock:
Pursuant to terms of an agreement with a minority shareholder, who is also
an officer of the Company, the Company is required to purchase, at book value,
the Class B shares of such shareholder upon his retirement, death, disability,
or the termination of his employment. Should such shareholder elect to sell his
shares, the Company has a right of first offer and an option to purchase the
shares. Adjustments to record the shares at redeemable value have been credited
or charged to compensation expense in the amounts of ($378), ($3,135) and $1,137
for 2002, 2001 and 2000, respectively.
11. Employee Benefit Plans
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible nonunion employees who meet certain
requirements of age, length of service and hours worked per year. The benefits
provided by the plans are based upon years of service and the employees' average
compensation, as defined. The Company's policy is to fund the pension plans in
amounts, which comply with contribution limits imposed by law.
The Company's Norwegian subsidiary maintains a funded noncontributory
defined benefit pension plan for all eligible employees. The Company's Belgium
subsidiary also maintains a noncontributory defined contribution and
noncontributory defined benefit plan for all eligible employees. Benefits for
all plans are based on employee compensation and service.
F-19
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
11. Employee Benefit Plans--(Continued)
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans.
Domestic International
-------------------------- --------------------------
June 2002 June 2001 June 2002 June 2001
--------- -------- --------- ---------
Change in benefit obligation
Benefit obligation at beginning of year ........................ $ 9,652 $ 8,732 $ 14,583 $ 9,175
Service cost ................................................... 879 949 378 161
Interest cost .................................................. 714 619 814 576
Benefits paid .................................................. (179) (249) (809) (740)
Actuarial (gain) ............................................... (34) (399) (1,313) (630)
Amendments ..................................................... 37 -- -- --
Change in Discount Rate ........................................ 752 -- -- --
-------- -------- -------- --------
Benefit obligation at end of year .............................. $ 11,821 $ 9,652 $ 13,653 $ 8,542
======== ======== ======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year ................. $ 9,193 $ 7,430 $ 14,742 $ 9,232
Actual return on plan assets ................................... 76 1,332 (940) 810
Employer contributions ......................................... 628 680 232 254
Benefits paid .................................................. (179) (249) (809) (740)
-------- -------- -------- --------
Fair value of plan assets at end of year ....................... $ 9,718 $ 9,193 $ 13,225 $ 9,556
======== ======== ======== ========
Domestic International
-------------------------- --------------------------
June 2002 June 2001 June 2002 June 2001
--------- -------- --------- ---------
Funded Status
Funded status of the plan ...................................... $ (2,103) $ (459) $ (429) $ 1,014
Unrecognized net actuarial (gain) .............................. (346) (1,755) (600) (852)
Unrecognized prior service cost ................................ (716) (918) -- --
Unrecognized transition obligation/(asset) ..................... (15) (18) 89 81
-------- -------- -------- --------
(Accrued) pension cost ......................................... (3,180) (3,150) (1,401) --
Prepaid pension cost .......................................... -- -- 461 243
-------- -------- -------- --------
Net (accrued) prepaid pension cost ............................. $ (3,180) $ (3,150) $ (940) $ 243
======== ======== ======== ========
June 2002 June 2001 June 2000
--------- --------- ---------
Assumptions (Domestic)
Discount rate .......................................................... 7.10% 7.50% 7.50%
Expected rate of return on plan assets ................................. 7.50% 7.50% 7.50%
Rate of compensation increase (depending on age) ....................... 3.00%-4.50% 3.00%-4.50% 5.00%
June 2002 June 2001 June 2000
--------- --------- ---------
Components of net periodic pension costs (Domestic)
Service cost - benefits earned during the year ......................... $ 879 $ 949 $ 905
Interest cost on benefit obligation .................................... 714 618 549
Expected return on plan assets ......................................... (709) (576) (487)
Amortization of initial unrecognized net transition obligation (asset) . (3) (3) (3)
Amortization of prior service costs .................................... (165) (165) (165)
Amortization of (gain) ................................................. (57) (31) (2)
----- ----- -----
Net periodic pension cost .............................................. $ 659 $ 792 $ 797
===== ===== =====
F-20
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
11. Employee Benefit Plans--(Continued)
June 2002 June 2001 June 2000
--------- --------- ---------
Assumptions (International)
Discount rate .......................................................... 5.75%-7.00% 7.00% 7.00%
Expected rate of return on plan assets ................................. 6.00%-8.00% 8.00% 8.00%
Rate of compensation increase .......................................... 3.00%-3.30% 3.30% 3.30%
Components of net periodic pension costs (International)
Service cost - benefits earned during the period ....................... $ 378 $ 161 $ 250
Interest cost on benefit obligation .................................... 814 576 635
Expected return on plan assets ......................................... (922) (810) (759)
Amortization of initial unrecognized net transition obligation (asset) . 58 (49) (18)
Amortization of loss ................................................... 13 5 5
----- ----- -----
Net periodic pension cost (benefit) .................................... $ 341 $(117) $ 113
===== ===== =====
The Company and its domestic subsidiaries have a 401(k) plan, under which
an employee may make a pre-tax contribution of up to 60% of base compensation,
and the Company makes a non-matching contribution equal to 1% of the employee's
base compensation and a matching contribution equal to 50% of the contribution
up to the first 3% of an employee's base compensation and 25% of any
contribution from 3% to 6% of base compensation. All contributions are subject
to the maximum amount deductible for federal income tax purposes. The Company's
contribution amounted to $566, $607 and $575 in 2002, 2001 and 2000,
respectively.
The Company has a deferred compensation and supplemental retirement plan
for certain senior executives of the Company. The benefits provided by the plan
are based upon years of service and the employees' average compensation subject
to certain limits. The plan also provides for death benefits before retirement.
Deferred compensation expense was $233, $123 and $97 in 2002, 2001 and 2000,
respectively. At June 30, 2002 and 2001, the aggregate liability under this plan
amounted to $1,000 and $705, respectively. To assist in funding the retirement
and death benefits of the plan, the Company invested in corporate-owned life
insurance policies, through a trust, which at June 30, 2002 and 2001 had cash
surrender values of $1,142 and $1,197, respectively, and are included in other
assets.
In addition to Norway and Belgium, most of the Company's foreign
subsidiaries have retirement plans covering substantially all employees.
Contributions to these plans are generally deposited under fiduciary-type
arrangements. Benefits under these plans are primarily based on levels of
compensation. Funding policies are based on legal requirements and local
practices. Expenses under these plans amounted to $683, $489 and $349 for 2002,
2001 and 2000, respectively.
