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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, 2000
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, 2000.
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2000: 24,488.50
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
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<PAGE>
PHILIPP BROTHERS CHEMICALS, INC.
TABLE OF CONTENTS
Page
----
PART I .................................................................... 4
Item 1. Business .................................................. 4
Item 2. Properties ................................................ 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders ....... 24
PART II ................................................................... 25
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 25
Item 6. Selected Financial Data ................................... 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk .................................................... 34
Item 8. Financial Statements and Supplementary Data ............... 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................ 34
PART III .................................................................. 35
Item 10. Directors and Executive Officers of the Registrant ........ 35
Item 11. Executive Compensation .................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management .............................................. 40
Item 13. Certain Relationships and Related Transactions ............ 40
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................ 42
Index to Financial Statements ............................................. F-1
Report of Independent Accountants ......................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and 1999 ........... F-3
Consolidated Statements of Operations and Comprehensive Income for
the years ended June 30, 2000, 1999 and 1998 ...................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended June 30, 1998, 1999 and 2000 ........................ F-5
Consolidated Statements of Cash Flows for the years ended June 30,
2000, 1999 and 1998 ............................................. F-6
Notes to Consolidated Financial Statements ............................... F-7
Consolidating Financial Statements
Consolidating Balance Sheet as of June 30, 2000 ................... F-29
Consolidating Income Statement for the year ended June 30, 2000 ... F-30
Consolidating Statement of Cash Flows for the year ended June 30,
2000 ............................................................ F-31
Consolidating Balance Sheet as of June 30, 1999 ................... F-32
Consolidating Income Statement for the year ended June 30, 1999 ... F-33
Consolidating Statement of Cash Flows for the year ended June
30, 1999 ........................................................ F-34
Consolidating Income Statement for the year ended June 30, 1998 ... F-35
Consolidating Statement of Cash Flows for the year ended June
30, 1998 ........................................................ F-36
SIGNATURES ............................................................... II-1
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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 nutrition and health, 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 36% of the Company's fiscal 2000 net
sales consisted of sales made by the Company outside the United States. During
fiscal 2000, the Company's products were manufactured at ten facilities in the
United States, four facilities in Europe, two facilities in Israel, and one
facility in South America. 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 400 specialty agricultural
and industrial chemicals, of which 50 products accounted for approximately 83%
of fiscal 2000 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 has two operating segments--AgChem and Industrial Chemicals.
The Company's AgChem segment manufactures and markets trace minerals, trace
mineral premixes and animal feed ingredients, as well as vitamins, vitamin
premixes and other animal health products to the animal feed, poultry and pet
food industries. These products include nicarbazin and amprolium, which the
Company distributes to the world-wide poultry industry through major
multinational pharmaceutical and animal health companies, and copper sulfate, a
key ingredient in animal nutrition, which the Company markets to the animal feed
industries in the United States and France. The Company also manufactures and
markets copper-based fungicides and other agricultural products for the United
States, French and other international markets. The Company's Industrial
Chemicals segment manufactures and markets a number of specialty and fine
organic chemicals and intermediates, as well as industrial 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, including copper oxide, which is used in the production of
water-borne wood preservatives. In addition to copper oxide, the Company
supplies other 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.
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Products
The Company manufactures and markets more than 400 specialty agricultural
and industrial chemicals.
The table below sets forth the Company's fiscal 2000 net sales by
operating segment, principal products, principal end markets or users, and
selected well-known customers.
<TABLE>
<CAPTION>
Business Segments Principal End Selected Well-Known
(2000 Net Sales)* Principal Products Markets or Users Customers
----------------- ------------------ ---------------- -------------------
<S> <C> <C> <C>
AGCHEM Agri-Tin Animal Feed Agway
($180 million sales) Amprolium Citrus BASF
Animal Feed Ingredients Coccidiostats** Cargill
Copper Fungicides Feed Mills Eli Lilly
Copper Sulfate F.G. Grapes Farmland/LandOLakes
Fungicides Nutritional Helena (Marubeni)
Growth Regulators Nuts Meriel (Merck/Rhone-Poulenc)
Nicarbazin Poultry and Pet Food Perdue
Trace Mineral Premixes Supplements Purina Mills
Trace Minerals Vegetables (Koch Industries)
Ultra-Flourish Vines Sivam
Sumitomo
Tyson Foods
United Agri Products (Conagra)
INDUSTRIAL Alkaline Etchant Acetylene Ashland
CHEMICALS Calcium Carbide Brick and Tile Automata
($138 million sales) Copper Oxide Catalysts BOC
Dicyandiamide Cement Coatings Colgate Palmolive
Ferric Chloride Chemical Milling Elementis
Fly Ash Concrete Engelhard
Iron Oxide Flame Retardation Fiberglass
Manganese Dioxide Frits*** Hadco
Metal Treatment Glass Hoffman La Roche
Recycling Activities Intermediates Hutchinson
Selenium Disulfide Metal Finishers Laporte
Sodium Fluoride Pharmaceutical MacDermid
Printed Circuit Board Morton International
Wood Treatment Osmose
Owens Corning
PPG Industries
Procter & Gamble
Sanmina
Shipley
SmithKline Beecham
Tyco International Unilever
Van Waters & Rogers
</TABLE>
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* Net sales excludes intersegment sales.
** Coccidiostats are a pharmaceutical product used for the prevention of
coccidiosis (a parasitic infection) in chickens.
*** A frit is a smelted chemical composition rapidly quenched to produce
glasses that are used to coat ceramics or metal substrates.
Reference is made to Note 14 of the Company's Consolidated Financial
Statements for certain segment information.
Champ Flowable(R), Champion(R), GibGro(R), MRT(R), Nicarb(R), Nicarmix(R),
Ac-Cu-Guard(TM), Agri-tin(TM), Chromax(TM), Chromox(TM), Brickox(TM),
Macclesfield(TM), Magna Float(TM), MRT Cement(TM), Ultra Flourish(TM) and Phibro
and design(TM) are trademarks of the Company.
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No single customer accounted for more than 4% of the Company's 2000 net
sales.
The Company manufactures and markets a broad range of specialty
agricultural and industrial chemicals, comprising two operating segments: AgChem
and Industrial Chemicals.
AgChem
The Company manufactures and markets trace minerals, trace mineral
premixes, as well as vitamins, vitamin premixes and animal health care products,
to the animal feed, poultry and pet food industries, and manufactures and
distributes fungicides and other agricultural products in the United States,
France and other international markets.
Animal Nutrition and Health Products
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 has a line of trace mineral
additives used by the U.S. animal feed industry. The majority of the other
ingredients the Company sells are nutrients which 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's foundation and strength in the animal feed industry have come from its
basic position in several trace minerals. The Company also manufactures and
markets copper sulfate as an animal feed supplement. Copper is a nutritional
requirement for the production of hemoglobin and for the normal growth and well
being of animals.
The Company customizes trace mineral and selenium premixes at its blending
facilities in Marion, Iowa, Quincy, Illinois and Bowmanstown, Pennsylvania, and
makes a diverse line of other trace minerals and macro-minerals. The Company's
major customers for these products are medium to large companies, co-ops,
blenders, integrated poultry operations and pet food companies. Typical
customers include Purina Mills, Continental Grain, ADM, Agway,
Farmland/LandOLakes, Perdue and Tyson Foods. The Company sells other
ingredients, such as buffers, vitamin K and amino acids, including lysine,
tryptophan and threonine.
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's nutritionists, field specialists and
veterinary experts provide technical assistance to ensure effective product use.
Koffolk Israel also produces other intermediates used in the manufacture
of certain pharmaceuticals. 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, and through
Koffolk Israel the Company also produces amprolium for distribution to the
world-wide poultry industry through major multinational pharmaceutical 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 1996, Koffolk Inc. ("Koffolk USA") purchased from
the Animal Feed Division of Merck & Co. Inc. ("Merck"), the right to sell
nicarbazin, which Koffolk Israel had been manufacturing in Israel. Koffolk USA
became the registered transferee and owner of the New Animal Drug Application
("NADA") for nicarbazin approved by the U.S. Food and Drug Administration
("FDA"). Koffolk USA became a subsidiary of the Company in June 1998.
Separately, Merck appointed Koffolk USA as its exclusive U.S. distributor of
amprolium for poultry markets. In 1999, Koffolk Israel purchased from Merial
Limited, the successor to Merck, its European rights for nicarbazin-based
products.
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Crop Protection
Through its division, Agtrol International, the Company focuses on
developing, registering, manufacturing and marketing crop protection chemicals.
The Company has a large and diversified portfolio of many products registered
under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA") for use
in crop protection in the United States, and holds product registrations for its
crop protection chemicals in many foreign countries. The principal markets are
in the Northern Hemisphere, particularly in North America and Europe. The
business is seasonal, with approximately 70% of sales occurring between March
and June.
The Company's current product line consists of a variety of copper
fungicides and gibberellins, a plant growth regulator used in table grapes and
citrus production. The Company also seeks to increase its product lines through
identification and registration of generic fungicides under FIFRA either
directly or through joint ventures or strategic alliances. In 1998, the Company
obtained the U.S. registration under FIFRA required to sell a triphenyltin
hydroxide ("TPTH") based product, under the name Agri-tin, a fungicide used
primarily in the sugar beet, pecan and potato industry. In 1998, the Company
also launched a mefenoxam-based product, under the name Ultra Flourish, for use
in a variety of end use formulations. Mefenoxam is a systemic fungicide used in
the tobacco, citrus and vegetable industries.
Copper Fungicides. The Company sells copper fungicides for the citrus,
vegetable, nut and vine industries. These copper fungicides generally have
greater efficacy than traditional copper sulfate and copper oxychloride
preparations. The Company sells its copper hydroxide fungicides under the names
Champion and Champ Flowable and, in France, Macclesfield 50. The Company also
sells its proprietary Bordeaux mixtures under the name Macclesfield 80.
Gibberellins. The Company sells gibberellic acid, a plant growth
regulator, under the name GibGro, for use primarily in the table grape and
citrus industries.
Industrial Chemicals
The Company manufactures and markets a number of inorganic and organic
specialty chemicals for use in the chemical catalyst, pharmaceutical,
construction, concrete, wood treatment, printed circuit board, automotive,
aerospace, glass and coal mining industries. Some of these products are produced
from raw materials derived from the Company's recycling operations. The Company
also purchases crude inorganic minerals in the form of ores and processes these
in various grades to produce chemicals for sale to manufacturers which
incorporate the resultant products into their finished products in various
industrial markets, including construction, with end-use applications in clay
brick, ceramic, masonry colorant, coatings, heavy media, foundry, glass,
electrodes, abrasives, dust control, and as an intermediate to various chemical
applications.
