================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
(Mark One)
|X|* QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 333-64641
----------
Philipp Brothers Chemicals, Inc.
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction (I.R.S. Employer
of 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)
----------
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 |_|
Number of shares of each class of common stock outstanding as of September 30,
2002:
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 subject to such filing requirements and not required to file this
Quarterly Report, but has provided all such reports as if so required
during the preceding 12 months.
================================================================================
PHILIPP BROTHERS CHEMICALS, INC.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Financial Statements .................................. 3
Condensed Consolidated Balance Sheets ........................... 4
Condensed Consolidated Statements of Operations and
Comprehensive Income .......................................... 5
Condensed Consolidated Statements of Changes in
Stockholders' Deficit ......................................... 6
Condensed Consolidated Statements of Cash Flows ................. 7
Notes to Condensed Consolidated Financial Statements ............ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 25
Item 4. Control and Procedures .......................................... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 26
Item 5. Other Information ............................................... 26
Item 6. Exhibits and Reports on Form 8-K ................................ 26
SIGNATURES ................................................................ 27
2
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2002
and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this
Form 10-Q under the caption "Certain Factors Affecting Future Operating
Results." Unless the context otherwise requires, references in this report to
the "Company" refers to the Company and/or one or more of its subsidiaries, as
applicable.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
3
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
September 30, June 30,
2002 2002
------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,653 $ 6,419
Trade receivables, less allowance for
doubtful accounts of $2,858 at
September 30, 2002 and $2,927 at
June 30, 2002 60,495 65,161
Other receivables 3,041 3,912
Inventories 89,962 93,517
Prepaid expenses and other current assets 14,235 15,965
--------- ---------
TOTAL CURRENT ASSETS 176,386 184,974
PROPERTY, PLANT AND EQUIPMENT, net 83,456 84,730
INTANGIBLES 12,840 13,200
OTHER ASSETS 12,601 13,540
--------- ---------
$ 285,283 $ 296,444
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 1,967 $ 7,767
Loans payable to banks 31,086 41,535
Current portion of long-term debt 10,038 8,851
Accounts payable 50,780 42,280
Accrued expenses and other current
liabilities 37,864 34,080
--------- ---------
TOTAL CURRENT LIABILITIES 131,735 134,513
LONG-TERM DEBT 134,036 136,641
OTHER LIABILITIES 28,166 29,877
--------- ---------
TOTAL LIABILITIES 293,937 301,031
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 58,725 56,602
--------- ---------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 740 740
Retained earnings (51,932) (49,652)
Accumulated other comprehensive (loss)
income -
(loss) gain on derivative instruments (21) 1,062
cumulative currency translation
adjustment (16,689) (13,862)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (67,379) (61,189)
--------- ---------
$ 285,283 $ 296,444
========= =========
See notes to unaudited Condensed Consolidated Financial Statements.
4
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended September 30, 2002 and 2001
(In Thousands)
2002 2001
-------- --------
NET SALES $ 97,041 $ 94,659
COST OF GOODS SOLD 75,237 74,194
-------- --------
GROSS PROFIT 21,804 20,465
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 17,446 19,056
-------- --------
OPERATING INCOME 4,358 1,409
OTHER:
Interest expense 4,504 4,643
Interest income (126) (70)
Other (income)/expense, net (310) (195)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 290 (2,969)
PROVISION (BENEFIT) FOR INCOME TAXES 447 (604)
-------- --------
NET LOSS (157) (2,365)
OTHER COMPREHENSIVE (LOSS) INCOME-
(Loss) gain on derivative instruments (1,083) 145
Change in currency translation adjustment (2,827) (1,566)
-------- --------
COMPREHENSIVE LOSS $ (4,067) $ (3,786)
======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
5
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Unaudited)
For the Three Months Ended September 30, 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, 2002 $ 521 $ 1 $ 1 $ 740 $(49,652) $(12,800) $(61,189)
Accretion of redeemable
preferred securities to fair
market value -- --
Dividends on Series B and C
redeemable preferred stock (2,123) (2,123)
Loss on derivative
instruments (1,083) (1,083)
Foreign currency translation
adjustment (2,827) (2,827)
Net loss (157) (157)
-------- -------- -------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 2002 $ 521 $ 1 $ 1 $ 740 $(51,932) $(16,710) $(67,379)
======== ======== ======== ======== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended September 30, 2002 and 2001
(In Thousands)