12. Income Taxes
(Loss) income from operations before provision (benefit) for income taxes
consisted of:
2002 2001 2000
-------- -------- --------
Domestic ................. $ (8,437) $(12,561) $ (2,332)
Foreign .................. (29,674) (4,315) 16,331
-------- -------- --------
$(38,111) $(16,876) $ 13,999
======== ======== ========
F-21
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
12. Income Taxes--(Continued)
Components of income tax expense (benefit) are as follows:
2002 2001 2000
-------- ------- -------
Current tax provision (benefit):
U.S. Federal ........................... $ -- $ -- $ --
State and local ........................ (256) 1,711 245
Foreign ................................ 2,943 3,876 2,264
-------- ------- -------
Total current tax provision ............ 2,687 5,587 2,509
-------- ------- -------
Deferred tax provision (benefit):
U.S. Federal ........................... (1,736) (3,528) (287)
State and local ........................ (766) (289) 5
Foreign ................................ (12,349) (4,760) 2,047
Change in valuation allowance-domestic . 15,413 1,009 (327)
-foreign .. 10,410 -- --
-------- ------- -------
Total deferred tax provision (benefit) . 10,972 (7,568) 1,438
-------- ------- -------
Provision (benefit) for income taxes ...... $ 13,659 $(1,981) $ 3,947
======== ======= =======
A reconciliation of the Federal statutory rate and the Company's effective tax
rate are as follows:
2002 2001 2000
-------- ------- -------
U.S. Federal income tax rate .............. (34.0)% (34.0)% 34.0%
State and local taxes, net of federal
income tax effect ...................... (1.8) 3.5 0.9
Foreign tax rate differences and taxes
in certain profitable foreign
jurisdictions .......................... 1.8 17.1 (13.1)
Change in valuation allowance ............. 67.8 6.0 (0.9)
Non-taxable income ........................ -- (6.3) --
Expenses with no tax benefit .............. 0.3 1.1 3.9
Other ..................................... 1.7 0.9 3.4
-------- ------- -------
35.8% (11.7)% 28.2%
======== ======= =======
Most of the investments of the Company's Israeli subsidiary in fixed
assets have been granted "approved enterprise" status under Israeli law. The
subsidiary is also a "foreign investors' company" as defined by Israeli law.
This status entitles the subsidiary to reduced tax rates, which results in a
substantial portion of the tax rate differences on foreign operations. The
entitlement of the reduced tax rates is conditional upon the subsidiary
fulfilling the conditions stipulated by Israeli law, regulations published
thereunder and the instruments of approval for the specific investments in
approved enterprises. In the event of failure to comply with these conditions,
the benefits may be canceled and the subsidiary may be required to refund the
amount of the benefits, in whole or in part, with the addition of interest. The
periods of benefits expire in various years through 2010.
Provision has not been made for United States or additional foreign taxes
on undistributed earnings of foreign subsidiaries of approximately $31,000,
whose earnings have been or are intended to be reinvested. It is not practicable
at this time to determine the amount of income tax liability that would result
should such earnings be repatriated.
F-22
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
12. Income Taxes--(Continued)
The tax effects of significant temporary differences that comprise the
deferred tax assets and liabilities at June 30, 2002 and 2001 are as follows:
2002 2001
-------- --------
Deferred tax assets:
Employee benefits ............................... $ 2,262 $ 2,198
Depreciation .................................... 4,470 1,043
Insurance ....................................... 428 429
Receivables allowances .......................... 1,005 1,175
Inventory ....................................... 5,347 4,312
Plant curtailment and environmental
remediation ................................... 827 1,305
Alternative minimum tax ......................... 158 144
Net operating loss carryforwards--domestic ...... 12,696 8,091
--foreign ....... 7,494 3,847
Other ........................................... 3,220 1,180
-------- --------
37,907 23,724
Valuation allowance ............................. (27,257) (1,434)
-------- --------
10,650 22,290
Deferred tax liabilities
Property, plant and equipment ................... (4,578) (6,248)
Other ........................................... (1,449) (606)
-------- --------
(6,027) (6,854)
-------- --------
Net deferred tax asset ............................. $ 4,623 $ 15,436
======== ========
Deferred taxes are included in the following line items in the
consolidated balance sheets:
2002 2001
-------- --------
Prepaid expenses and other current assets .......... $ 6,593 $ 10,133
Accrued expenses, taxes and other current
liabilities ...................................... (717) (523)
Other assets ....................................... 305 9,222
Other liabilities .................................. (1,558) (3,396)
-------- --------
$ 4,623 $ 15,436
======== ========
The Company has incurred domestic losses in recent years and has
reassessed the likelihood of recovering net domestic deferred tax assets
resulting in the recording of a full valuation allowance of $15,413, including
$12,154 related to prior year net deferred tax asset balances. In addition,
through fiscal 2001, the Company's Odda subsidiary had a net deferred tax
liability; however, significant losses in fiscal 2002 have resulted in a net
deferred tax asset and a full valuation allowance has been provided due to
uncertainty of future profitability of this operation. The Company's position
with respect to the likelihood of recoverability of these deferred tax assets
will continue to be evaluated each reporting period based upon actual and
expected operating performance.
The Company has domestic federal net operating loss carryforwards of
approximately $26,000 that expire in 2019 through 2022 and foreign net operating
loss carryforwards of approximately $40,000 that expire over various periods
beginning in 2010.
F-23
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
13. Commitments and Contingencies
(a) Leases:
The Company leases equipment and office, warehouse and manufacturing
facilities through fiscal 2010 for minimum annual rentals (plus certain cost
escalations) as follows:
Capital Operating
Year Ended June 30 Leases Leases
------------------ ------ ------
2003 ............................................. $472 $2,242
2004 ............................................. 402 2,021
2005 ............................................. 103 1,723
2006 ............................................. 2 1,309
2007 ............................................. -- 799
Thereafter ....................................... -- 1,627
---- ------
Total minimum lease payments ..................... $979 $9,721
======
Amounts representing interest .................... 126
----
Present value of minimum lease payments .......... $853
====
Equipment under capitalized leases included in the consolidated balance
sheets at June 30, 2002 and 2001 amounted to $33 and $195, net of accumulated
depreciation of $833 and $993, respectively.
The commitment for facilities includes $1,500 with an affiliate controlled
by shareholders of the Company. (Refer to Note 5.)
Rent expense under operating leases for the years ended June 30, 2002,
2001 and 2000 amounted to $2,721, $2,243 and $1,734, respectively.
(b) Purchase Commitments:
The Company's subsidiary, MRT, has entered into minimum purchase
commitments to purchase fly ash at fixed prices over periods of up to 15 years.
Fly ash purchased under minimum purchase agreements for the years ended June 30,
2002, 2001 and 2000 were $5,802, $5,098 and $3,630, respectively.
At June 30, 2002, the Company had the following minimum purchase
commitments:
Fly Ash
Minimum
Year Ended June 30 Purchase
------------------ --------
2003 ........................................................ $ 7,512
2004 ........................................................ 7,077
2005 ........................................................ 6,256
2006 ........................................................ 4,641
2007 ........................................................ 4,545
Thereafter .................................................. 31,838
-------
Total minimum purchase commitments .......................... $61,869
=======
F-24
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
13. Commitments and Contingencies--(Continued)
(c) Litigation:
On or about April 17, 1997, CP and the Company were served with a
complaint filed by Chevron USA, Inc. ("Chevron") in the United States District
Court for the District of New Jersey, alleging that operations of CP at its
Sewaren plant affected adjoining property owned by Chevron and that Philipp
Brothers, as the parent of CP, is also responsible to Chevron. In July 2002, a
phased settlement agreement was reached under which the Company and another
defendant will, subject to certain conditions, take title to the property,
subject to a period of due diligence investigation of the property. The
Company's portion of the settlement for past costs and expenses is $495 and is
included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income. The payable of $495 is
included in accrued expenses and other current liabilities as of June 30, 2002
and was subsequently paid in July 2002. The Company and the other defendant
will, if the sale becomes final, share equally in the costs of remediation.