Inorganic
Copper Chemicals. The Company manufacturers and sells various copper
chemicals. The Company's major copper chemicals are described below:
Copper Oxide. Copper oxide is used as an ingredient in the production of
water-borne wood preservatives ("CCA"). Due to its recycling capabilities, the
Company believes that it is a low cost supplier of copper oxide to the CCA
market. The Company also sells copper oxide to the catalyst, dye, ceramic and
feed industries.
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, and water treatment. The Company markets copper sulfate solution
to the mining and wood treatment industries.
Mineral Oxides. The Company manufactures and sells various mineral oxides.
The Company's major mineral oxide products include iron compounds and manganese
compounds. The Company's iron compounds include red iron oxide (Hematite) (sold
to the brick, masonry, glass, foundry, electrode, abrasive, feed, and
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various 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). The Company's 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 various other chemical
industries); and manganous oxide (sold to customers requiring an acid soluble
form of manganese, such as animal feed, fertilizer and chemical manufacturers).
Alkaline Etchants. Through its U.S. subsidiary, Phibro-Tech, Inc.
("Phibro-Tech"), the Company manufactures and recycles alkaline etchants in the
United States. Of the Company's five facilities involved with these products,
four have final RCRA Part B hazardous waste treatment and storage permits and
one is in an interim permit status. See "--Environmental Matters." The Company's
etchants are used to remove excess 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.
Recycling Activities. The Company is a leading recycler in the United
States of hazardous chemical waste streams that contain copper or nickel. 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, 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.
Metal-containing waste is either collected by the Company or delivered
directly to one of its facilities by the waste generator. The Company collects
and transports chemical waste in its specially-constructed tankers and
semi-trailers and drum transporting trailers. In some locations, rail
transportation by tank cars or piggyback trailers is also utilized. Upon arrival
at one of the Company's recycling and processing facilities, and prior to
unloading, a representative sample of the delivered waste is tested and analyzed
to assure that it conforms to the customer's contracted waste profile
specifications. 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.
Fly Ash Related Products. Through Mineral Resource Technologies, L.L.C.
("MRT"), a subsidiary started by the Company in 1995, 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. MRT typically provides these products to its customers
directly from a utility's site or through its own terminals. Through the MRT
Technology Center in Atlanta, MRT seeks to develop end-use markets for certain
of these by-products. MRT's research and development program resulted, in March
1998, in two issued U.S. patents and a proprietary value-added product, called
MRT Cement, made primarily from fly ash. (Fly ash is the fine residue and bottom
ash is the heavier particles that result from the combustion of coal. Fly ash is
a pozzolan; i.e., 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 cementitious
materials.) There is no assurance that MRT Cement will be, or the Company's
research and development efforts will result in the development of, a
commercially successful product.
In connection with its fly ash management operations, MRT has entered into
and will seek to enter long-term sales and distribution agreements with
utilities providing for minimum payments and/or purchase
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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,
developing fly ash beneficiation facilities and successfully commercializing MRT
Cement. The Company is in the process of evaluating methods to exploit the MRT
Cement and fly ash beneficiation technologies, including constructing cement
manufacturing and fly ash beneficiation plants. However, there can be no
assurance that the Company will be successful in developing commercially viable
means of exploiting any such product or technology. 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.
Organic
The Company sells its organic chemical intermediates to multi-national
pharmaceutical companies, including Pfizer, Merck, Johnson & Johnson and Hoffman
La Roche. Often the Company's intermediate products are used as building blocks
in multi-stage pharmaceutical production.
The Company also manufactures and markets 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 English subsidiary, Wychem Limited, the Company 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. Wychem is able to tailor the quality and
supply characteristics of its 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 by Wychem is novel and
included in the customer's regulatory submissions.
Through its Norwegian subsidiary, ODDA Smelteverk AS ("ODDA"), which it
acquired in October 1998 together with certain related distribution business
assets, the Company manufactures and distributes calcium carbide and
dicyandiamide. 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. 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. In January 2000, the
Company sold to a Norwegian "state governed" power production company its
approximately 21% holding in Aktieselskabet Tyssefaldene ("Tyssefaldene"), which
operates three power stations within the region of Norway in which ODDA is
located, two of which were leased from the Government of Norway by Tyssefaldene
and one of which is owned by Tyssefaldene. The net sales proceeds were $18.7
million. As a result of the sale, ODDA's long-term concession from the
Government of Norway to buy power at cost was terminated early, and ODDA agreed
to purchase a portion of its power needs through 2010 at rates consistent with
market rates prevailing at the time of the closing. ODDA will purchase the
balance of its power needs at market rates at the time of purchase.
Sales, Marketing And Distribution
The Company sells specialty chemicals to manufacturers who incorporate the
Company's products into their finished goods. The Company has more than 3,450
customers. Sales to the top ten customers represented approximately 17% of the
Company's 2000 net sales and no single customer represented more than 4% of the
Company's 2000 net sales.
The Company's sales and marketing network consists of a direct sales force
in its AgChem and Industrial Chemicals segments of approximately 58 and 49
persons, respectively, as well as more than 130 and 100 independent agents and
distributors, respectively, 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 that the three key factors to
marketing its products successfully are high quality products, a highly trained
and technical sales
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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 which
are purchased from manufacturers in the United States, Europe and Asia. In
fiscal 2000, no single raw material accounted for more than 5% of the Company's
cost of goods sold. Total raw materials cost was approximately $165 million or
52% of net sales in 2000.
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
approximately 100 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 substantial research and development at its Ramat Hovav
facility. 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.
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 possesses important formulation and compounding technology for
the animal feed industry. The Company also possesses what it believes to be
unique technology and know-how for the production of copper-containing
fungicides. This technology enables the Company to produce fungicides of
extremely fine particle size, which improves efficacy while reducing the
quantity of active ingredients needed through enhanced bio-availability.
Finally, the Company and its predecessors have over 20 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 and Trademarks
The Company owns certain patents, tradenames and trademarks and uses
know-how, trade secrets, formulae and manufacturing techniques which assist in
maintaining the competitive positions of certain of its products. 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 or trademark 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 2000 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 and fly ash management
activities. For additional information on the Company's customers, see
"--Products" and "--Sales, Marketing and Distribution."
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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 which may be used as an
alternative or substitute therefor, including amprolium and nicarbazin. The
Company competes with several regional companies of varying sizes and financial
resources in the hazardous metal-containing chemical waste recycling industry.
The Company also competes with large national companies which offer alternative
methods of treatment or disposal of hazardous metal-containing chemical waste
and which have substantially greater financial resources than the Company. While
these national companies do not currently offer recycling services similar to
those offered by the Company, their entry into the recycling business could have
a material adverse effect on the Company. In addition, the Company competes with
several large chemical companies in the chemical production business, none of
which obtains a significant portion of its raw materials from recycling. To the
extent these companies, or new entrants into the market, offer comparable
finished chemical products at lower prices, the Company's business could be
adversely affected.
Employees
As of June 30, 2000, the Company had approximately 1,130 employees
worldwide, of whom 45% were salaried employees and 55% were hourly employees. Of
these, 294 employees were in management and administration, 107 in sales and
marketing, 103 were chemists or technicians and 627 were in production.
Approximately 9% of the Company's domestic employees were covered by collective
bargaining agreements with three unions. These agreements expire from 2000
through 2005. 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 75% of ODDA's employees are covered by collective bargaining
agreements.
The Company considers its relations with both its union and non-union
employees to be good.
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
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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 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 "--Litigation," 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. References to the Company should accordingly 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.
Regulation
The following summarizes the principal federal environmental laws
affecting the business of the Company:
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
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enforce their own water pollution control programs. Pursuant to the mandate of
the Clean Water Act, the EPA has promulgated "pretreatment" 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
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
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. The coal
industry is directly affected by 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
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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 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 state 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.
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
recycling facilities as RCRA regulated facilities and have 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. Part B
renewal applications have been submitted for the Santa Fe Springs and Sumter
sites. The applications are being reviewed. Phibro-Tech has also obtained an
interim status RCRA permit from the California Department of Health Services and
has filed a Part B permit application with the Department for its Union City,
California facility.
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.
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Subsidiaries of the Company are required by 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 $1.6 million as of June 30, 2000.
Waste Byproducts
In connection with the Company's subsidiaries' production of finished
chemical products, limited quantities of waste by-products are generated
primarily in the form of sludge. Depending on the contents of the sludge, the
subsidiaries of the Company either send it to smelters for metal recovery or
send it for treatment or disposal to regulated facilities.
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 12 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"), effective March 11, 1991. The ACO mandates the development
and implementation of an environmental remediation plan and requires payment of
a penalty in the amount of $2.2 million plus interest calculated at 8.57% per
annum, to be paid in ten yearly installments. This charge was previously
reflected in the Company's consolidated financial statements. In addition, the
ACO sets forth stipulated penalties for specified violations of the ACO and
requires reimbursement by CP to the DEP for prior costs and future oversight
costs. CP has posted $500,000 in financial assurances which amount may be
modified based on cost reviews which CP is required to submit annually as part
of its investigation and remediation program. CP has substantially completed its
investigation and remediation efforts which include 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
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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. An
engineering firm has been hired to investigate the situation and to make
recommendations.
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
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 received a summons
from Communities for a Better Environment alleging that Phibro-Tech violated
Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1985, and
the California Health and Safety Code. Several other companies in Santa Fe
Springs received similar summonses. The parties are engaged in discovery and
trial with respect to this latter proceeding is set for August 2001.
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 is
an interim status facility with an application for a RCRA Part B permit pending.
In lieu of conducting investigation activities under a final Part B permit,
Phibro-Tech entered into a consent order with the California DTSC requiring the
assessment and investigation of soil and ground water quality and remediation,
if required, similar to that which would be required under a Part B permit.
Phibro-Tech completed the first phase of the investigation process and has
submitted reports and assessments to the DTSC which are currently under review.
Further limited characterization has been requested but Phibro-Tech and its
consulting engineers do not currently anticipate any extensive ongoing
corrective measures. This facility is also the subject of a DTSC summary of
violations alleging certain permit violations and violations of the California
Health and Safety Code and corresponding regulations. Phibro-Tech is in contact
with the DTSC with regard to this matter in an attempt to determine whether it
can be resolved through a mutually acceptable compliance schedule.
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
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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 will be
additional site characterization, which is scheduled to be undertaken shortly.
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.
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.