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net loss $ (157) $ (2,365)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 3,937 4,158
Other 1,259 789
Changes in operating assets and
liabilities:
Accounts receivable 3,955 5,525
Inventories 1,441 (4,383)
Prepaid expenses and other current assets 1,469 2,606
Other assets (187) (815)
Accounts payable 8,870 (1,334)
Accrued expenses and other current
liabilities 2,987 872
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,574 5,053
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (4,017) (3,626)
Other investing 320 79
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,697) (3,547)
-------- --------
FINANCING ACTIVITIES:
Cash overdraft (5,800) 99
Net increase (decrease) in short-term debt (10,387) 1,917
Proceeds from long-term debt -- 11
Payments of long-term debt (1,468) (1,073)
-------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (17,655) 954
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 12 52
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,234 2,512
CASH AND CASH EQUIVALENTS at beginning of period 6,419 14,845
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 8,653 $ 17,357
======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
7
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
1. General
In the opinion of Philipp Brothers Chemicals, Inc. (the "Company"), the
accompanying unaudited condensed consolidated financials statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly its financial position as of September 30, 2002 and its results
of operations and cash flows for the three months ended September 30, 2002 and
2001.
The condensed consolidated balance sheet as of June 30, 2002 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. Additionally, it should be noted
that the accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with accounting standards appropriate
for interim financial statements. While the Company believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the Company's consolidated financial statements for the year
ended June 30, 2002.
Certain prior year amounts in the accompanying condensed consolidated
financial statements and related notes have been reclassified to conform to the
fiscal 2003 presentation.
The results of operations for the three months ended September 30, 2002
may not be indicative of results for the full year.
Effective July 1, 2002 the Company adopted 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 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 has assessed the useful lives of its
intangible assets. The adoption of SFAS No. 141 and No. 142 did not result in an
impact on the Company's financial statements.
Effective July 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 143 "Accounting for Asset Retirement Obligations"
("SFAS No. 143"). SFAS No. 143 established accounting standards for the
recognition and measurement of an asset retirement obligation and its associated
asset retirement cost. The Company has reviewed its tangible long-lived assets
for associated asset retirement obligations ("AROs") in accordance with SFAS No.
143. The Company has not recognized liabilities associated with AROs since the
associated assets have indeterminate useful lives.
Effective July 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. "144 Accounting for Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"). SFAS No. 144 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 adoption of SFAS No. 144
did not result in an impact on the Company's financial statements.
Effective July 1, 2002 the Company adopted 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." The adoption of SFAS No. 145 did not result in an
impact on the Company's financial statements.
8
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
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. Reclassifications
Freight and warehousing expenses of $6,598, $6,994, $6,428 and $9,245 for
the three months ended September 30, 2001, December 31, 2001, March 31, 2002 and
June 30, 2002, respectively, are being reclassified from selling, general and
administrative expenses to cost of goods sold on the Company's condensed
consolidated statements of operations and comprehensive income. This
reclassification had no impact on net sales, operating income (loss) or net loss
for each of the periods presented below. Results for the prior fiscal year are
as follows:
3 Months Ended 3 Months Ended 3 Months Ended 3 Months Ended 12 Months Ended
September 30, December 31, March 31, June 30, June 30,
2001 2001 2002 2002 2002
-------------- -------------- -------------- -------------- ---------------
Net Sales $ 94,659 $ 97,987 $ 96,310 $ 99,857 $ 388,813
Gross Profit 20,465 24,295 16,539 5,167 66,466
Operating Income (Loss) 1,409 4,614 (3,729) (23,958) (21,664)
Net (Loss) (2,365) (1,699) (9,072) (38,634) (51,770)
3. Risks and Uncertainties
As of September 30, 2002 (after giving effect to the amendment referred to
below), the Company was in compliance with the financial covenants included in
its amended senior credit facility ("credit agreement" or "facility") with its
lending banks, for which PNC Bank serves as agent. 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 increase 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 fiscal 2003,
the Company cannot be certain it will be able to obtain waivers or amendments on
favorable terms, if at all.