While the costs cannot be estimated at this time, the Company believes the costs
will not be material and insurance recoveries will be available to offset some
of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under CERCLA by
the EPA, involving a former third-party fertilizer manufacturing site in
Jericho, South Carolina. An agreement has been reached under which the Company
has agreed to contribute up to $900 of which $500 has been paid as of June 30,
2002. Some recovery from insurance and other sources is expected. The Company
has also accrued its best estimate of any future costs.
The Company and its subsidiaries are a 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.
(d) Environmental Remediation:
The Company's domestic subsidiaries are subject to various federal, state
and local environmental laws and regulations that 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 ceased operations at its Union City,
California facility. Costs accrued for closure were $350 as of June 30, 2002.
On or about November 15, 2001, the Company was advised by the State of
California that the State intended to file a civil complaint against the Company
for alleged violations arising out of operations at the Santa Fe Springs,
California facility. The Company is engaged in negotiations with the State of
California at this time. The amount of any penalty that may be assessed cannot
be determined at this time, but is not expected to be material.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the United States
Environmental Protection Agency relating to a third-party superfund site in
Rhode Island. The Company is investigating the matter, which relates to events
in the 1950's and 1960's.
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.
F-25
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
13. Commitments and Contingencies--(Continued)
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 (including the Chevron and
Jericho litigation) to be approximately $2,573, which is included in current and
long-term liabilities in the June 30, 2002 consolidated balance sheet
(approximately $2,222 in 2001). Such amounts primarily represent the cost of
feasibility studies and remediation activities and are expected to be
substantially incurred over a three-year period. No amounts have been
discounted. Environmental provisions are $2,164, $1,252 and $252 for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively, and are included in
selling, general and administrative expenses in the consolidated statements of
operations.
(e) Plant Curtailment:
During the fourth quarter of fiscal 1998, the Company decided to curtail
major manufacturing operations of its Sewaren, New Jersey facility and recorded
nonrecurring charges of $10.0 million related to this curtailment. Of these
charges, $5.6 million represented non-cash asset write-downs during fiscal 1998
related to the manufacturing facility; $1.1 million represented associated site
restoration; and $3.3 million represented the cost of long-term groundwater and
remediation activities. The accrual for groundwater monitoring represented
personnel, utility and related costs aggregating an estimated $4.2 million over
10 years and discounted at a 7% rate.
In June 2000, the Company entered an agreement ("Transfer Agreement") with
the Township of Woodbridge ("Township") to transfer title to its property in
Sewaren, New Jersey to the Township. Simultaneously, the Company entered into a
10-year lease agreement with the Township, with payments aggregating $2 million,
for certain areas of the property in order to allow the Company to conduct
operations related to its RCRA Part B Facility Permit. The Company retained its
environmental obligations pursuant to an Administrative Consent Order (ACO)
between the Company and the New Jersey Department of Environmental Protection
and has fully paid its obligations under the ACO. Pursuant to the Transfer
Agreement, the Township took title to the property and assumed obligations with
regard to the property, including maintaining the ground water recovery system
required by the ACO. In connection with the assumption of obligations by the
Township in fiscal 2000, the Company reversed $1,481 to income, representing
amounts previously reserved for ground water monitoring and remediation, net of
the present value of its lease obligations.
14. Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and cash equivalents, and trade receivables. The
Company places its cash and cash equivalents with high quality financial
institutions in various countries. The Company sells to customers in a variety
of industries, markets and countries. Concentrations of credit risk with respect
to receivables arising from these sales are limited due to the large number of
customers comprising the Company's customer base. Ongoing credit evaluations of
customers' financial conditions are performed and, generally, no collateral is
required. The Company maintains appropriate reserves for uncollectible
receivables.
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
Senior Subordinated Notes is estimated based on quoted market prices. At June
30, 2002 and 2001, the fair value of the Company's Senior Subordinated Notes was
$51,000 and $65,900, respectively, and the related carrying amount is $100,000.
At June 30, 2002 and 2001, the fair value of the Company's other long-term debt
does not differ materially from its carrying amount based on the variable
interest rate structure of these obligations.
The Company obtains third-party letters of credit and surety bonds in
connection with certain inventory purchases and insurance obligations. The
contract values of the letters of credit and surety bonds at June 30, 2002 and
2001 were $1,837 and $1,035, respectively. The difference between the carrying
values and fair values of these letters of credit and surety bonds were not
material.
F-26
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
14. Financial Instruments--(Continued)
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world and utilizes certain financial
instruments to manage its foreign currency and commodity exposures, primarily
related to forecasted transactions. To qualify a derivative as a hedge at
inception and throughout the hedge period, the company formally documents the
nature and relationships between hedging instruments and hedged items, as well
as its risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected
terms of a forecasted transaction must be specifically identified, and it must
be probable that each forecasted transaction would occur. If it were deemed
probable that the forecasted transaction would not occur, the gain or loss would
be recognized in operations currently. Financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the
hedging instrument and the item being hedged, both at inception and throughout
the hedged period. The Company hedges forecasted transactions for periods not
exceeding the next twelve months. The Company does not engage in trading or
other speculative uses of financial instruments.
The Company uses forward contracts and options to mitigate its exposure to
changes in foreign currency exchange rates and as a means of hedging forecasted
operating costs. When using options as a hedging instrument, the Company
excludes the time value from the assessment of effectiveness. Pursuant to SFAS
No. 133, all cumulative changes in a foreign currency option's fair value are
deferred as a component of accumulated other comprehensive income until the
underlying hedged transactions are reported on the Company's consolidated
statement of operations and comprehensive income. The Company also utilizes, on
a limited basis, certain commodity derivatives, primarily on copper used in its
manufacturing process, to hedge the cost of its anticipated production
requirements. During the fiscal year ended June 30, 2002, the Company's foreign
currency options and forward contracts and commodity futures contracts have been
designated as cash flow hedges and conform to the criteria of SFAS No. 133 to
qualify for hedge accounting treatment at June 30, 2002. The Company has elected
to hedge against forecasted cash flow transactions for its subsequent fiscal
year ending June 30, 2003. The Company has deferred $1,062 of cumulative gains
(net of losses) on various foreign exchange options, forward contracts and
copper futures contracts designated as cash flow hedges against forecasted
transactions for the fiscal year ended June 30, 2002. These gains will be
realized into cost of goods sold as the hedged purchase transactions are made
within the fiscal year ending June 30, 2003.
In addition, the Company utilizes energy swap contracts at its Norwegian
operations to mitigate volatility in local power rates. The Company's energy
swap contract has not been designated as qualifying as a hedge under SFAS No.
133 and therefore, changes in fair value have been charged to other (income)
expense, net in the amount of $1,157 for the year ended June 30, 2002.
The fair value associated with 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.
The fair value of commodity contracts is estimated based on quotes from
the market makers of these instruments and represents the estimated amounts that
the Company would expect to receive or pay to terminate the agreements as of the
reporting date.
15. Business Segments
The Company has four reportable segments--Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets a broad range of feed
additive products including trace minerals, anticoccidials, antibiotics,
vitamins, vitamin premixes and other animal health products. The Company's
Industrial Chemicals segment manufactures and markets pigments and other mineral
products. Certain of these products include copper oxide, which is produced by
the Company's recycling operation, mineral oxides, and alkaline etchants. The
Company's Distribution segment markets and distributes a variety of industrial,
specialty and fine organic chemicals and intermediates produced primarily by
third parties.