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 below 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 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
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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 are now focusing 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 discharge of polynucleated aromatic hydrocarbons ("PAH")
from the Venturi scrubber in the calcium carbide plant and the nitrogen content
in the filtercake (1%) discharge from the dicyandiamide plant. In a meeting
between ODDA and SFT (Norwegian Pollution Control Authority) in June 1998, SFT
indicated that ODDA should make a diligent effort to develop a commercial use
for filtercake within three years, and consider the reduction of discharges of
PAH from existing levels (which discharges are in compliance with ODDA's
permits). Projects involving a new filter to reduce emissions of soluble
nitrogen and a facility to dry and bulk ship filtercake are being pursued in
consultation with the SFT.
Government Regulation
Certain agricultural feed products offered by the Company, namely
nicarbazin and amprolium products, 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 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.
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. An 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
18
<PAGE>
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." The Company has taken the
necessary steps to apply for a BSA for nicarbazin in the EU. However, there is
no assurance that the Company will receive a BSA for nicarbazin in the EU, or if
its does receive such BSA, when it will be granted or whether it will be
unlimited.
19
<PAGE>
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,
2000 and for the year then ended, Israeli operations (excluding Koffolk Israel's
non-Israeli subsidiaries) accounted for approximately 18% of the Company's
consolidated assets and approximately 16% of its consolidated net sales. All
figures and percentages are approximate. A portion of the information with
respect to Israel presented hereunder has been taken from Annual Reports of the
Bank of Israel.
Political 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. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and the
Palestine Liberation Organization ("PLO")--Palestinian Authority representatives
have been signed. In addition, Israel and several other Arab states have
announced their intention to establish trade and other relations and are
discussing certain projects. As of the date hereof, Israel has not entered into
any peace agreement with Syria or Lebanon and there have been delays in the
negotiation and implementation of agreements with the PLO. There can be no
assurance as to whether or how the "peace process" will develop or what effect
it may have upon the Company. 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. Despite measures to counteract the
boycott, including anti-boycott legislation in the United States, the boycott
has had an indeterminate negative effect upon trade with and foreign investment
in Israel. 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. Some of the employees of the
Company's Israeli subsidiaries currently are obligated to perform annual reserve
duty. While the Company's Israeli subsidiaries have operated effectively under
these and similar requirements in the past, no assessment can be made of the
full impact of such requirements on the Company in the future, particularly if
emergency circumstances occur.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and security incidents. The Israeli government has, for these and other reasons,
intervened in the economy by utilizing, among other means, fiscal and monetary
policies, import duties, foreign currency restrictions and control of wages,
prices and exchange rates. The Israeli government periodically changes its
policies in all these areas.
Israel has a high balance of payments deficit, primarily as a result of
its defense burden, the absorption of immigrants, especially from the former
Soviet Union, the provision of a minimum standard of living for lower income
segments of the community and the maintenance of a minimum level of net foreign
reserves. In order to finance this deficit, Israel must sustain an adequate
inflow of capital from abroad. The major sources of the country's capital
imports include U.S. military and economic aid, personal remittances from
abroad, sales of Israeli government bonds (primarily in the United States) and
loans from foreign governments, international institutions and the private
sector.
Assistance from the United States
The State of Israel receives significant amounts of economic and military
assistance from the United States. There is no assurance that foreign aid from
the United States will continue at or near amounts received in the past, and if
its does not, the Israeli economy could suffer material adverse consequences.
20
<PAGE>
Trade Agreements
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia and Canada.
These preferences allow Israel to export the products covered by such programs
either duty-free or at reduced tariffs. Israel has also entered into
preferential trade agreements with the European Union and the European Free
Trade Association. In recent years, Israel has established commercial and trade
relations with a number of other nations, including Russia, China and nations in
Eastern Europe, with which Israel had not previously had such relations.
Employees
Most of Koffolk Israel's employees are members of the Histadrut, and are
represented by collective bargaining units. Koffolk Israel is subject to various
Israeli labor laws and collective bargaining agreements between Histadrut and
the federation of industrial employers. Such laws and agreements cover a wide
range of areas, including hiring practices, wages, promotions, employment
conditions (such as working hours, overtime payment, vacations, sick leave and
severance pay), benefits programs (such as pension plans and education funds)
and special issues, such as equal pay for equal work, equal opportunity in
employment and employment of women. The collective bargaining agreements also
cover the relations between management and the employees' representatives,
including Histadrut's involvement in certain aspects of hiring and dismissing
employees and procedures for settling labor disputes. Koffolk Israel continues
to operate under the terms of Israel's national collective bargaining agreement,
portions of which expired in 1994. Israeli employers and employees are required
to pay predetermined sums to the National Insurance Institute, an organization
similar to the United States Social Security Administration. These contributions
entitle the employees to receive a range of medical services and other benefits.
Certain employees of Koffolk Israel are covered by individual employment
agreements.
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.
21
<PAGE>
Item 2. Properties.
The Company maintains its principal executive offices and a sales office
in Fort Lee, New Jersey. The Company has 17 manufacturing facilities. 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, all of
which are owned, except as noted.
Approximate
Location Square Footage Uses
------- -------------- -----
Fort Lee, New Jersey(a) 23,500 Corporate Headquarters
Atlanta, Georgia(a) 5,000 MRT Administrative and Sales,
Laboratory
Bowmanstown, Pennsylvania 56,500 Industrial Chemicals; AgChem
Bremen, Indiana 50,000 AgChem; Warehouse
Garland, Texas 20,000 Industrial Chemicals
Houston, Texas(a) 10,300 Administrative and Sales
Joliet, Illinois 34,500 Industrial Chemicals
Ladora, Iowa 9,500 Warehouse
Marion, Iowa 32,500 AgChem
Phoenix City, Alabama 6,000 Industrial Chemicals
Quincy, Illinois(b) 187,000 Industrial Chemicals; AgChem;
Warehouse; Administrative and
Sales
Santa Fe Springs, California(c) 90,000 Industrial Chemicals
Sumter, South Carolina 123,000 AgChem; Industrial Chemicals
Union City, California 20,600 Industrial Chemicals
Wilmington, Illinois 119,000 Warehouse
Bordeaux, France 141,000 AgChem; Administrative and
Sales
Braganca Paulista, Brazil 35,000 Agchem; Administrative and
Sales
Meerbusch, Germany(a) 700 Sales
Odda, Norway 364,000 Industrial Chemicals;
Warehouse;
Administrative and Sales
Petach Tikva, Israel 60,000 AgChem; Administrative and
Sales
Ramat Hovav, Israel(a) 140,000 AgChem; Industrial Chemicals
Reading, Berks, United Kingdom(a) 3,100 Administrative and Sales
Stradishall, United Kingdom 20,000 Industrial Chemicals;
Administrative and Sales
Scunthorpe, United Kingdom(a) 93,000 Industrial Chemicals;
Warehouse
----------
(a) This facility is leased. The Company's leases expire from 2000 to 2027.
For information concerning the Company's rental obligations, see Note 12
to the Company's Consolidated Financial Statements included herein.
(b) Comprises six facilities, including three warehouse, 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."
22
<PAGE>
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. Of the Company's five
domestic facilities involved with recycling, four have final RCRA Part B
hazardous waste storage and treatment permits and one is in an interim permit
status. The Company's regulatory compliance programs include plans to achieve
compliance with international standards known as ISO 9002 standards, which
became mandatory in Europe in 1999. The FDA is in the process of adopting the
ISO 9002 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 9002 certification. The Company does not believe
that adoption of the ISO 9002 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. The complaint
includes statutory claims under RCRA and common law claims. There are several
other defendants in the action, including the former owner of the Sewaren site
and Chevron's site and a prior tenant of the Chevron site. Additional parties
have been brought into the action. Interrogatories have been exchanged and
depositions are being conducted. The Company is not, at this time, in a position
to assess the extent of any ultimate liability it may have in connection with
this suit or the potential responsibility of other defendants, or the future
cost of remediation of the Chevron site, and is actively defending the action.
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. Phibro-Tech responded that it had supplied a useful
product to the operator of the site and that it believes this constitutes a
defense to the claims brought against it. The South Carolina Department of
Health and Environmental Control, which had assumed oversight of this site,
filed suit in United States District Court to approve a settlement with certain
steel company PRPs. Other parties intervened and filed administrative actions to
contest the substantive and procedural fairness of that settlement. The Court
permitted other PRPs to intervene and, in August 1999, disapproved the
settlement. Discussions between representatives of the original group of
settling PRPs and of the other PRPs have taken place in an effort to determine
whether a joint settlement proposal is feasible. Under applicable law all
non-settling PRPs could be found to have strict, joint and several liability
under CERCLA. Accordingly, Phibro-Tech will continue to assess how best to
respond to claims raised in this proceeding. While the outcome of ongoing
negotiations is uncertain, the Company has accrued its best estimate of the
amount for which this matter can be settled.
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<PAGE>
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. Phibro-Tech has responded, requested further
information and joined a PRP working group which has engaged in discussions with
the EPA. The Company is not, at this time, in a position to assess the extent of
any ultimate liability it may have in connection with this proceeding or the
potential responsibility of other PRPs.
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, 2000.
24
<PAGE>
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, 2000, 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, 2000.
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, 2000. 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
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------
2000 1999(a) 1998 1997 1996(f)
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ................................... $318,056 $297,294 $275,577 $266,058 $238,982
Net income (loss) before extraordinary items 10,053 (466) (7,065) 8,036 (10)
Extraordinary items ......................... -- -- (1,962) -- --
Net income (loss) (b) (c) (d) ............... 10,053 (466) (9,027) 8,036 (10)
Balance Sheet Data:
Total assets ................................ $258,451 $238,779 $192,196 $162,700 $158,182
Debt (e) .................................... 150,772 140,103 104,296 67,259 70,269
</TABLE>
Notes to Summary Consolidated Financial Data:
----------
(a) Reflects the acquisition of ODDA effective October 1, 1998.
(b) In 2000, includes a $13.7 million gain resulting from ODDA's sale of its
minority equity interest in a local Norway hydroelectric power company and
related power rights. In 2000, also includes $1.5 million of income
resulting from the transfer of title to CP's property in Sewaren, New
Jersey and the lease back of certain portions of the property, which
transfer gave rise to the reversal of amounts previously reserved for
ground water monitoring and remediation, net of CP's lease obligations.
(c) In 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.
(d) In 1999, includes a $1.5 million charge related to the severance of a
senior executive. In 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. In 1997,
includes $5.6 million gain related to proceeds from the life insurance
policy received on the death of the then Chairman of the Board of the
Company.