9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
In addition, the Company's credit agreement and its note payable to
Pfizer, Inc. 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, 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.
4. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average cost 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.
Inventories consist of the following at September 30, 2002 and June 30,
2002:
September 30, June 30,
2002 2002
-------------- --------
Raw materials $22,277 $23,524
Work-in-process 1,879 2,098
Finished goods 65,806 67,895
------- -------
Total inventory $89,962 $93,517
======= =======
5. Restructuring and Asset Writedowns
The Company's Odda, Norway operation has suffered operating losses during
fiscal years 2002 and 2001. 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. During
the fourth quarter of fiscal year 2002, due to further deterioration of the Odda
business, the Company's review of 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, resulted in the
Company recording an impairment charge.
During fiscal 2002 Odda incurred restructuring charges and terminated
approximately 120 employees. An accrual of $824 for restructuring charges still
to be paid at June 30, 2002 remained on the Company's balance sheet at June 30,
2002. An accrual of $770 for restructuring costs still to be paid at September
30, 2002 remains on the Company's balance sheet at September 30, 2002. The
Company anticipates that by the end of January 2003 substantially all of the
remaining restructuring costs will be paid.
During the first quarter of fiscal 2003 Odda reduced production of its
primary product, dicyandiamide, pending market acceptance of its calcium oxide,
a by-product of the manufacturing process. In November 2002, the Company
announced a temporary shutdown of the Odda operation due to continuing operating
losses, higher than planned operating costs, and delays in the market acceptance
of calcium oxide. Various alternatives are under consideration by the Company.
10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
6. Contingencies
(a) Litigation:
On or about April 17, 1997, the Company and CP Chemicals, Inc. ("CP") 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
was included in selling, general and administrative expenses in the June 30,
2002 statement of operations and comprehensive income, and was 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 the
federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency (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 September 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.
(b) 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 September 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.
11
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
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 Jericho
litigation) to be approximately $2,025, which is included in current and
long-term liabilities in the September 30, 2002 condensed consolidated balance
sheet.
7. 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. 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.
Segment data for the three months ended September 30, 2002 and 2001 is as
follows:
Animal Corporate
Health & Industrial All Expenses &
Three Months Ended September 30, 2002 Nutrition Chemicals Distribution Other Adjustments Total
--------- ---------- ------------ -------- ----------- --------
Revenues -external customers $ 59,976 $ 17,322 $ 9,573 $ 10,170 $ -- $ 97,041
-intersegment 927 2,893 351 4 (4,175) --
-------- -------- -------- -------- -------- --------
Total revenues $ 60,903 $ 20,215 $ 9,924 $ 10,174 $ (4,175) $ 97,041
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 9,702 $ (2,110) $ 743 $ 85 $ (4,062) $ 4,358
======== ======== ======== ======== ======== ========
Animal Corporate
Health & Industrial All Expenses &
Three Months Ended September 30, 2001 Nutrition Chemicals Distribution Other Adjustments Total
--------- ---------- ------------ -------- ----------- --------
Revenues -external customers $ 57,943 $ 17,345 $ 9,435 $ 9,936 $ -- $ 94,659
-intersegment
1,410 3,666 554 11 (5,641) --
-------- -------- -------- -------- -------- --------
Total revenues $ 59,353 $ 21,011 $ 9,989 $ 9,947 $ (5,641) $ 94,659
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 7,365 $ (4,200) $ 838 $ 119 $ (2,713) $ 1,409
======== ======== ======== ======== ======== ========
8. Consolidating Financial Statements
In June 1998, the Company issued $100 million in Senior Subordinated Notes
due 2008 (the "Notes"). In connection with the issuance of these Notes, the
Company's U.S. Subsidiaries fully and unconditionally guaranteed such Notes on a
joint and several basis. Foreign subsidiaries do not presently guarantee the
Notes.
12
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
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, 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.