F-27
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
15. Business Segments--(Continued)
The Company's All Other segment manufactures and markets a variety of specialty
custom chemicals, and copper-based fungicides, as well as providing management
and recycling of coal combustion residues.
Transfers between segments are priced at amounts that include a
manufacturing profit except that certain domestic transfers of $10,228 and
$9,606 from the Industrial Chemicals segment to the All Other segment for fiscal
2001 and 2000, respectively, were recorded at the cost of the product
transferred.
2002 2001 2000
--------- --------- ---------
Net Sales
Animal Health and Nutrition .......... $ 243,436 $ 202,573 $ 135,088
Industrial Chemicals ................. 90,897 97,227 99,712
Distribution ......................... 36,880 44,452 49,254
All Other ............................ 39,407 46,979 69,198
Intersegment ......................... (21,807) (26,821) (30,226)
--------- --------- ---------
Net Sales ......................... $ 388,813 $ 364,410 $ 323,026
========= ========= =========
2002 2001 2000
--------- --------- ---------
Intersegment Sales
Animal Health and Nutrition .......... $ 3,834 $ 4,767 $ 5,019
Industrial Chemicals ................. 15,864 20,060 23,576
Distribution ......................... 1,988 1,994 1,631
All Other ............................ 121 -- --
--------- --------- ---------
Intersegment Sales ................ $ 21,807 $ 26,821 $ 30,226
========= ========= =========
2002 2001 2000
--------- --------- ---------
Operating (Loss) Income
Animal Health and Nutrition .......... $ 28,298 $ 17,562 $ 11,539
Industrial Chemicals ................. (34,079) (3,350) 5,355
Distribution ......................... 1,391 3,936 3,817
All Other ............................ (2,678) (7,086) 4,045
Corporate expenses and adjustments ... (14,596) (10,086) (9,082)
--------- --------- ---------
Operating (Loss) Income ........... $ (21,664) $ 976 $ 15,674
========= ========= =========
2002 2001 2000
--------- --------- ---------
Identifiable Assets
Animal Health and Nutrition .......... $ 186,118 $ 169,870 $ 66,203
Industrial Chemicals ................. 57,419 88,496 84,395
Distribution ......................... 11,826 16,568 18,825
All Other ............................ 30,688 33,362 66,187
Corporate ............................ 10,393 21,723 22,841
--------- --------- ---------
Identifiable Assets ............... $ 296,444 $ 330,019 $ 258,451
========= ========= =========
F-28
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
15. Business Segments--(Continued)
2002 2001 2000
--------- --------- ---------
Depreciation and Amortization
Animal Health and Nutrition .......... $ 7,438 $ 5,089 $ 3,698
Industrial Chemicals ................. 21,000 6,115 5,806
Distribution ......................... 223 223 268
All Other ............................ 1,838 1,623 1,558
Corporate ............................ 1,049 782 536
--------- --------- ---------
Depreciation and Amortization ..... $ 31,548 $ 13,832 $ 11,866
========= ========= =========
2002 2001 2000
--------- --------- ---------
Capital Expenditures
Animal Health and Nutrition .......... $ 5,915 $ 2,669 $ 2,363
Industrial Chemicals ................. 3,160 6,122 15,413
Distribution ......................... 14 18 13
All Other ............................ 2,138 5,484 4,696
Corporate ............................ 119 251 119
--------- --------- ---------
Capital Expenditures .............. $ 11,346 $ 14,544 $ 22,604
========= ========= =========
16. Geographic Information:
The following is information about the Company's operations in different
geographic areas. Revenues to external customers and property, plant and
equipment are attributed to the geographic areas based on the location of the
Company's subsidiaries.
2002 2001 2000
--------- --------- ---------
Revenues:
United States ........................ $ 240,520 $ 224,154 $ 209,767
Europe ............................... 55,096 56,392 59,120
Israel ............................... 45,266 52,746 49,494
South America ........................ 25,476 19,603 4,645
Asia/Pacific ......................... 22,455 11,515 --
--------- --------- ---------
Total Revenues .................... $ 388,813 $ 364,410 $ 323,026
========= ========= =========
2002 2001 2000
--------- --------- ---------
Operating (Loss) Income
United States ........................ $ 8,568 $ 6,982 $ 13,715
Europe ............................... (24,102) 534 3,182
Israel ............................... 4,529 6,867 7,119
South America ........................ 3,212 3,354 740
Asia/Pacific ......................... (49) 478 --
Corporate and Other .................. (13,822) (17,239) (9,082)
--------- --------- ---------
Total Operating (Loss) Income ..... $ (21,664) $ 976 $ 15,674
========= ========= =========
F-29
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
16. Geographic Information--(Continued)
2002 2001 2000
--------- --------- ---------
Property, Plant and Equipment
United States ........................ $ 30,223 $ 30,769 $ 25,734
Europe ............................... 27,852 40,693 32,465
Israel ............................... 12,647 14,219 15,899
South America ........................ 13,750 16,426 2,082
Asia/Pacific ......................... 258 216 --
--------- --------- ---------
Total Property, Plant and Equipment $ 84,730 $ 102,323 $ 76,180
========= ========= =========
17. Valuation and Qualifying Accounts:
Activity in the allowance for doubtful accounts consisted of the following
for the fiscal years ended June 30:
2002 2001 2000
------- ------- -----
Balance at beginning of period ......... $ 2,369 $ 756 $ 886
Provision for bad debts ................ 1,018 1,740 --
Bad debt write-offs .................... (460) (127) (130)
------- ------- -----
Balance at end of period ............... $ 2,927 $ 2,369 $ 756
======= ======= =====
18. Insurance Recoveries:
In April 1999, the Company suffered inventory, real property and equipment
loss at its Bowmanstown, Pennsylvania facility as a result of a fire. The
Company carries insurance coverage for the property damage and business
interruption losses and recorded a receivable of $4,259 in other receivables at
June 30, 1999 for amounts reimbursable from the insurance carrier. The
receivable was net of the Company's deductible and $1,000 advanced by the
insurance carrier prior to June 30, 1999.
A reduction of cost of sales of $396 was recorded for insurance recoveries
in excess of the net book value of damaged inventory and a gain of $3,701 was
recorded in other income for the excess of amounts reimbursable over the net
book value of property and equipment. As of June 30, 2000, the Company finalized
its claims with its insurance carriers and recorded additional gains in fiscal
2000 for property damage of $946 in other income and reimbursement for business
interruption losses of $1,161 as a reduction of cost of sales.
19. Divestitures
On May 4, 2001, the Company sold its Agtrol U.S. business, a division of
the Company's Phibro-Tech, Inc. subsidiary, to Nufarm, Inc. ("Nufarm"), the U.S.
subsidiary of Nufarm Limited, a publicly listed Australian-based company. On
June 14, 2001, the Company sold its Agtrol international business to Nufarm. The
sale included inventory and intangible assets to Nufarm, but did not include the
manufacturing facilities. Phibro-Tech also entered into agreements to supply
copper fungicide products to Nufarm from its Sumter, South Carolina plant for
five years, and from its Bordeaux, France plant for three years. On December 24,
2001, the Company transferred certain receivables and rebate liabilities, at net
carrying value, from Agtrol U.S. sales prior to May 1, 2001, to Nufarm, without
recourse.