(e) Debt is equal to loans payable to banks, other loans payable, long term
debt and current portion of long term debt.
(f) Reflects the acquisition of Planalquimica effective December 7, 1995.
25
<PAGE>
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 nutrition and health,
agriculture, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company also provides recycling and hazardous waste services
primarily to the electronics and metal treatment industries.
The Company operates in two industry segments: AgChem and Industrial
Chemicals.
On October 1, 1998, the Company acquired all of the outstanding capital
stock of ODDA Smelteverk AS, a Norwegian company, and certain assets of the
business of BOC Carbide Industries in the United Kingdom (together "ODDA") from
the BOC Group, for $19 million in cash and the assumption of $18.2 million in
debt. The acquisition was primarily financed by proceeds from the issuance of
$100 million in principal amount of Senior Subordinated Notes in June 1998. The
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at fair values at the acquisition date,
with the excess of purchase price over the fair value allocated to goodwill. The
operating results of ODDA are included in the Company's consolidated statements
of operations, as part of the Industrial Chemical segment, from the date of
acquisition.
Results of Operations
Sales
($000's)
Year Ended June 30,
-----------------------------------
Operating Segments: 2000 1999 1998
--------- --------- ---------
AgChem ............................... $ 184,633 $ 177,411 $ 181,817
Industrial Chemicals ................. 160,076 151,045 127,416
Elimination of intersegment sales .... (26,653) (31,162) (33,656)
--------- --------- ---------
$ 318,056 $ 297,294 $ 275,577
========= ========= =========
Operating Income (Loss)
($000's)
Year Ended June 30,
-----------------------------------
Operating Segments: 2000 1999 1998
--------- --------- ---------
AgChem ............................... $ 15,658 $ 11,412 $ 9,532
Industrial Chemicals ................. 9,098 9,079 (2,389)
Other (includes corporate expenses and
intercompany profit elimination) ... (9,082) (10,136) (11,370)
--------- --------- ---------
$ 15,674 $ 10,355 $ (4,227)
========= ========= =========
26
<PAGE>
Comparison of Fiscal Year Ended June 30, 2000 to Fiscal Year Ended June 30,
1999.
Net Sales. Net sales increased by $20.8 million, or 7%, to $318 million in
fiscal 2000, as compared to the prior year. Industrial Chemicals sales were
higher by $9 million primarily due to a full year of dicyandiamide and calcium
carbide sales ($5.6 million) by ODDA (acquired in October 1998), higher volume
sales of coal fly ash ($5.3 million) and higher recycling fees ($1.1 million)
due to increased demand. Lower intersegment sales by the Industrial Chemicals
segment ($2.2 million) were primarily due to production disruptions for certain
mineral oxides as a result of a fire in the Company's Bowmanstown, PA facility
(and as a result purchases by the AgChem segment were supplemented from third
party sources). AgChem sales were higher by $7.2 million primarily due to higher
volume sales of the Company's animal nutrition and health products, primarily
coccidiostats ($1.5 million), feed pre-mixes ($1.9 million) primarily due to the
December 1998 acquisition of a feed pre-mix business and higher volume sales of
the Company's crop protection chemicals ($5.5 million) due to increased market
penetration of generic fungicides and introduction of a new copper based
fungicide. These increases were somewhat offset by discontinued and lower sales
of intermediate chemical products, by Koffolk, the Company's Israeli subsidiary.
Gross Profit. Gross profit increased by $14.5 million or 19.5% to $88.5
million as compared to the prior year. This increase was primarily attributable
to higher profits ($9.9 million) from increased sales in the Company's
Industrial Chemicals segment due to the ODDA acquisition, higher volume sales of
coal fly ash and higher recycling fees. Gross profit of the Company's AgChem
segment was $3.4 million higher than the prior year, primarily due to higher
volume sales by and lower costs, principally raw materials, at the Company's
Israeli subsidiary (Koffolk) for coccidiostats. Gross profit from other AgChem
product sales remained unchanged mainly due to higher sales of lower margin
products. Overall, these factors (primarily the Industrial Chemicals segment)
also resulted in an increase in gross profit as a percentage of net sales to
27.8% in fiscal 2000 as compared to 24.9% in the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $10.1 million or 15.8% to $74.3 million in
fiscal 2000 as compared to the prior year. In the Industrial Chemicals segment,
the increase was primarily due to the ODDA acquisition ($2.1 million), higher
distribution expenses associated with increased sales of coal fly ash ($3.9
million) and higher distribution expenses ($1.1 million) associated with
inorganic chemical sales. In fiscal 2000, non-segment operating expenses include
a $1.1 million non-cash charge to reflect the increase in repurchase value of
redeemable common stock of a minority shareholder, as compared to income of $.2
million in the prior year. The prior year included an accrual for compensation
expenses ($1.5 million) associated with the termination of employment of an
executive of a subsidiary of the Company.
Curtailment of Operations. In June 2000, the Company transferred title to
its property in Sewaren, New Jersey to the Township of Woodbridge.
Simultaneously, the Company entered into a ten year lease agreement with
payments aggregating $2 million for certain areas of the property in order to
allow it to conduct operations related to its RCRA Part B Facility Permit.
Pursuant to the Transfer Agreement, the Township of Woodbridge took title to the
property and assumed obligations with regard to the property including
maintaining the ground water recovery system required by the Administrative
Consent Order between the Company and the New Jersey Department of Environmental
Protection. In connection with the assumption of obligations by the Township,
the Company has reversed $1.5 million to income representing amounts previously
reserved for ground water monitoring and remediation net of the present value of
its lease obligations. In fiscal 1999, the Company reversed $.5 million of the
original $10 million charge to income based upon a reassessment of site
remediation and ongoing cost requirements.
Operating Income. Operating income increased by $5.3 million or 51.3% to
$15.7 million in fiscal 2000 as compared to the same period of the prior year.
Operating income of the AgChem segment increased by $4.2 million primarily due
to increased profitability of the Company's animal health and nutrition
products. Operating income of the Industrial Chemicals segment remained
essentially unchanged as compared to the prior year. In addition, non-segment
operating expenses decreased by $1 million in the current year as compared to
the prior year.
Interest Expense. Interest expense increased by $1.6 million or 12.3% to
$14.8 million in fiscal 2000 as compared to the prior year primarily due to an
increased average level of bank borrowings and higher average interest rates.
27
<PAGE>
Gain from Property Damage Claim. In April 1999, the Company suffered
inventory, real property and equipment loss at its Bowmanstown, Pennsylvania
facility resulting from a fire. In fiscal 2000, the Company settled all claims
with its insurance carriers and recorded a gain of $946 (in addition to the $3.7
million booked in fiscal 1999) based on agreed upon final reimbursements for
damaged property and equipment in excess of its net book value.
Other Expense, Net. Other expense, net, principally reflects foreign
currency transaction losses of the Company's foreign subsidiaries.
Gain from Sale of Assets. 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-owned" power production company in January 2000. As
a result of the sale, the subsidiary's ability to purchase power at cost
terminated and it purchases a majority of its power at prevailing market rates.
The Company realized net sale proceeds of $18.7 million and recorded a pre-tax
gain of $13.7 million. Approximately $1.3 million of additional net gain has
been deferred and will be recognized over the period of a related power purchase
contract with the buyer.
Income Taxes. The 2000 and 1999 tax provisions differ from the amount
calculated at the U.S. statutory rate, due primarily to the effect of
non-deductible expenses and tax rate differences on foreign operations. The 2000
tax expense includes a provision related to the gain on sale of assets at the
Norwegian statutory rate of 28%. No valuation allowance has been provided on the
Company's net deferred tax assets, as management believes that it is more likely
than not that such amounts will be recovered in future periods.
Comparison of Fiscal Year Ended June 30, 1999 to Fiscal Year Ended June 30, 1998
Net Sales. Net Sales increased by $21.7 million or 7.9% to $297.3 million
in fiscal 1999 as compared to the prior year. This increase was primarily due to
higher sales of $25.1 million in the Company's Industrial Chemicals group for
dicyandiamide and calcium carbide ($29.8 million) as a result of the ODDA
acquisition and higher volume sales of the Company's coal fly ash ($3.8
million). This increase was partially offset by lower volume sales of inorganic
intermediate products primarily to the wood treating industry ($1.4 million) due
to lower demand, lower sales of copper sulfate feed grade ($1.2 million) due to
lower copper prices and competitive pressures, and lower volume sales of metal
finishing and electronic chemicals and lower recycling revenues due to lower
customer demand ($3.0 million).
AgChem sales in 1999 were lower by $3.4 million as compared to the prior
year primarily as a result of lower demand for the Company's animal nutrition
and health products ($13.4 million), which was partially offset by higher crop
protection chemical sales ($5.5 million) primarily due to introduction of new
generic fungicides and the acquisition in December 1998 of a feed pre-mix
business ($3.3 million).
Gross Profit. Gross profit increased by $7.4 million or 11% to $74 million
in 1999. This increase was primarily attributable to higher sales in the
Company's Industrial Chemicals group ($9.8 million), due to the ODDA acquisition
and higher sales of coal fly ash, which were partially offset by lower sales of
inorganic chemical intermediates (primarily to the wood treating industry) and
copper sulfate feed grade. Gross profit of the Company's AgChem segment was
comparable to the prior year as higher crop protection product sales were offset
by lower sales of animal nutrition and health products, principally
coccidiostats. Gross profit as a percentage of net sales also increased to 24.9%
in 1999, as compared to 24.2% in 1998, principally due to the impact of the ODDA
acquisition on the Industrial Chemicals group and higher margins on new generic
fungicides within the AgChem group.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $3.2 million or 5.4% to $64.2 million in fiscal
1999 as compared to the prior year. This increase was primarily due to the
Company's acquisition of ODDA ($9.0 million), higher selling expenses associated
with sale of the Company's newly introduced generic fungicides ($1.8 million)
and compensation expenses associated with the separation of employment of an
executive of a subsidiary of the Company ($1.5 million). These increases were
partially offset by $2.5 million in lower expenses due to the 1998 curtailment
of operations at the Company's Sewaren, New Jersey facility. Also included in
1998 are charges of $5.6 million associated with
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<PAGE>
the forgiveness of executive notes and related income tax reimbursements and
$1.2 million of severance charges.
Operating Income (Loss). Operating income of the AgChem group increased
$1.9 million in 1999 as compared to the prior year, due primarily to the
introduction of new generic fungicides. Excluding the 1998 charge for
curtailment of operations at the Sewaren, New Jersey facility, operating income
of the Industrial Chemicals group increased by $1.5 million, due primarily to
the ODDA acquisition and the increase in sales of coal fly ash. In addition,
non-segment operating expenses in 1999 included a charge associated with the
separation from employment of an executive and in 1998 included a $5.6 million
charge associated with the forgiveness of certain notes due from executives and
related tax reimbursements.