13
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of September 30, 2002
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 43 $ 1,758 $ 6,852 $ 8,653
Trade receivables 3,433 27,557 29,505 60,495
Other receivables 393 880 1,768 3,041
Inventory 2,772 48,467 38,723 89,962
Prepaid expenses and other 1,724 767 11,744 14,235
---------------------------------------------------------------------------------
Total current assets 8,365 79,429 88,592 -- 176,386
---------------------------------------------------------------------------------
Property, plant & equipment, net 508 30,015 52,933 83,456
Intangibles 32 1,438 11,370 12,840
Investment in subsidiaries 77,824 3,621 -- (81,445) --
Intercompany 68,146 (37,483) 1,938 (32,601) --
Other assets 9,538 1,788 1,275 12,601
---------------------------------------------------------------------------------
Total assets $ 164,413 $ 78,808 $ 156,108 $(114,046) $ 285,283
=================================================================================
Liabilities and Stockholders' Deficit
Current Liabilities:
Cash overdraft $ 350 $ 1,617 $ -- $ 1,967
Loan payable to banks 28,064 -- 3,022 31,086
Current portion of long term debt 3,507 493 6,038 10,038
Accounts payable 1,560 31,933 17,287 50,780
Accrued expenses and other 9,728 7,514 20,622 37,864
---------------------------------------------------------------------------------
Total current liabilities 43,209 41,557 46,969 -- 131,735
Long term debt 127,380 (67,658) 106,915 (32,601) 134,036
Other liabilities 2,478 5,199 20,489 28,166
---------------------------------------------------------------------------------
Total liabilities 173,067 (20,902) 174,373 (32,601) 293,937
---------------------------------------------------------------------------------
Redeemable securities:
Series B and C preferred stock 58,725 -- -- 58,725
---------------------------------------------------------------------------------
Stockholders' Deficit
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 (51,932) (10,921) (10,008) 20,929 (51,932)
Accumulated other comprehensive
(loss) income-
loss on derivative instruments (21) (311) 290 21 (21)
cumulative currency translation
adjustment (16,689) 25 (16,713) 16,688 (16,689)
---------------------------------------------------------------------------------
Total stockholders' deficit (67,379) 99,710 (18,265) (81,445) (67,379)
---------------------------------------------------------------------------------
Total liabilities and deficit $ 164,413 $ 78,808 $ 156,108 $(114,046) $ 285,283
=================================================================================
14
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended September 30, 2002
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 7,108 $56,217 $ 36,480 $ (2,764) $ 97,041
Cost of goods sold 5,787 42,813 29,401 (2,764) 75,237
---------------------------------------------------------------------------------
Gross profit 1,321 13,404 7,079 -- 21,804
Selling, general, and administrative
expenses 4,358 7,474 5,614 17,446
---------------------------------------------------------------------------------
Operating (loss) income (3,037) 5,930 1,465 -- 4,358
Interest expense 386 812 3,306 4,504
Interest income (1) -- (125) (126)
Other expense 97 139 (546) (310)
Intercompany allocation (4,168) 4,168 -- --
Loss (profit) relating to subsidiaries 806 -- -- (806) --
---------------------------------------------------------------------------------
(Loss) income before income taxes (157) 811 (1,170) 806 290
Provision (benefit) for income taxes -- 77 370 447
---------------------------------------------------------------------------------
Net (loss) income $ (157) $ 734 $ (1,540) $ 806 $ (157)
=================================================================================
15
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Three Months Ended September 30, 2002
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (157) $ 734 $(1,540) $ 806 $ (157)
Adjustments to reconcile net (loss)
income to cash provided by
operating activities:
Depreciation and amortization 355 1,361 2,221 3,937
Other 95 (548) 1,712 1,259
Changes in operating assets and
liabilities:
Accounts receivable (306) 1,702 2,559 3,955
Inventory (65) (3,553) 5,059 1,441
Prepaid expenses and other 1,285 1,669 (1,485) 1,469
Other assets (154) 567 (600) (187)
Intercompany 6,000 (795) (4,399) (806) --
Accounts payable 536 7,137 1,197 8,870
Accrued expenses and other 2,322 (1,568) 2,233 2,987
---------------------------------------------------------------------------------
Net cash provided by
operating activities 9,911 6,706 6,957 -- 23,574
---------------------------------------------------------------------------------
Investing activities:
Capital expenditures (172) (1,572) (2,273) (4,017)
Other investing -- -- 320 320
---------------------------------------------------------------------------------
Net cash used in
investing activities (172) (1,572) (1,953) -- (3,697)
---------------------------------------------------------------------------------