The sales price was $27,139, of which the Company received $25,418 in cash
plus a note for $1,225 payable on June 30, 2001. The proceeds of the note were
received on July 18, 2001. The Company recorded a pre-tax gain of $1,457.
Approximately $1,484 of additional gain was deferred and will be recognized over
the period of the related supply agreements.
Revenues for the Agtrol business amounted to $31,333 and $54,043 for the
years ended June 30, 2001 and 2000, respectively. Operating (losses) income for
the Agtrol business amounted to ($6,444) and $2,599 for the years ended June 30,
2001 and 2000, respectively.
F-30
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
19. Divestitures--(Continued)
Odda had a minority equity investment in a local hydroelectric power
company and also held contracts for the purchase of hydroelectric power through
the years 2006 to 2010. As a result of legislative, regulatory and market
developments occurring in Norway since the 1998 acquisition, the Company was
able to sell its investment and related power rights to a Norwegian
"state-governed" power production company in January 2000. The Company realized
net sales proceeds of $18,750 and recorded a pre-tax gain of $13,763.
In fiscal 2001, Odda sold certain non-operating real property and
recognized a gain of $983.
20. Fourth Quarter Adjustments
During the fourth quarter of fiscal 2002, the Company recorded a net loss
of $38,634. Significant fourth quarter adjustments included in the net loss are:
accelerated depreciation and restructuring costs associated with the shutdown of
two product lines of the Company's Odda subsidiary of $12,907; fixed asset and
intangible write-downs related to the Company's Odda and Carbide Industries
subsidiaries ongoing operations of $6,799; and an increase in valuation
allowances for prior year domestic deferred tax assets of $12,154.
21. Consolidating Financial Statements
In June 1998, the Company issued $100 million in Senior Subordinated Notes
as described in Note 7. In connection with the issuance of these Notes, the
Company's U.S. Subsidiaries fully and unconditionally guaranteed such Notes on a
joint and several basis. Foreign subsidiaries do not presently guarantee the
Notes.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent, Guarantors
and Non-Guarantor Subsidiaries. The Parent is Philipp Brothers Chemicals, Inc.
("PBC"). The U.S. Guarantor Subsidiaries include all domestic subsidiaries of
PBC including the following: C.P. Chemicals, Inc., Phibro-Tech, Inc., Mineral
Resource Technologies, Inc., Prince Agriproducts, Inc., The Prince Manufacturing
Company (PA), The Prince Manufacturing Company (IL), Phibrochem, Inc., Phibro
Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc.
and Phibro Animal Health U.S., Inc. The U.S. and foreign Guarantor and
Non-Guarantor Subsidiaries are directly or indirectly wholly owned as to voting
stock by PBC.
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.
The principal consolidation adjustments are to eliminate investments in
subsidiaries and intercompany balances and transactions. Separate financial
statements of the U.S. Guarantor subsidiaries and the non-guarantor subsidiaries
are not presented because management has determined that such financial
statements would not be material to investors.
F-31
PHILIPP BROTHERS CHEMICALS, INC.
CONSOLIDATING BALANCE SHEET
As of June 30, 2002
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents ..................... $ 457 $ 130 $ 5,832 $ 6,419
Trade receivables ............................. 3,150 28,671 33,340 65,161
Other receivables ............................. 392 855 2,665 3,912
Inventory ..................................... 2,707 44,929 45,881 93,517
Prepaid expenses and other .................... 3,010 2,460 10,495 15,965
-----------------------------------------------------------------------------
Total current assets ................. 9,716 77,045 98,213 -- 184,974
-----------------------------------------------------------------------------
Property, plant & equipment, net .............. 409 29,781 54,540 84,730
Intangibles ................................... 32 1,495 11,673 13,200
Investment in subsidiaries .................... 82,540 3,621 -- (86,161) --
Intercompany .................................. 73,359 (36,074) (5,240) (32,045) --
Other assets .................................. 9,738 1,918 1,884 13,540
-----------------------------------------------------------------------------
Total assets ......................... $ 175,794 $ 77,786 $ 161,070 $(118,206) $ 296,444
=============================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Cash overdraft ................................ $ 576 $ 5,502 $ 1,689 $ 7,767
Loan payable to banks ......................... 37,991 -- 3,544 41,535
Current portion of long term debt ............. 3,216 530 5,105 8,851
Accounts payable .............................. 1,024 24,716 16,540 42,280
Accrued expenses and other .................... 7,579 8,092 18,409 34,080
-----------------------------------------------------------------------------
Total current liabilities ..................... 50,386 38,840 45,287 -- 134,513
-----------------------------------------------------------------------------
Long term debt ................................ 127,643 (68,271) 109,314 (32,045) 136,641
Other liabilities ............................. 2,352 6,156 21,369 29,877
Redeemable securities:
Series B and C preferred stock ................ 56,602 -- -- 56,602
Stockholders' Equity
Series A preferred stock ...................... 521 -- -- 521
Common stock .................................. 2 32 -- (32) 2
Paid in capital ............................... 740 110,885 8,166 (119,051) 740
Retained earnings ............................. (49,652) (10,271) (9,852) 20,123 (49,652)
Accumulated other comprehensive
income (loss)- gain on derivative
instruments ................................. 1,062 384 678 (1,062) 1,062
cumulative currency translation
adjustment .................................. (13,862) 31 (13,892) 13,861 (13,862)
-----------------------------------------------------------------------------
Total stockholders' equity ........... (61,189) 101,061 (14,900) (86,161) (61,189)
-----------------------------------------------------------------------------
Total liabilities and equity ......... $ 175,794 $ 77,786 $ 161,070 $(118,206) $ 296,444
=============================================================================
F-32
PHILIPP BROTHERS CHEMICALS, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For The Year Ended June 30, 2002
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Net sales ......................................... $ 25,692 $ 208,524 $ 165,641 $(11,044) $ 388,813
Cost of goods sold ................................ 20,837 164,040 148,514 (11,044) 322,347
-----------------------------------------------------------------------------
Gross profit ............................. 4,855 44,484 17,127 -- 66,466
Selling, general, and administrative
expenses ........................................ 17,528 36,913 26,890 81,331
Asset writedowns .................................. -- -- 6,799 6,799
-----------------------------------------------------------------------------
Operating (loss) income .................. (12,673) 7,571 (16,562) -- (21,664)
Interest expense .................................. 2,394 2,075 13,689 18,158
Interest income ................................... (15) -- (341) (356)
Other (income) expense ............................ (243) (876) (124) (1,243)
Gains from sale of assets ......................... -- -- (112) (112)
Intercompany allocation ........................... (15,070) 15,070 -- --
Loss (profit) relating to subsidiaries ............ 41,972 -- -- (41,972) --
-----------------------------------------------------------------------------
(Loss) income before income taxes ........ (41,711) (8,698) (29,674) 41,972 (38,111)
Provision (benefit) for income taxes .............. 10,059 4,229 (629) 13,659
-----------------------------------------------------------------------------
Net (loss) income ........................ $(51,770) $ (12,927) $ (29,045) $ 41,972 $ (51,770)
=============================================================================
F-33
PHILIPP BROTHERS CHEMICALS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended June 30, 2002
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net (loss) income ................................. $(51,770) $(12,927) $(29,045) $ 41,972 $(51,770)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization .................... 1,049 5,592 24,907 31,548
Deferred income taxes ............................ 9,297 4,890 (3,215) 10,972
Gains from sale of assets ........................ -- -- (112) (112)
Change in redemption amount of
redeemable common stock ........................ (378) -- -- (378)
Asset writedowns ................................. -- -- 6,799 6,799
Effects of changes in foreign currency ........... -- -- 2,120 2,120
Other ............................................ (43) 865 1,339 2,161
Changes in operating assets and
liabilities, net of effect of