Interest Expense. Interest expense increased by $6.3 million or 91.4% to
$13.1 million in fiscal 1999 as compared to the prior year primarily due to
increased principal and interest expense associated with the offering of $100
million of Senior Subordinated Notes in June 1998 and interest expense incurred
by ODDA on its bank borrowings.
Gain from Property Damage Claim. In April 1999, a fire damaged the
Company's Bowmanstown, Pennsylvania facility, including real property and
machinery and equipment. The gain of $3.7 million represents the excess of
insurance proceeds to be recovered over the net carrying value of the damaged
property.
Other Expense, Net. Other expense, net, principally reflects foreign
currency transaction gains and losses of the Company's foreign subsidiaries.
Taxes. The 1999 tax provision differs from the amount calculated at the
U.S. statutory rate due primarily to the effect of non-deductible expenses and
tax rate differences on foreign operations. The fiscal 1998 net benefit for
income taxes includes a deferred benefit at the statutory tax rate of 34% for
the U.S. pre-tax loss and the impact of lower tax rates on foreign pre-tax
income. No valuation allowance has been provided on the Company's net deferred
tax assets, as management believes that it is more likely than not that such
amounts will be recovered in future periods, except with respect to certain
foreign and U.S. state net operating loss carryforwards.
Liquidity and Capital Resources
Net Cash Used in Operating Activities. Net cash used in operations for
fiscal 2000 was $7.9 million, an increase of $4.8 million from the prior year.
This increase was primarily due to higher levels of AgChem segment accounts
receivable in the U.S., mainly a result of higher crop protection chemical sales
during the quarter ending June 30, 2000 as compared to the comparable period of
the prior year. Crop protection chemical sales are highly seasonal and are
typically highest during the last quarter of the Company's fiscal year. Net cash
used in operations was $3.1 million for fiscal 1999 as compared to $1.3 million
of net cash generated by operations in fiscal 1998. This change was primarily
due to lower earnings before non-cash items, primarily due to higher interest
expenses, and higher levels of accounts receivable and inventories due to the
ODDA and feed pre-mix business acquisitions. Partially offsetting these changes
were fiscal 1999 accruals for payments associated with separation of employment
of a senior executive and accruals for obtaining label registration rights for
certain fungicides which were be paid in fiscal 2000.
Net Cash Used in Investing Activities. Net cash used in investing
activities for fiscal 2000 was $4.1 million as compared to $33.8 million in
fiscal 1999. In fiscal 2000 the Company had higher capital expenditures
primarily at ODDA for increased production capacities and at MRT for collection
and distribution infrastructure associated with its fly ash management
contracts. Also during fiscal 2000 the Company made investments in two
businesses for a combined $3 million. The Company, in fiscal 2000, received
gross proceeds of $18.7 million from the sale of assets by ODDA and collected
proceeds of $4 million from its insurance carriers for property damage claims
arising from the fire at the Bowmanstown, Pennsylvania facility. Higher capital
expenditures were primarily due to expenditures by ODDA for increased production
capacities. Net cash used in investing activities for fiscal 1999 was $33.8
million, an increase of $25.7 million over the prior year. This increase was
primarily due to the ODDA acquisition, as well as a small acquisition of a
business in the feed pre-mix industry.
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Net Cash Provided by Financing Activities. Net cash provided by financing
activities for fiscal 2000 was $11.3 million, primarily as a result of drawdowns
under the Company's revolving credit facilities, which was partially offset by
repayments of approximately $10 million in bank indebtedness, by the Company's
Norwegian subsidiary from net proceeds generated from the asset sale. Net cash
provided by financing activities for fiscal 1999 was $15.7 million, primarily as
a result of drawdowns under the Company's revolving credit facility. Net cash
provided by financing activities for fiscal 1998 was $26.8 million, primarily as
a result of proceeds from the issuance of the $100 million of Senior
Subordinated Notes, less discounts and fees of $3.8 million and after repayments
of the Company's long-term and short-term indebtedness.
Liquidity. As of June 30, 2000 and 1999, the Company had $79.9 and $72.6
million of working capital, respectively.
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 domestic
subsidiaries of the Company.
In August 1998, the Company and all of its domestic subsidiaries entered
into a credit agreement with PNC Bank, National Association, providing, among
other things, for the extension of a $60 million senior secured facility,
consisting of a $35 million revolving credit facility (subject to the level of
eligible receivables and eligible inventory, with a sub-limit for inventory of
$15 million), including a $7.5 million letter of credit sub-facility, and a $25
million acquisition facility.
At June 30, 1999, the Company was not in compliance with the domestic net
worth requirements of the credit agreement. The lenders waived the default as of
June 30, 1999 and amended domestic net worth requirements for fiscal 2000. The
Company's Norwegian subsidiary, ODDA, was not in compliance with the debt
service and liabilities to equity ratios in its bank agreement. Subsequently, a
waiver was obtained from ODDA's lenders. As of June 30, 2000, the Company was in
compliance with its domestic and Norwegian credit facility covenants.
In April 1999, the Company suffered inventory, real property and machinery
and equipment loss at its Bowmanstown, Pennsylvania facility resulting from a
fire. The Company carries insurance coverage for the property damage and
business interruption losses. The Company received reimbursement of $4 million
and $1 million in fiscal 2000 and 1999, respectively. In addition, the Company
recorded a receivable of $4.1 million in other receivables as of June 30, 2000
for the remaining amounts reimbursable from the insurance carrier. The
receivable has been subsequently collected in full settlement with the Company's
insurance carriers.
The Company realized net sale proceeds of $18.7 million from ODDA's sale
in January 2000 of its investment in a local hydroelectric power company and
related power rights, and recorded a pre-tax gain of $13.7 million.
Approximately $1.3 million of additional net gain has been deferred and will be
recognized over the period of a related power purchase contract with the buyer.
A total of approximately $10 million in bank indebtedness of ODDA was repaid
from the proceeds of the sale. As a result of the sale, the subsidiary's ability
to purchase power at cost terminated and it purchases a majority of its power at
prevailing market rates.
In the fourth quarter of fiscal 2000, due to competitive market
conditions, the Company extended payment terms on selected AgChem product sales,
representing approximately $6.7 million of revenues. While the impact of the
extended terms on year-to-year June 30 receivables was not significant, these
terms defer cash inflows into the third and fourth quarters of fiscal 2001. As
indicated below, the Company believes it has adequate cash and financing
resources to mitigate this impact.
The Company anticipates spending approximately $16 million for capital
expenditures for its existing business in fiscal 2001, principally for
improvements and expansion at ODDA and MRT. Depending on actual future operating
results, the Company may, if necessary, postpone certain expenditures that are
considered discretionary.
At June 30, 2000, the Company had $29.7 million outstanding borrowings
under its credit agreement
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with PNC Bank. In addition to amounts outstanding, the Company had $5.3 million
available under the borrowing base formula. Certain of the Company's foreign
subsidiaries also had availability under their respective foreign revolving
credit facilities of approximately $5 million in the aggregate. In addition,
ODDA expects to obtain during fiscal 2001 long-term financing and grants
totaling approximately NOK (Norwegian Kroner) 18 million (U.S. $2,000,000 as of
June 30, 2000) from the Norwegian Industrial and Regional Development Fund (SND)
for recently completed capital projects. The Company believes that cash flows
from operations and available borrowing arrangements should provide sufficient
working capital to operate the Company's existing business, to make budgeted
capital expenditures and to service interest and current principal coming due on
outstanding debt.
Seasonality of Business
The Company's sales are typically highest in the fourth fiscal quarter.
The Company's sales of copper-based fungicides and other agricultural products
are typically highest in the first and fourth fiscal quarters, and its sales of
gibberellic acid are highest in the fourth quarter, due to the seasonal nature
of the agricultural industry. The Company's sales of finished chemicals to the
wood treatment industry are typically highest in the first and fourth fiscal
quarters due to the increased level of home construction during these periods.
Additionally, sales of these products may be more concentrated in one of these
quarters due to weather conditions.
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.
Foreign currency transaction gains and losses are included in net income.
Currency translation losses relating to short and long-term debt of the
Company's Israeli and Norwegian subsidiaries that are denominated or linked to
foreign currencies are included in earnings. Such translation losses were
$2,142,000 and $1,829,000 for the 2000 and 1999 fiscal years, respectively. See
Note 1 to the Company's Consolidated Financial Statements.
Impact of Recently Adopted Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 was originally effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999,
the Financial Accounting Standards Board issued Statements of Financial
Accounting Standard No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" (SFAS
137). SFAS 137 defers the effective date of FASB 133 for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (July 1, 2000 for the Company).
SFAS 133 requires that all derivative intruments be recorded on the balance
sheet at their fair value. Gain or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. In June 2000, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities an amendment of FASB Statement No. 133" (SFAS 138). SFAS 138
amends the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities.
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<PAGE>
The Company's foreign currency contracts are currently marked to market
with corresponding charges or credits to income, therefore there will be no
impact on accounting for these contracts for the adoption of SFAS 133. With
respect to commodity contracts, the difference between fair value and carrying
value at June 30, 2000 is not significant; however, implementation of this
standard may have a material effect on earnings, comprehensive income and
financial position of future annual or interim periods.
In December 1999, the Securities and Executive Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The
effective date of SAB 101 is no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. This SAB clarifies proper methods of
revenue recognition given certain circumstances surrounding sales transactions.
The Company continues to evaluate the impact of SAB 101, but believes it is in
compliance with the provisions of the SAB and, accordingly, does not expect SAB
101 to have a material effect on its financial statements.
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 carrying amounts of cash and cash
equivalents, trade receivables, trade payables and short term debt are
considered to be representative of their fair value because of their short
maturities. As of June 30, 2000, the fair value of the Company's senior
subordinated debt is estimated based on quoted market rates at $70.8 million and
the related carrying amount is $100 million. A 100 basis point increase in
interest rates could result in approximately $5.4 million reduction in the fair
value of total debt.