Financing activities:
Cash overdraft (226) (3,885) (1,689) (5,800)
Net decrease in short term debt (9,927) -- (460) (10,387)
Payments of long term debt -- (136) (1,332) (1,468)
---------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (10,153) (4,021) (3,481) -- (17,655)
---------------------------------------------------------------------------------
Effect of exchange rate changes
on cash -- (7) 19 12
---------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (414) 1,106 1,542 -- 2,234
Cash and cash equivalents
at beginning of year 457 652 5,310 6,419
---------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 43 $ 1,758 $ 6,852 $ -- $ 8,653
=================================================================================
16
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
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' Deficit
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' Deficit
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' deficit (61,189) 101,061 (14,900) (86,161) (61,189)
---------------------------------------------------------------------------------
Total liabilities and deficit $ 175,794 $ 77,786 $ 161,070 $(118,206) $ 296,444
=================================================================================
17
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended September 30, 2001
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 7,108 $ 51,594 $ 42,404 $ (6,447) $ 94,659
Cost of goods sold 5,632 41,161 33,848 (6,447) 74,194
---------------------------------------------------------------------------------
Gross profit 1,476 10,433 8,556 -- 20,465
Selling, general, and administrative
expenses 3,737 8,542 6,777 19,056
---------------------------------------------------------------------------------
Operating (loss) income (2,261) 1,891 1,779 -- 1,409
Interest expense 674 933 3,036 4,643
Interest income 3 -- (73) (70)
Other expense (income) 117 19 (331) (195)
Intercompany allocation (993) 993 -- --
Loss (profit) relating to subsidiaries 1,098 -- -- (1,098) --
---------------------------------------------------------------------------------
(Loss) income before income taxes (3,160) (54) (853) 1,098 (2,969)
(Benefit) provision for income taxes (795) 320 (129) (604)
---------------------------------------------------------------------------------
Net (loss) income $(2,365) $ (374) $ (724) $ 1,098 $ (2,365)
=================================================================================
18
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Three Months Ended September 30, 2001
(In Thousands)
------------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $(2,365) $ (374) $ (724) $ 1,098 $ (2,365)
Adjustments to reconcile net (loss)
income to cash (used in) provided by
operating activities:
Depreciation and amortization 264 1,344 2,550 4,158
Other (211) 65 935 789
Changes in operating assets and liabilities:
Accounts receivable 210 2,369 2,946 5,525
Inventory 220 (1,401) (3,202) (4,383)
Prepaid expenses and other 362 1,843 401 2,606
Other assets 264 (996) (83) (815)
Intercompany (3,000) (718) 4,816 (1,098) --
Accounts payable (502) (1,861) 1,029 (1,334)
Accrued expenses and other 1,462 1,093 (1,683) 872
---------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (3,296) 1,364 6,985 -- 5,053
---------------------------------------------------------------------------------
Investing activities:
Capital expenditures (70) (1,426) (2,130) (3,626)
Other investing -- -- 79 79
---------------------------------------------------------------------------------
Net cash used in
investing activities (70) (1,426) (2,051) -- (3,547)
---------------------------------------------------------------------------------
Financing activities:
Cash overdraft -- 246 (147) 99
Net increase (decrease)
in short term debt 3,498 -- (1,581) 1,917
Proceeds from long term debt -- 11 -- 11
Payments of long term debt (8) (126) (939) (1,073)
---------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 3,490 131 (2,667) -- 954
---------------------------------------------------------------------------------
Effect of exchange rate changes
on cash -- -- 52 52
---------------------------------------------------------------------------------
Net increase in cash and
cash equivalents 124 69 2,319 -- 2,512
Cash and cash equivalents
at beginning of year 1,292 700 12,853 14,845
---------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 1,416 $ 769 $ 15,172 $ -- $ 17,357
=================================================================================
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
The Company recorded operating income of $4.4 million and $1.4 million for
the three months ended September 30, 2002 and 2001, respectively. Purchase
accounting adjustments relating to inventory acquired in the acquisition of the
Phibro Animal Health ("PAH") business in November 2002, resulted in an increase
to cost of goods sold of $2.0 million for the quarter ended September 30, 2001.