business acquired:
Accounts receivable .............................. 1,299 1,798 7,244 10,341
Inventory ........................................ 606 (2,719) (10,027) (12,140)
Prepaid expenses and other ....................... 210 (1,150) (103) (1,043)
Other assets ..................................... (1,335) 2,471 2,068 3,204
Intercompany ..................................... 27,032 6,917 8,023 (41,972) --
Accounts payable ................................. (719) 785 (9,955) (9,889)
Accrued expenses and other ....................... (119) (4,126) 7,687 3,442
-----------------------------------------------------------------------------
Net cash (used in) provided by
operating activities ............................ (14,871) 2,396 7,730 -- (4,745)
-----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures ............................. (119) (5,049) (6,178) (11,346)
Acquisition of a business ........................ -- -- (7,182) (7,182)
Proceeds from property damage claim .............. -- 411 -- 411
Proceeds from sale of assets ..................... -- -- 173 173
Other investing .................................. 613 3 (33) 583
-----------------------------------------------------------------------------
Net cash provided by (used in)
investing activities ............................ 494 (4,635) (13,220) -- (17,361)
-----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash overdraft ................................... 563 1,331 1,544 3,438
Net decrease in short term debt .................. 13,520 -- (864) 12,656
Proceeds from long term debt ..................... 2,000 322 -- 2,322
Payments of long term debt ....................... (2,541) (494) (1,704) (4,739)
Other financing .................................. -- -- -- --
-----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ............................ 13,542 1,159 (1,024) -- 13,677
-----------------------------------------------------------------------------
Effect of exchange rate changes on cash ........... -- -- 3 3
-----------------------------------------------------------------------------
Net decrease in cash and cash equivalents ......... (835) (1,080) (6,511) -- (8,426)
Cash and cash equivalents at beginning
of year ......................................... 1,292 1,210 12,343 14,845
-----------------------------------------------------------------------------
Cash and cash equivalents at end of year .......... $ 457 $ 130 $ 5,832 $ -- $ 6,419
=============================================================================
F-34
PHILIPP BROTHERS CHEMICALS, INC.
CONSOLIDATING BALANCE SHEET
As of June 30, 2001
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents ...................... $ 1,292 $ 1,210 $ 12,343 $ 14,845
Trade receivables .............................. 4,624 32,291 40,995 77,910
Other receivables .............................. 791 1,913 2,096 4,800
Inventory ...................................... 2,715 44,050 37,031 83,796
Prepaid expenses and other ..................... 5,461 2,745 9,242 17,448
-----------------------------------------------------------------------------
Total current assets .................... 14,883 82,209 101,707 -- 198,799
-----------------------------------------------------------------------------
Property, plant & equipment, net ............... 626 30,143 71,554 102,323
Intangibles .................................... 87 1,677 3,830 5,594
Investment in subsidiaries ..................... 55,897 1,593 -- (57,490) --
Intercompany ................................... 54,322 (22,808) 3,852 (35,366) --
Other assets ................................... 93,466 (71,333) 1,170 23,303
-----------------------------------------------------------------------------
Total assets ............................ $ 219,281 $ 21,481 $ 182,113 $ (92,856) $ 330,019
=============================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Cash overdraft ................................. $ 13 $ 4,209 $ -- $ 4,222
Loan payable to banks .......................... 24,471 -- 3,992 28,463
Current portion of long term debt .............. 2,541 493 2,370 5,404
Accounts payable ............................... 1,743 23,359 26,202 51,304
Accrued expenses and other ..................... 7,859 11,780 15,739 35,378
-----------------------------------------------------------------------------
Total current liabilities ...................... 36,627 39,841 48,303 -- 124,771
-----------------------------------------------------------------------------
Long term debt ................................. 127,263 (60,654) 108,221 (35,366) 139,464
Other liabilities .............................. 2,129 5,826 5,066 13,021
Redeemable securities:
Series B and C preferred stock ................. 48,980 -- -- 48,980
Common stock ................................... 877 -- (499) 378
-----------------------------------------------------------------------------
49,857 -- (499) -- 49,358
-----------------------------------------------------------------------------
Stockholders' Equity
Series A preferred stock ....................... 521 -- -- 521
Common stock ................................... 2 32 -- (32) 2
Paid in capital ................................ 878 34,092 6,138 (40,230) 878
Retained earnings .............................. 9,741 2,325 22,496 (24,821) 9,741
Accumulated other comprehensive (loss)
income- cumulative currency
translation adjustment ....................... (7,737) 19 (7,612) 7,593 (7,737)
-----------------------------------------------------------------------------
Total stockholders' equity .............. 3,405 36,468 21,022 (57,490) 3,405
-----------------------------------------------------------------------------
Total liabilities and equity ............ $ 219,281 $ 21,481 $ 182,113 $ (92,856) $ 330,019
=============================================================================
F-35
PHILIPP BROTHERS CHEMICALS, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For The Year Ended June 30, 2001
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Net sales ......................................... $ 33,350 $ 198,029 $ 157,513 $(24,482) $ 364,410
Cost of goods sold ................................ 27,936 156,985 130,698 $(24,482) 291,137
-----------------------------------------------------------------------------
Gross profit ............................... 5,414 41,044 26,815 -- 73,273
Selling, general, and administrative expenses ..... 14,686 36,644 20,967 72,297
-----------------------------------------------------------------------------
Operating (loss) income .................... (9,272) 4,400 5,848 -- 976
Interest expense .................................. 12,623 45 5,629 18,297
Interest income ................................... (117) (10) (439) (566)
Other expense (income) ............................ 407 260 1,894 2,561
Gains from sale of assets ......................... -- (1,790) (650) (2,440)
Intercompany allocation ........................... (16,216) 12,487 3,729 --
Loss (profit) relating to subsidiaries ............ 9,039 -- -- (9,039) --
-----------------------------------------------------------------------------
(Loss) income before income taxes .......... (15,008) (6,592) (4,315) 9,039 (16,876)
Benefit for income taxes .......................... (113) (1,170) (698) (1,981)
-----------------------------------------------------------------------------
Net (loss) income .......................... $(14,895) $ (5,422) $ (3,617) $ 9,039 $ (14,895)
=============================================================================
F-36
PHILIPP BROTHERS CHEMICALS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended June 30, 2001
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net (loss) income ................................. $(14,895) $ (5,422) $ (3,617) $ 9,039 $(14,895)
Adjustments to reconcile net (loss)
income to net
cash provided by operating activities:
Depreciation and amortization .................... 782 5,103 7,947 13,832
Deferred income taxes ............................ (4,040) 769 (4,297) (7,568)
Gains from sale of assets ........................ -- (1,790) (650) (2,440)
Change in redemption amount of
redeemable common stock ........................ (1,512) (356) (1,623) (3,491)
Other ............................................ 406 1,640 245 2,291
Changes in operating assets and liabilities,
net of effect of business acquired:
Accounts receivable .............................. 1,549 9,220 (12,178) (1,409)
Inventory ........................................ 552 (12,831) 10,280 (1,999)
Prepaid expenses and other ....................... 2,179 5,803 (2,995) 4,987
Other assets ..................................... 1,281 (1,411) 2,333 2,203
Intercompany ..................................... 29,101 (26,301) 6,239 (9,039) --
Accounts payable ................................. (397) 8,021 11,845 19,469
Accrued expenses and other ....................... (2,186) 380 3,967 2,161
-----------------------------------------------------------------------------
Net cash provided by (used in)
operating activities ............................ 12,820 (17,175) 17,496 -- 13,141