Foreign Currency Exchange Rate Risk
A significant portion of the financial results of the Company is derived
from activities conducted outside the U.S. and denominated in currencies other
than the U.S. dollar. Because the financial results of the Company are reported
in U.S. dollars, they are affected by changes in the value of the various
foreign currencies in relation to the U.S. Dollar. Exchange rate risks are
reduced, however, by the diversity of the Company's foreign operations and the
fact that international activities are not concentrated in any single non-U.S.
currency. Short-term exposures to changing foreign currency exchange rates are
primarily due to operating cash flows denominated in foreign currencies. The
Company covers known and anticipated operating exposures by using purchased
foreign currency exchange option and forward contracts. The primary currencies
for which the Company has foreign currency exchange rate exposure are the Euro
and Japanese yen.
The Company uses sensitivity analysis to assess the market risk associated
with its foreign currency transactions. Market risk is defined for these
purposes as the potential change in fair value resulting from an adverse
movement in foreign currency exchange rates. The fair value associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date. At June 30, 2000, the fair value did not differ materially from its
carrying amount. Based on the limited amount of foreign currency contracts at
June 30, 2000, the Company does not
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believe that an instantaneous 10% adverse movement in foreign currency rates
from their levels at June 30, 2000, with all other variables held constant,
would have a material effect on the Company's results of operations, financial
position or cash flows.
Other
The Company obtains third party letters of credit and surety bonds in
connection with certain inventory purchases and insurance obligations. At June
30, 2000, the contract values of these letters of credit and surety bonds were
$2.3 million and their fair values did not differ materially from their carrying
amount.
Commodity Price Risk
The Company purchases certain raw materials, such as copper, under
short-term supply contracts. The purchase prices thereunder are generally
determined based on prevailing market conditions. The Company uses commodity
derivative instruments to modify some of the commodity price risks. Assuming a
10% change in the underlying commodity price, the potential change in the fair
value of commodity derivative contracts held at June 30, 2000 would not be
material when compared to the Company's earnings and financial position.
The foregoing market risk discussion and the estimated amounts presented
are Forward-Looking Statements that assume certain market conditions. Actual
results in the future may differ materially from these projected results due to
developments in relevant financial markets and commodity markets. The methods
used above to assess risk should not be considered projections of expected
future events or results.
Year 2000 Disclosure
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
The term "Year 2000 ("Y2K") Issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from the dates in the "1900's." These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that make use of the date field. The Y2K
computer software compliance issues affect the Company and most companies in the
world.
Prior to December 31, 1999, the Company conducted a review of its core
management information systems and equipment with embedded chips or processors
("Management Systems") used in the Company's operations, and also its internal
manufacturing systems at its plants, including computer-based manufacturing,
logistical and related systems ("Manufacturing Systems").
Prior to December 31, 1999, the Company replaced or upgraded most of its
Management Systems and Manufacturing Systems. The Company substantially upgraded
its desktop computers, networks and servers and software applications and
packages. The Company expended approximately $587,000, $920,000 and $245,000 in
the fiscal years ended June 30, 1997, 1998 and 1999, respectively, towards
compliance with Y2K Issues. Such amounts during such periods were allocated as
follows: for 1997, $72,700 for hardware, $9,000 for software, $300,800 for
outside consultants and $205,000 for internal costs; for 1998, $229,700 for
hardware, $35,600 for software, $235,000 for outside consultants and $420,000
for internal costs; for 1999, $168,000 for hardware, $53,000 for software,
$24,000 for outside consultants and nominal internal costs. The Company expended
approximately $150,000 during the second half of calendar 1999, of which
approximately $30,000 was spent on hardware, $70,000 on software modifications
and systems testing by outside consultants and $50,000 was allocated to internal
costs and contingencies.
The Company believes that its Management Systems and Manufacturing Systems
are currently in Y2K compliance. Subsequent to January 1, 2000, the Company has
experienced no interruption in, or failure of, normal business activities or
operations due to a Y2K Issue. The Company believes that the implementation
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<PAGE>
of new business systems and the completion of the Company's Y2K modifications
successfully mitigated the possibility of significant interruptions of normal
operations.
Certain Factors Affecting Future Operating Results
This Form 10-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; the uncertain impact of the Company's acquisition plans; and the
seasonality of the Company's business.
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.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The following sets forth, as of June 30, 2000, the name, age, and position
of the Company's directors and executive officers:
Name Age Position
----- --- --------
Jack C. Bendheim 53 Director, President and Chief Executive Officer
Marvin S. Sussman 53 Director; Chief Operating Officer and Executive
Vice President; President, Prince Group
James O. Herlands 58 Director and Executive Vice President; President,
CP/PhibroChem Group
Nathan Z. Bistricer 49 Vice President and Chief Financial Officer
Joseph M. Katzenstein 58 Treasurer and Secretary
JACK C. BENDHEIM -- Director, President and Chief Executive Officer. Mr.
Bendheim has been President since 1988. 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.
MARVIN S. SUSSMAN -- Director, Chief Operating Officer and Executive Vice
President, and President of the Company's Prince Group. He has been a director
since 1988 and was appointed Chief Operating Officer in 1998. Mr. Sussman joined
the Company in 1971. Since then, he has served in various executive positions at
the Company and at the Prince Group. Since 1988, Mr. Sussman has been President
of the Company's Prince Group and Executive Vice-President of the Company. Mr.
Sussman is the brother-in-law of Jack Bendheim.
JAMES O. HERLANDS -- Director and Executive Vice President, and President
of CP/PhibroChem. Mr. Herlands joined the Company in 1964. Since then, he has
served in various capabilities in sales/marketing and purchasing. He has been a
director since 1988. Since 1992, Mr. Herlands has been President of the
Company's CP/PhibroChem Group. From 1988 to 1992, Mr. Herlands was Senior Vice
President of the Company. Mr. Herlands is the first cousin of Jack Bendheim.
NATHAN Z. BISTRICER -- Vice President and Chief Financial Officer. Mr.
Bistricer has served as Vice President and Chief Financial Officer since he
joined the Company in 1985. From 1981 to 1985, Mr. Bistricer served as Vice
President--Administrator and Treasurer of Belco Petroleum Corporation, an oil
and gas exploration company.
JOSEPH 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.
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Item 11. Executive Compensation.
The following table sets forth the cash compensation paid by the Company
and its subsidiaries for services during fiscal 2000, 1999 and 1998 to each of
the Company's five most highly compensated executive officers:
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Awards Payouts
Annual Compensation ----------------------- -------
---------------------------------- Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation** Awards Options/SARs Payouts Compensation***
--------------- ---- ------ ----- -------------- ---------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack C. Bendheim .............. 2000 $1,500,000 $ -- $ -- $ -- $ -- $ -- $5,362
President & CEO 1999 $1,207,000 -- -- -- -- -- $5,200
1998 $1,725,000 -- -- -- -- -- $5,200
Marvin S. Sussman* ............ 2000 $ 467,000 $ 667,600 -- $ -- $ -- $ -- $5,362
Executive Vice President & COO; 1999 $ 467,000 $ 597,200 -- -- -- -- $5,200
President of Prince Group 1998 $ 479,500 $ 423,700 -- -- -- -- $5,200
James O. Herlands ............. 2000 $ 382,500 $ 252,500 -- $ -- $ -- $ -- $5,362
Executive Vice President; 1999 $ 365,000 $ 250,000 $ 24,015 -- -- -- $5,200
President of CP/Phibrochem 1998 $ 350,000 $ 250,000 $1,030,100 -- -- -- $5,200
Nathan Z. Bistricer ........... 2000 $ 245,000 $ 75,000 -- $ -- $ -- $ -- $5,362
Vice President & CFO 1999 $ 233,700 $ 180,000 $ 24,015 -- -- -- $5,200
1998 $ 233,700 $ 60,000 $1,030,100 -- -- -- $5,200
Joseph M. Katzenstein ......... 2000 $ 115,250 $ -- $ -- $ -- $ -- $ -- $3,746
Treasurer and Secretary 1999 $ 111,250 -- -- -- -- -- $3,616
1998 $ 108,750 -- -- -- -- -- $3,534
</TABLE>
----------
* 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, permanent disability or the termination of his
employment by the Company. See "Certain Relationships and Related
Transactions." As a result, the Company is required to record as
compensation to Mr. Sussman each year the change in the book value of the
Company attributable to Mr. Sussman's shares. For 2000, 1999 and 1998 the
amount attributable to Mr. Sussman's shares was $1,137,000, $(187,000) and
$(1,250,000), respectively. Such amounts have not been distributed to Mr.
Sussman.
** In fiscal 1998, Phibro-Tech, a subsidiary of the Company, canceled the
limited recourse notes issued by executives related to acquiring 4% of the
stock of Phibro-Tech, and forgave all amounts due the Company, resulting
in compensation expense. The Company also paid the executives an
additional amount as reimbursement for their income tax liability related
to the forgiveness, which was also recorded as compensation expense. See
"Certain Relationships and Related Transactions."
*** Represents contributions by the Company under its 401(k) Retirement and
Savings Plan. See "--Compensation Pursuant to Plans."
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<PAGE>
In fiscal 2000, the Company granted no options or long-term incentive plan
awards 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 Marvin S. Sussman in
December 1987. Mr. Sussman, as President of the Company's Prince Group, is
responsible for the day-to-day operations of that group. 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 the event of the termination of Mr. Sussman's
employment, the Company was obligated to make a severance payment to Mr. Sussman
in an amount equal to the principal balance of and all accrued interest on
certain promissory notes dated June 30, 1993 made by Mr. Sussman and his wife to
Jack Bendheim and his wife. On December 31, 1999, the aggregate balance of such
notes, $40,000, plus accrued interest at 6% per annum, was paid in full, thereby
terminating such severance obligation.
In 1995, Nathan Bistricer and James O. Herlands purchased stock in
Phibro-Tech. In connection therewith, the Company entered into severance
agreements with them. The agreements provide that, upon the Actual or
Constructive Termination of such executive or a Change in Control Event (as such
terms are defined), the executive is entitled to receive a cash Severance Amount
(as defined therein), based upon a multiple of Phibro-Tech's pretax 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, 2000, severance payments equal to an aggregate of
approximately $412,000 would have been due to Messrs. Bistricer and Herlands if
they 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 $150,000 (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 6.0% 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 over 3.0% 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.
The accounts of Messrs. Bendheim, Sussman, Herlands, Bistricer and
Katzenstein were credited with employer contributions of $5,362, $5,362, $5,362,
$5,362 and $3,746, respectively, for fiscal 2000.
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,
37
<PAGE>
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 certain. 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 certain.