Excluding the purchase accounting adjustment, the Company's performance in
fiscal 2003 improved over the prior fiscal period.
At September 30, 2002, after giving effect to the amendment described
below, the Company was in compliance with the financial covenants included in
its amended domestic senior credit facility ("credit agreement" or "credit
facility") with its lending banks. During fiscal 2003, the Company amended the
credit facility and obtained a waiver for noncompliance at June 30, 2002. In
addition, the Company entered into an agreement with its Norwegian banks to
restructure loans and to obtain a waiver for noncompliance at June 30, 2002.
Further, 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.
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. In November 2002, the Company announced a temporary
shutdown of the Odda facility due to continuing operating losses, higher than
planned operating costs and delays in the market acceptance of calcium oxide.
Various alternatives are under consideration by the Company. Additional
impairment charges may be recorded in the future, the extent of which will be
dependent upon the outcome of the alternatives selected.
Certain prior year amounts have been reclassified to conform to the fiscal
2003 presentation. Freight and warehousing expenses of $6,598 for the three
months ended September 30, 2001 were reclassified from general and
administrative expenses to cost of goods sold.
Results of Operations
Sales
($000's)
Three Months Ended
September 30,
--------------------------
Operating Segments: 2002 2001
-------- --------
Animal Health and Nutrition .............. $ 60,903 $ 59,353
Industrial Chemicals ..................... 20,215 21,011
Distribution ............................. 9,924 9,989
All Other ................................ 10,174 9,947
Elimination of intersegment sales ........ (4,175) (5,641)
-------- --------
$ 97,041 $ 94,659
======== ========
Operating Income (Loss)
($000's)
Three Months Ended
September 30,
--------------------------
Operating Segments: 2002 2001
-------- --------
Animal Health and Nutrition .............. $ 9,702 $ 7,365
Industrial Chemicals ..................... (2,110) (4,200)
Distribution ............................. 743 838
All Other ................................ 85 119
Corporate expenses and intercompany
profit elimination ..................... (4,062) (2,713)
-------- --------
$ 4,358 $ 1,409
======== ========
20
Comparison of Three Months Ended September 30, 2002 and 2001
Net Sales. Net sales increased by $2.4 million, or 3%, to $97.0 million in
the three months ended September 30, 2002, as compared to the same period of the
prior year. The increase was primarily due to higher sales in the Animal Health
segment offset in part by declines in the Industrial Chemical segment.
The Animal Health and Nutrition segment's net sales increased by $1.5
million, or 2.6% to $60.9 million for the three months ended September 30, 2002.
The Company's PAH operations improved due to higher unit volume sales of its
antibacterial and anticoccidial products. Higher revenues were also recorded at
the Company's Prince Agri operations due to higher unit volumes associated with
its vitamin and other specialty ingredients. The Company's Koffolk sales
declined due to the adverse business climate in Israel and unfavorable currency
impacts at its Brazilian subsidiary.
The Industrial Chemicals segment's net sales decreased by $.8 million, or
4%, to $20.2 million in the three months ended September 30, 2002 as compared to
the prior period. The Company's Odda subsidiary revenues declined by $2.7
million due to discontinued production and sale of the CY-50 and calcium carbide
product lines in the fourth quarter of 2002. In addition, in the quarter ended
September 30, 2002, Odda reduced production of dicyandiamide pending market
acceptance of its calcium oxide, a by-product of the manufacturing process.
Sales by the Company's Phibro-Tech subsidiary increased by $1.4 million due to
increased unit volumes over the prior year comparable quarter. Higher unit
shipments of pigments and blends and manganese dioxide products by the Company's
Prince operations, partially offset by sales price declines, increased revenues
by $.5 million during the current fiscal period.