-----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures ............................. (251) (9,201) (5,092) (14,544)
Acquisition of a business ........................ (51,700) -- -- (51,700)
Proceeds from sale of assets ..................... -- 25,418 1,052 26,470
Other investing .................................. (50) -- (325) (375)
-----------------------------------------------------------------------------
Net cash (used in) provided by
investing activities ............................ (52,001) 16,217 (4,365) -- (40,149)
-----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash overdraft ................................... (145) 2,905 (106) 2,654
Net decrease in short term debt .................. (3,969) -- (4,037) (8,006)
Proceeds from long term debt ..................... 3,800 24 5,539 9,363
Proceeds from issuance of redeemable
preferred stock ................................ 45,000 -- -- 45,000
Payments of long term debt ....................... (32) (862) (4,030) (4,924)
Other financing .................................. (4,192) -- -- (4,192)
-----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ............................ 40,462 2,067 (2,634) -- 39,895
-----------------------------------------------------------------------------
Effect of exchange rate changes on cash ........... -- 2 (447) (445)
-----------------------------------------------------------------------------
Net increase in cash and cash equivalents ......... 1,281 1,111 10,050 -- 12,442
Cash and cash equivalents at beginning
of year ......................................... 11 99 2,293 2,403
-----------------------------------------------------------------------------
Cash and cash equivalents at end of year .......... $ 1,292 $ 1,210 $ 12,343 $ -- $ 14,845
=============================================================================
F-37
PHILIPP BROTHERS CHEMICALS, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended June 30, 2000
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Net sales ......................................... $ 35,977 $ 175,068 $ 124,322 $(12,341) $323,026
Cost of goods sold ................................ 29,685 137,274 94,964 (12,341) 249,582
-----------------------------------------------------------------------------
Gross profit ................... 6,292 37,794 29,358 -- 73,444
Selling, general, and administrative expenses ..... 11,993 28,144 19,114 59,251
Curtailment of operations at
manufacturing facility ......................... -- (1,481) -- (1,481)
-----------------------------------------------------------------------------
Operating (loss) income ........................... (5,701) 11,131 10,244 -- 15,674
Interest expense .................................. 8,519 198 6,037 14,754
Interest income ................................... (19) (2) (579) (600)
Other (income) expense ............................ (912) -- 3,142 2,230
Gain from property damage claim ................... -- (946) -- (946)
Gain from sale of asset ........................... -- -- (13,763) (13,763)
Intercompany allocation ........................... (10,925) 10,860 65 --
(Profit) loss relating to subsidiaries ............ (10,967) -- -- 10,967 --
-----------------------------------------------------------------------------
Income (loss) before income taxes ................. 8,603 1,021 15,342 (10,967) 13,999
(Benefit) provision for income taxes .............. (1,450) 1,020 4,376 -- 3,946
-----------------------------------------------------------------------------
Net income (loss) ................................. $ 10,053 $ 1 $ 10,966 $(10,967) $ 10,053
=============================================================================
F-38
PHILIPP BROTHERS CHEMICALS, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended June 30, 2000
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) ................................. $ 10,053 $ 1 $ 10,966 $(10,967) $ 10,053
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization .................... 536 4,224 7,106 11,866
Deferred income taxes ............................ (337) (272) 2,047 1,438
Provision for curtailment of operations
at manufacturing facility ...................... -- (1,481) -- (1,481)
Gain from property damage claim .................. -- (946) (107) (1,053)
Gain from sale of asset .......................... -- -- (13,763) (13,763)
Change in redemption amount of
redeemable securities .......................... 13 (130) 1,124 1,007
Other ............................................ 1,360 350 (983) 727
Changes in operating assets and
liabilities, net of effect of
business acquired:
Accounts receivable .............................. (77) (13,499) 5,295 (8,281)
Inventory ........................................ 945 1,471 (1,832) 584
Prepaid expenses and other ....................... (3,884) 258 1,344 (2,282)
Other assets ..................................... (1,316) 917 (1,146) (1,545)
Intercompany ..................................... (21,658) 18,526 (7,835) 10,967 --
Accounts payable ................................. 173 687 (4,628) (3,768)
Accrued expenses and other ....................... 927 (4,280) 1,942 (1,411)
-----------------------------------------------------------------------------
Net cash (used in) provided by
operating activities ............................ (13,265) 5,826 (470) -- (7,909)
-----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures ............................. (119) (11,276) (11,209) (22,604)
Proceeds from property damage claim .............. -- 3,999 -- 3,999
Proceeds from sale of asset ...................... -- -- 18,750 18,750
Other investing .................................. (3,157) -- (1,046) (4,203)
-----------------------------------------------------------------------------
Net cash (used in) provided by
investing activities ............................ (3,276) (7,277) 6,495 -- (4,058)
-----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash overdraft ................................... (119) 1,089 (288) 682
Net increase in short term debt .................. 72 -- 4,117 4,189
Proceeds from long term debt ..................... 16,300 1,595 391 18,286
Payments of long term debt ....................... (94) (1,300) (10,477) (11,871)
Other financing .................................. -- -- 62 62
-----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ............................ 16,159 1,384 (6,195) -- 11,348
-----------------------------------------------------------------------------
Net decrease in cash and cash equivalents ......... (382) (67) (170) (619)
-----------------------------------------------------------------------------
Cash and cash equivalents at beginning
of year ......................................... 393 166 2,463 3,022
-----------------------------------------------------------------------------
Cash and cash equivalents at end of year .......... $ 11 $ 99 $ 2,293 $ -- $ 2,403
=============================================================================
F-39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
By: /s/ Jack C. Bendheim By: /s/ Gerald K. Carlson
--------------------------------- ------------------------------
Jack C. Bendheim Gerald K. Carlson
Chairman of the Board Chief Executive Officer
Date: October 25, 2002 Date: October 25, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Title Date
------------------- ----
/s/ Gerald K. Carlson October 25, 2002
----------------------------------------
Gerald K. Carlson
Chief Executive Officer
(Principal Executive Officer)
/s/ Jack C. Bendheim October 25, 2002
----------------------------------------
Jack C. Bendheim
Director, Chairman of the Board
/s/ Richard G. Johnson October 25, 2002
----------------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Marvin S. Sussman October 25, 2002
----------------------------------------
Marvin S. Sussman
Director, Vice Chairman
and President of Animal Health Group
/s/ James O. Herlands October 25, 2002
----------------------------------------
James O. Herlands
Director and Executive Vice President
II-1
CERTIFICATIONS
I, Gerald K. Carlson, certify that:
(1) I have reviewed this annual report on Form 10-K of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
Date: October 24, 2002
/s/ Gerald K. Carlson
---------------------------------
Gerald K. Carlson,
Chief Executive Officer
I, Jack C. Bendheim, certify that:
(1) I have reviewed this annual report on Form 10-K of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
Date: October 24, 2002
/s/ Jack C. Bendheim
---------------------------------
Jack C. Bendheim,
Chairman of the Board
II-2
I, Richard G. Johnson, certify that:
(1) I have reviewed this annual report on Form 10-K of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
Date: October 24, 2002
/s/ Richard G. Johnson
---------------------------------
Richard G. Johnson,
Chief Financial Officer
Since the Company does not have securities registered under Section 12 of
the Securities Exchange Act of 1934 and is not required to file periodic reports
pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company files periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its senior subordinated notes.