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............. $12,320 $15,890- $19,320 $22,910 $26,670
$100,000............ $17,950 $23,390 $28,700 $34,160 $39,800
$150,000............ $29,200 $38,390 $47,450 $56,660 $66,050
$200,000............ $31,450 $41,390 $51,200 $61,160 $71,300
As of June 30, 2000, Messrs. Bendheim, Sussman, Herlands, Bistricer and
Katzenstein had 31, 29, 36, 15 and 38 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, 2000 is $160,000. Such
individuals, at age 65, will have 43, 41, 43, 31 and 45 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, 2000, is $106,600, $122,030, $120,340, $65,020 and
$47,820, 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). Five 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, 2000.
Annual Survivor's Deferred
Retirement Income Compensation
Income Benefit Benefit Benefit
-------------- ----------- ------------
Jack C. Bendheim ................ $16,451 $1,500,000 $177,544
Nathan Z. Bistricer ............. $12,275 $ 480,000 $ 72,366
James O. Herlands ............... $16,451 $ 750,000 $154,764
Marvin S. Sussman ............... $16,451 $ 933,984 $ 63,241
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
38
<PAGE>
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 2000, the Board of Directors took certain action by written
consent. There were no formal meetings of the Board. 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.
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 Jack Bendheim, the President and Chief Executive Officer of the Company.
During fiscal 2000, Messrs. Bendheim, Sussman and Herlands participated in
deliberations regarding compensation of the Company's other 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."
39
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The table sets forth certain information as of June 30, 2000 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 ... -- --
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.
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. On June
30, 1995, Jack Bendheim borrowed $1,500,000 from NatWest Bank N.A. (now Fleet
Bank) which he reloaned to First Dice. On September 29, 1999, Jack Bendheim
refinanced the loan from Fleet Bank to provide for self-amortizing payments.
Similarly, Jack Bendheim's loan to First Dice was restructured to reflect the
same terms as his borrowing from Fleet Bank. The repayment to Jack Bendheim of
such loan by First Dice is personally guaranteed by each of the limited partners
of First Dice in proportion to their respective limited partnership interests.
The Company believes that the terms of such lease and loan are on terms no 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.
In connection with the consummation of the offering by the Company of its
Senior Subordinated Notes in June 1998, Phibro-Tech canceled certain limited
recourse promissory notes from I. David Paley (the former President of
Phibro-Tech) ($1,392,461), Nathan Z. Bistricer ($415,685) and James O. Herlands
($415,685) (the "Executives"), related to acquiring 10.7% of the stock of
Phibro-Tech in 1995 and forgave all amounts due thereunder (including an
aggregate of $628,000 in accrued interest), and paid the Executives an
additional aggregate amount of $2,740,000 as reimbursement for their resulting
income tax liability. As a result of the repayment of certain notes of the
Company with proceeds of the offering of the Company's Senior Subordinated
Notes, the Class B common stock of the Executives converted into an equal number
of Class A common stock of Phibro-Tech. Pursuant to an amendment to the
Certificate of Incorporation of Phibro-Tech adopted in January 1999, the shares
of Phibro-Tech owned by the Executives were exchanged for an equal number of
newly authorized shares of non-voting Class B Common Stock of Phibro-Tech, and
the shares of MMC owned by Phibro-Tech were transferred to and became directly
owned by Philipp Brothers. A
40
<PAGE>
Shareholders Agreement among the Executives and Phibro-Tech provides, among
other things, for restrictions on such 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 I. David Paley from Phibro-Tech in
March 1999, pursuant to the Shareholders Agreement among the Executives and
Phibro-Tech, the Company paid $2,862,660 in connection with the repurchase of
the 240.03 shares of his Class B Common Stock of Phibro-Tech and in satisfaction
of Phibro-Tech's severance obligation under a Severance Agreement between
Phibro-Tech and Mr. Paley. In addition, the Company has retained Mr. Paley,
pursuant to a Consulting Agreement, through March 15, 2002, to render consulting
and advisory services to the Company on a part-time basis. The consulting fee
payable to Mr. Paley is $200,000 for the first year and $150,000 for each of the
second and third years of the term. Mr. Paley is also entitled under such
Consulting Agreement to life insurance equal to the unpaid consulting fee, and
certain other benefits.
The Company periodically advances 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%.
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.
41
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 -- Restated Certificate of Incorporation of Philipp Brothers
Chemicals, Inc.*
3.2 -- By-laws of Philipp Brothers Chemicals, Inc.*
3.3 -- Composite Certificate of Incorporation of Phibro-Tech, Inc.****
3.4 -- By-Laws of Phibro-Tech, Inc.*
3.5 -- Certificate of Incorporation of C.P. Chemicals, Inc.*
3.6 -- By-Laws of C.P. Chemicals, Inc.*
3.7 -- Certificate of Incorporation of Prince Agriproducts, Inc.*
3.8 -- By-Laws of Prince Agriproducts, Inc.*
3.9 -- Certificate of Incorporation of The Prince Manufacturing Company,
an Illinois corporation*
3.10 -- By-Laws of The Prince Manufacturing Company, an Illinois
corporation*
3.11 -- Certificate of Incorporation of The Prince Manufacturing Company,
a Pennsylvania corporation*
3.12 -- By-Laws of The Prince Manufacturing Company, a Pennsylvania
corporation*
3.13 -- Certificate of Formation of Mineral Resource Technologies, L.L.C.*
3.14 -- Amended and Restated Combined Limited Liability Company Agreement
of Mineral Resource Technologies, L.L.C., and Stockholders
Agreement of MRT Management Corp., dated as of June 30, 1999****
3.15 -- Certificate of Incorporation of MRT Management Corp.*
3.15.1 -- Amendment to Certificate of Incorporation of MRT Management
Corp.****
3.15.2 -- Composite Certificate of Incorporation of MRT Management Corp.****
3.16 -- By-Laws of MRT Management Corp.*
3.17 -- Certificate of Incorporation of Koffolk, Inc.*
3.18 -- By-Laws of Koffolk, Inc.*
3.19 -- Certificate of Incorporation of Phibrochem, Inc.*
3.20 -- By-Laws of Phibrochem, Inc.*
3.21 -- Certificate of Incorporation of Phibro Chemicals, Inc.*
3.22 -- By-Laws of Phibro Chemicals, Inc.*
3.23 -- Certificate of Incorporation of Western Magnesium Corp.*
3.24 -- By-Laws of Western Magnesium Corp.*
4.1 -- Indenture, dated as of June 11, 1998, among the Company, the
Guarantors named therein and The Chase Manhattan Bank, as trustee,
relating to the 9 7/8% Senior Subordinated Notes due 2008 of the
Company, and exhibits thereto, including Form of 9 7/8% Senior
Subordinated Note due 2008 of Company*
42
<PAGE>
Certain instruments which define the rights of holders of
long-term debt of the Company 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 the Company and its subsidiaries
on a consolidated basis, as of June 30, 2000. For a description of
such indebtedness, see Note 7 of Notes to Consolidated Financial
Statements. The Company hereby agrees to furnish copies of such
instruments to the Securities and Exchange Commission upon its
request.
10.1 -- Registration Rights Agreement, dated June 11, 1998, among Philipp
Brothers Chemicals, Inc., the Guarantors named therein and
Schroder & Co. Inc.*
10.2 -- Revolving Credit, Acquisition Term Loan and Security Agreement,
dated August 19, 1998, among Philipp Brothers Chemicals, Inc., as
Borrower, the Guarantors named therein, PNC Bank, N.A. as Agent
and Lender, and the other institutions from time to time party
thereto as Lenders*
10.3 -- Manufacturing Agreement, dated May 15, 1994, by and between Merck
& Co., Inc., Koffolk, Ltd., and Philipp Brothers Chemicals, Inc.+*
10.4 -- [Intentionally Omitted.]
10.5 -- Asset Purchase and Trademark Assignment Agreement, dated August 5,
1996, between Koffolk, Inc. and Merck & Co., Inc.; assigned by
Merck & Co., Inc. to Merial Limited.*
10.6 -- Distributorship Agreement, dated August 5, 1996, by and between
Merck & Co., Inc. and Koffolk, Inc.; assigned by Merck & Co., Inc.
to Merial Limited.+*
10.7 -- License Agreement, dated May 30, 1996, by and between Michigan
Technological University and Mineral Resource Technologies,
L.L.C.+*
10.8 -- Lease, dated July 25, 1986, between Philipp Brothers Chemicals,
Inc. and 400 Kelby Associates, as amended December 1, 1986 and
December 30, 1994*
10.9 -- Lease, dated June 30, 1995, between First Dice Road Co. and
Phibro-Tech, Inc., as amended May 1998*
10.10 -- Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and
Israel Land Administration*
10.11 -- Master Lease Agreement, dated February 27, 1998, between General
Electric Capital Corp., Philipp Brothers Chemicals, Inc. and
Phibro-Tech, Inc.*
10.12 -- Stockholders Agreement, dated December 29, 1987, by and between
Philipp Brothers Chemicals, Inc., Charles H. Bendheim, Jack C.
Bendheim and Marvin S. Sussman*
10.13 -- Employment Agreement, dated December 29, 1987, by and between
Philipp Brothers Chemicals, Inc. and Marvin S. Sussman* ++
10.14 -- Stockholders Agreement, dated February 21, 1995, between I. David
Paley, Nathan Z. Bistricer, James O. Herlands and Phibro-Tech,
Inc., as amended as of June 11, 1998*
10.15 -- Severance Agreement, dated as of February 21, 1995, between I.
David Paley and Phibro-Tech, Inc.* ++
10.16 -- Form of Severance Agreement, each dated as of February 21, 1995,
between Philipp Brothers Chemicals, Inc. and each of Nathan Z.