Net sales for the Distribution segment decreased by $.1 million, or 1%, to
$9.9 million in 2002, as compared to the prior period. Declines in the segment's
carbide sales, related to the discontinuance of carbide production at Odda,
account for the decrease and were partially offset by improvements in product
mix.
Net sales for the All Other segment increased by $.2 million, or 2%, to
$10.2 million in 2002, as compared to the prior period. The Company's fly ash
business increased revenues by approximately $.8 million due to higher unit
volumes offset in part by declines in average selling prices. A decrease in
specialized lab projects and formulations at the segment's U.K. operations
lowered revenues by $.4 million. Lower sales of crop protection chemicals
accounted for the balance of the decrease.
Gross Profit. Gross profit increased by $1.3 million, or 7%, to $21.8
million in the three months ended September 30, 2002, as compared to the prior
period. Purchase accounting adjustments relating to inventory acquired in the
PAH acquisition resulted in an increase to cost of goods sold of $0 and $2.0
million for the three months ended September 30, 2002 and 2001, respectively.
Excluding the purchase accounting adjustments, gross profit increased by
approximately $.1 million in the Animal Health segment primarily due to higher
unit volumes. The Industrial Chemicals segment increased by approximately $.2
million primarily due to higher margins at the Company's Prince Manufacturing
and Phibro-Tech facilities offset in part by higher production costs at the
Company's Odda facility. The Distribution segment declined $.1 million primarily
as a result of lower unit volume of carbide products. The All Other segment
declined by approximately $.3 million primarily due to higher freight costs
associated with the Company's fly ash operations and decreases in specialized
lab projects and formulations at the segment's U.K. facility. Elimination of
inter-company profit in inventory accounted for the balance of the decrease.
Selling, General and Administrative Expenses. Costs decreased by $1.6
million, or 8% to $17.4 million in 2002, as compared to the prior period. Costs
declined primarily at the Company's Phibro-Tech, Koffolk and Odda operations due
to cost reduction programs and lower levels of production activity. The prior
period included a $.4 million non-cash gain to reflect the decrease in
repurchase value of redeemable common stock of a minority shareholder; no amount
was recorded in the current period.
Operating Income (Loss). Operating income increased by $2.9 million to
$4.4 million in 2002, as compared to the prior period. The Animal Health and
Nutrition segment, after the exclusion of purchase accounting adjustments in
fiscal 2002, increased due to higher unit volumes and cost reductions. The
Industrial Chemicals segment improved primarily due to cost reduction programs
and also higher sales and production volumes at the Company's Phibro-Tech
facilities. The Company's Distribution and All Other segment declined slightly
from the prior period.
Interest Expense, Net. Costs decreased by $.2 million or 4% to $4.4
million for the three months ended September 30, 2002 as compared to the prior
period primarily due to lower interest rates offset in part by slightly higher
average borrowing levels.
21
Other Expense, Net. Other expense, net principally reflects foreign
currency transaction/translation gains and losses of the Company's foreign
subsidiaries (principally Norwegian Kroner and the Israeli Shekel). The Company
also recorded a gain of $.7 million on a power purchase derivative instrument at
its Odda facility.
Income Taxes. An income tax provision of $.4 million was reported on a
consolidated pre-tax income of $.3 million in fiscal 2003 primarily due to
income tax provisions in profitable foreign jurisdictions and also for state
income taxes. In addition, domestic pre-tax income was recorded without a tax
provision due to the utilization of net operating loss carryforwards with a full
valuation allowance. The Company's Odda facility losses were not given any tax
benefit. 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.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Cash provided by operations for
the three months ended September 30, 2002 and 2001 was $24.8 million and $5.1
million, respectively. Cash provided by operating activities increased in the
three months ended September 30, 2002, compared with the three months ended
September 30, 2001, primarily due to improved earnings and improvements in
working capital management.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the three months ended September 30, 2002 and 2001 was $3.7
million and $3.5 million, respectively. Capital expenditures of $4.0 million and
$3.6 million in the respective 2002 and 2001 periods, were mostly for new
product development, maintaining the Company's existing asset base and for
environmental, health and safety projects. Proceeds from the sale of assets
accounted for the remainder of cash used in investing activities.