II-3
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Composite Certificate of Incorporation of Registrant(7)
3.2 By-laws of Registrant(1)
4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors
named therein and The Chase Manhattan Bank, as trustee, relating to
the 9 7/8% Senior Subordinated Notes due 2008 of Registrant, and
exhibits thereto, including Form of 9 7/8% Senior Subordinated Note
due 2008 of Company(1)
4.1.1 Supplemental Indenture, dated as of November 30, 2000, among
Registrant, the Guarantors named therein and The Chase Manhattan Bank,
as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008
of Registrant(7)
Certain instruments which define the rights of holders of long-term
debt of Registrant and its consolidated subsidiaries have not been
filed as Exhibits to this Report since the total amount of securities
authorized under any such instrument does not exceed 10% of the total
assets of Registrant and its subsidiaries on a consolidated basis, as
of June 30, 2002. For a description of such indebtedness, see Note 7
of Notes to Consolidated Financial Statements. Registrant hereby
agrees to furnish copies of such instruments to the Securities and
Exchange Commission upon its request.
10.1 Amended and Restated Revolving Credit, Capital Expenditure Line and
Security Agreement, dated November 30, 2000, among Registrant, the
Guarantors thereunder and PNC Bank, National Association ("PNC")(4)
10.1.1 First Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated September 28, 2001 and
effective June 30, 2001, among Registrant, the Guarantors thereunder
and PNC(7)
10.1.2 Second Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated October 18, 2002 among
Registrant, the Guarantors thereunder and PNC(8)
10.2 Manufacturing Agreement, dated May 15, 1994, by and between Merck &
Co., Inc., Koffolk, Ltd., and Registrant(1)+
10.3 Lease, dated July 25, 1986, between Registrant and 400 Kelby
Associates, as amended December 1, 1986 and December 30, 1994(1)
10.4 Lease, dated June 30, 1995, between First Dice Road Co. and
Phibro-Tech, Inc., as amended May 1998(1)
10.5 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel
Land Administration(1)
10.6 Master Lease Agreement, dated February 27, 1998, between General
Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1)
10.7 Stockholders Agreement, dated December 29, 1987, by and between
Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S.
Sussman(1)
10.8 Employment Agreement, dated December 29, 1987, by and between
Registrant and Marvin S. Sussman(1)++
10.9 Stockholders Agreement, dated February 21, 1995, between James O.
Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1)
10.10 Form of Severance Agreement, dated as of February 21, 1995, between
Registrant and James O. Herlands(1)++
10.11 Agreement of Limited Partnership of First Dice Road Company, dated
June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim,
Marvin S. Sussman and James O. Herlands, as amended November 1985(1)
10.12 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred
Compensation Plan Trust, dated as of January 1, 1994, by and between
Registrant on its own behalf and on behalf of C.P. Chemicals, Inc.,
Phibro-Tech, Inc. and the Trustee thereunder; Philipp
1
Brothers Chemicals, Inc. Retirement Income and Deferred Compensation
Plan, dated March 18, 1994 ("Retirement Income and Deferred
Compensation Plan")(1)++
10.12.1 First, Second and Third Amendments to Retirement Income and Deferred
Compensation Plan.(2)++
10.13 Form of Executive Income Deferred Compensation Agreement, each dated
March 11, 1990, by and between Registrant and each of Jack Bendheim,
James Herlands and Marvin Sussman(1)++
10.14 Form of Executive Income Split Dollar Agreement, each dated March 1,
1990, by and between Registrant and each of Jack Bendheim, James
Herlands and Marvin Sussman(1)++
10.15 Supply Agreement, dated as of September 28, 1998, between BOC Limited
and Registrant(1)
10.16 Administrative Consent Order, dated March 11, 1991, issued by the
State of New Jersey Department of Environmental Protection, Division
of Hazardous Waste Management, to C.P. Chemicals, Inc.(1)
10.17 Agreement for Transfer of Ownership, dated as of June 8, 2000, between
C. P. Chemicals, Inc. ("CP") and the Township of Woodbridge
("Township"), and related Environmental Indemnification Agreement,
between CP and Township, and Lease, between Township and CP(2)
10.18 Stockholders' Agreement, dated as of January 5, 2000, among
shareholders of Penick Holding Company ("PHC"), and Certificate of
Incorporation of PHC and Certificate of Designation, Preferences and
Rights of Series A Redeemable Cumulative Preferred Stock of PHC(2)
10.19 Separation Agreement among Registrant, Phibro Tech, Inc. and Nathan
Bistricer dated as of October 4, 2000(3)
10.20 Stock Purchase Agreement between Phibro Tech, Inc. and Nathan
Bistricer dated as of October 4, 2000(3)
10.21 Asset Purchase Agreement, dated as of September 28, 2000, among
Pfizer, Inc., the Asset Selling Corporations (named therein) and
Registrant, and various exhibits and certain Schedules thereto(3)+
10.22 Stock Purchase Agreement, dated as of November 30, 2000, between
Registrant and the Purchasers (as defined therein)(4)
10.23 Stockholders' Agreement, dated as of November 30, 2000, among
Registrant, the Investor Stockholders (as defined therein) and Jack C.
Bendheim(4)
10.24 United States Asset Purchase Agreement between Phibro-Tech, Inc. and
Nufarm, Inc. dated as of May 1, 2001(5)
10.24.1 Amendment No. 1 to United States Asset Purchase Agreement between
Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001(6)
10.25 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as
of May 1, 2001(5)
10.26 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as
of May 1, 2001(5)
10.27 Management and Advisory Services Agreement dated November 30, 2000
between Registrant and Palladium Equity Partners, L.L.C.(7)++
10.28 Employment Agreement, dated May 28, 2002, by and between Registrant
and Gerald K. Carlson(8)++
10.29 Agreement and General Release, and Consulting Agreement dated as of
September 11, 2002, by and between Registrant and David C.
Storbeck(8)++
21 List of Subsidiaries(8)
----------
1 Filed as an Exhibit to the Registrant's Registration Statement on Form
S-4, No. 333-64641.
2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2000.
4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001.
2
6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
8 Filed herewith.
+ A request for confidential treatment has been granted for portions of such
document. Confidential portions have been omitted and filed separately
with the SEC as required by Rule 406(b).
++ This Exhibit is a management compensatory plan or arrangement.
3