Net Cash (Used In) Provided by Financing Activities. Net cash (used in)
provided by financing activities for the three months ended September 30, 2002
and 2001 was ($17.9) million and $1.0 million, respectively. Borrowings under
the domestic revolving credit agreement and other long-term debt were reduced in
fiscal 2003 from cash generated by operating activities.
Liquidity. At September 30, 2002, after giving effect to the amendment
referred to below, the Company was in compliance with the financial covenants
included in its amended domestic senior credit facility ("credit agreement" or
"credit facility") with its lending banks. 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 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 credit
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 cannot be certain it will be able to obtain waivers or
amendments on favorable terms, if at all.
In addition, the Company's credit agreement and its note payable to Pfizer
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. Philipp Brothers Chemicals,
Inc. is the guarantor of this debt.
22
Working capital as of September 30, 2002 was $44.7 million compared to
$50.4 million at fiscal year end June 30, 2002. Due to the nature and terms of
the 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 September 30, 2002, the
amount of credit extended under this agreement totaled $28.8 million and the
Company had $8.7 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 $9.4
million. Management's efforts to improve liquidity has resulted in a decrease in
borrowings under the revolving credit agreement to approximately $24.7 million
as of October 31, 2002.
The Company anticipates spending approximately $10.7 million for capital
expenditures in fiscal 2003, primarily to cover the Company's asset replacement
needs, improve processes, and for environmental and regulatory compliance,
subject to the availability of funds.
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 for the fiscal year ended June 30, 2002.
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
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 for the fiscal year ended June 30, 2002.
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 $2.0 million at
September 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.
23
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 unsalable.
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.
New Accounting Pronouncements
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.
Seasonality of Business
There is some seasonality in the Company's results 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.
Quantitative and Qualitative Disclosure About Market Risk
For financial market risks related to changes in interest rates, foreign
currency exchange rates and commodity prices, reference is made to Part II, Item
7, Quantitative and Qualitative Disclosure About Market Risk, in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002 and to Note
14 to the Consolidated Financial Statements of the Company included therein.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among other factors
noted herein, the following: the Company's substantial leverage and potential
inability to service its debt; the Company's dependence on distributions from
its subsidiaries; risks associated with the Company's international
24
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 3 of the Notes to
Condensed Consolidated Financial Statements included in this Report and matters
referred to throughout Item 1of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
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 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Disclosure
About Market Risk."
Item 4. Control and Procedures
(a) Based upon an evaluation by the Company's Chief Executive Officer,
Chairman of the Board and Chief Financial Officer within 90 days
prior to the filing date of this Quarterly Report on Form 10-Q they
have concluded that the Company's disclosure controls and procedures
as defined in Rule 15d-14(c) under the Securities Exchange Act of
1934, as amended, are effective for gathering, analyzing and
disclosing information contained in the Company's periodic reports
provided to the Securities and Exchange Commission.
(b) Since the date of the most recent evaluation of the Company's
internal controls, there have been no significant changes in such
internal controls or in other factors that could significantly
affect these controls nor were there any corrective actions with
regard to significant deficiencies and material weaknesses.
25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
On or about April 17, 1997, Philipp Brothers Chemicals, Inc. ("Philipp
Brothers") and CP Chemicals, Inc. ("CP") 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.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
None.
(b) Reports on Form 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
Date: November 14, 2002 By: /s/ JACK C. BENDHEIM
--------------------------------
Jack C. Bendheim
Chairman of the Board
Date: November 14, 2002 By: /S/ GERALD K. CARLSON
--------------------------------
Gerald K. Carlson
Chief Executive Officer
Date: November 14, 2002 By: /s/ RICHARD G. JOHNSON
--------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
27
CERTIFICATIONS
I, Gerald K. Carlson, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Gerald K. Carlson
----------------------------
Gerald K. Carlson,
Chief Executive Officer
28
I, Jack C. Bendheim, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Jack C. Bendheim
--------------------------------
Jack C. Bendheim,
Chairman of the Board
29
I, Richard G. Johnson, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 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 submits 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.
30