Bistricer and James O. Herlands* ++
10.17 -- 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*
10.18 -- Philipp Brothers Chemicals, Inc. Retirement Income and Deferred
Compensation Plan Trust, dated as of January 1, 1994, by and
between Philipp Brothers Chemicals, Inc. 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")* ++
43
<PAGE>
10.18.1 -- First, Second and Third Amendments to Retirement Income and
Deferred Compensation Plan.**** ++
10.19 -- Form of Executive Income Deferred Compensation Agreement, each
dated March 11, 1990, by and between Philipp Brothers Chemicals,
Inc. and each of Jack Bendheim, James Herlands and Marvin Sussman*
++
10.20 -- Form of Executive Income Split Dollar Agreement, each dated March
1, 1990, by and between Philipp Brothers Chemicals, Inc. and each
of Jack Bendheim, James Herlands and Marvin Sussman* ++
10.21 -- Agreement for the Sale and Purchase of the Shares of ODDA
Smelteverk A/S and of the Business and Certain Assets of BOC
Carbide Industries, a division of BOC Ltd., dated June 26, 1998,
between The BOC Group plc and Philipp Brothers Chemicals, Inc.*
10.22 -- Supply Agreement, dated as of September 28, 1998, between BOC
Limited and Phillip Brothers Chemicals, Inc.*
10.23 -- 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.*
10.24 -- 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****
10.25 -- 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****
10.26 -- Licensing Agreement, dated January 28, 1980, between Gunness Wharf
Limited and BOC Limited+*
10.27 -- Agreement, dated January 28, 1980, between BOC Limited and Gunness
Wharf Limited+*
10.28 -- Subscription and Exchange Agreement, dated as of January 29, 1999
among I. David Paley, Nathan Z. Bistricer, James O. Herlands and
Phibro Tech, Inc.**
10.29 -- General Release between Phibro-Tech, Inc. and I. David Paley dated
as of September 1, 1999***
10.30 -- Separation Agreement between Phibro-Tech, Inc. and I. David Paley
dated as of September 1, 1999*** ++
10.31 -- Stock Purchase Agreement between Phibro-Tech, Inc. and I. David
Paley dated as of September 1, 1999***
10.32 -- Consulting Agreement between Phibro-Tech, Inc. and I. David Paley
dated as of September 1, 1999***
21.1 -- List of Subsidiaries****
27.1 -- Financial Data Schedules****
----------
* Filed as an Exhibit to the Registrant's Registration Statement on Form
S-4, No. 333-64641.
** Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 1998.
*** Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999.
**** 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.
44
<PAGE>
(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.
No reports on Form 8-K have been filed during the last quarter of the
fiscal year ended June 30, 2000.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants ........................................ F-2
Consolidated Balance Sheets--June 30, 2000 and 1999 ...................... F-3
Consolidated Statements of Operations and Comprehensive
Income--for the years ended June 30, 2000, 1999 and 1998 ............. F-4
Consolidated Statements of Changes in Stockholders'
Equity--for the years ended June 30, 1998, 1999 and 2000 ............. F-5
Consolidated Statements of Cash Flows--for the years ended
June 30, 2000, 1999 and 1998 ......................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
<PAGE>
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 Subsidiaries at
June 30, 2000 and June 30, 1999, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 2000 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
September 26, 2000
F-2
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS
2000 1999
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 2,403 $ 3,022
Trade receivables, less allowance for doubtful accounts of $756
at June 30, 2000 and $886 at June 30, 1999 ................. 79,376 70,177
Other receivables ............................................. 8,479 10,596
Inventories ................................................... 50,405 51,430
Prepaid expenses and other current assets ..................... 9,098 6,133
--------- ---------
TOTAL CURRENT ASSETS ..................................... 149,761 141,358
PROPERTY, PLANT AND EQUIPMENT, net ............................... 76,180 64,294
INTANGIBLES ...................................................... 6,297 6,959
OTHER ASSETS ..................................................... 26,213 26,168
--------- ---------
$ 258,451 $ 238,779
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft ................................................ $ 2,120 $ 1,438
Loans payable to banks ........................................ 8,650 3,734
Current portions of long-term debt ............................ 2,296 1,450
Accounts payable .............................................. 32,642 36,410
Accrued expenses and other current liabilities ................ 24,157 25,740
--------- ---------
TOTAL CURRENT LIABILITIES ................................ 69,865 68,772
LONG-TERM DEBT ................................................... 139,722 134,088
OTHER LIABILITIES ................................................ 13,282 11,514
--------- ---------
TOTAL LIABILITIES ........................................ 222,869 214,374
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Common stock .................................................. 3,513 2,376
Common stock of subsidiary .................................... 451 581
--------- ---------
TOTAL REDEEMABLE SECURITIES .............................. 3,964 2,957
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock-$100 par value, 150,543 shares
authorized; none issued at June 30, 2000 and
1999; Series A Preferred Stock--$100 par value,
6% noncumulative, 5,207 shares authorized and
issued at June 30, 2000 and 1999 ........................... 521 521
Common stock-$0.10 par value, 30,300 shares authorized
and 24,488 shares issued at June 30, 2000 and 1999 ......... 2 2
Paid-in capital ............................................... 878 816
Retained earnings ............................................. 32,808 22,755
Accumulated other comprehensive loss--
cumulative currency translation adjustment ................. (2,591) (2,646)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ............................... 31,618 21,448
--------- ---------
$ 258,451 $ 238,779
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended June 30, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
NET SALES .......................................... $ 318,056 $ 297,294 $ 275,577
COST OF GOODS SOLD ................................. 229,553 223,247 208,913
--------- --------- ---------
GROSS PROFIT .................................... 88,503 74,047 66,664
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................................ 74,310 64,192 60,891
CURTAILMENT OF OPERATIONS AT
MANUFACTURING FACILITY .......................... (1,481) (500) 10,000
--------- --------- ---------
OPERATING INCOME (LOSS) ......................... 15,674 10,355 (4,227)
OTHER:
Interest expense ................................ 14,754 13,142 6,865
Interest income ................................. (600) (628) (383)
Gain from property damage claim ................. (946) (3,701) --
Gain on sale of assets .......................... (13,763) -- --
Other expense, net .............................. 2,230 1,829 1,045
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ....................... 13,999 (287) (11,754)
PROVISION (BENEFIT) FOR INCOME TAXES ............... 3,946 179 (4,689)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ......... 10,053 (466) (7,065)
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT (NET OF APPLICABLE INCOME TAXES
OF $ 1,011) ..................................... -- -- (1,962)
--------- --------- ---------
NET INCOME (LOSS) ............................... 10,053 (466) (9,027)
OTHER COMPREHENSIVE INCOME
Change in foreign currency translation adjustment 55 (2,043) (125)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) ..................... $ 10,108 $ (2,509) $ (9,152)
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1998, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ------------------- Accumulated Other
Class Class Class Paid-in Retained Comprehensive
Second Series "A" "A" "B" "C" Capital Earnings Income (loss) Total
------- ---------- ----- ----- ----- ------- -------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1,1997 ............... $ 680 $521 $ 1 $ 1 $ 1 $2,364 $32,314 $(478) $35,404
Redemption of
preferred stock .............. (680) (680)
Foreign currency translation
adjustment ................... (125) (125)
Receivable from principal
shareholder .................. (429) (429)
Distribution to principal
shareholder for
acquisition of business ...... (1,500) (66) (1,566)
Net income (loss) .............. (9,027) (9,027)
----- ---- ---- ---- ---- ---- ------- ------- -------
BALANCE, June 30, 1998 ............. -- 521 1 1 1 435 23,221 (603) 23,577
Foreign currency translation
adjustment ................... (2,043) (2,043)
Elimination of Class "C" shares
to Class "A" common stock .... (1) 1 --
Receivable from principal
shareholder .................. 380 380
Net income (loss) .............. (466) (466)
----- ---- ---- ---- ---- ---- ------- ------- -------
BALANCE, June 30, 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 (loss) .............. 10,053 10,053
----- ---- ---- ---- ---- ---- ------- ------- -------
BALANCE, June 30, 2000 ............. $ -- $521 $ 1 $ 1 $ -- $878 $32,808 $(2,591) $31,618
===== ==== ==== ==== ==== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 10,053 $ (466) $ (9,027)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization .................................. 11,866 11,245 9,253
Deferred income taxes .......................................... 1,438 (773) (5,229)
Forgiveness of promissory notes ................................ -- -- 2,591
Provision for curtailment of operations at manufacuring facility (1,481) (500) 10,000
Change in redemption amount of redeemable securities ........... 1,007 (860) (1,250)
Extraordinary loss on extinguishment of debt, net of tax ....... -- -- 1,962
Gain from sale of assets ....................................... (13,763) -- --
Gain from property damage claims ............................... (1,053) (3,701) --
Other .......................................................... 727 1,644 1,391
Changes in operating assets and liabilities, net of
businesses acquired:
Accounts receivable ......................................... (8,281) (5,922) (5,487)
Inventories ................................................. 584 (3,550) 1,605
Prepaid expenses and other current assets ................... (2,282) 35 (3,279)
Other assets ................................................ (1,545) (7,443) (1,349)
Accounts payable ............................................ (3,768) 43 (879)
Accrued expenses and other current liabilities .............. (1,411) 7,147 1,037
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ...................................... (7,909) (3,101) 1,339
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures ........................................... (22,604) (12,262) (8,031)
Proceeds from property damage claim ............................ 3,999 -- --
Proceeds from sale of assets ................................... 18,750 -- --
Acquisition of businesses, net of cash acquired ................ -- (21,505) --
Other investments .............................................. (3,000) -- --
Other .......................................................... (1,203) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .......................... (4,058) (33,767) (8,031)
--------- --------- ---------
FINANCING ACTIVITIES:
Cash overdraft ................................................. 682 (477) 1,915
Net increase in short-term debt ................................ 4,189 2,227 (13,533)
Proceeds from long-term debt ................................... 18,286 15,214 100,380
Payments of long-term debt ..................................... (11,871) (1,675) (52,922)
Payments of deferred financing costs ........................... -- -- (3,724)
Extinguishment of debt ......................................... -- -- (2,600)
Proceeds from life insurance ................................... -- -- 6,045
Distribution to principal shareholder for
acquisition of business ...................................... -- -- (1,500)
Receivable from principal shareholder .......................... 62 380 (429)
Redemption of preferred stock .................................. -- -- (6,812)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 11,348 15,669 26,820
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ...................................... (619) (21,199) 20,128
CASH AND CASH EQUIVALENTS at beginning of period ............ 3,022 24,221 4,093
--------- --------- ---------
CASH AND CASH EQUIVALENTS at end of period .................. $ 2,403 $ 3,022 $ 24,221
========= ========= =========
Supplementary cash flow information:
Interest paid .................................................. $ 13,694 $ 12,125 $ 6,060
========= ========= =========
Income taxes paid .............................................. $ 1,355 $ 1,284 $ 1,930
========= ========= =========
Summary of significant noncash investing and
financing activities:
Capital lease additions ........................................ $ 1,536 $ -- $ 403
========= ========= =========
Debt assumed through acquisition ............................... $ -- $ 18,195 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
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 diversified global manufacturer and
marketer of a broad range of specialty and industrial chemicals, which are sold
worldwide for use in numerous markets. 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 has two
business segments: (i) AgChem and (ii) Industrial Chemicals. During fiscal 2000,
the Company's products were manufactured at ten facilities in the United States,
four facilities in Europe, two facilities in Israel and one facility in South
America.
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 years of the Company's Israeli and Brazilian subsidiaries end
on March 31. Accordingly, the accounts of these subsidiaries are included in the
consolidated financial statements on a three month lag. The consolidated balance
sheets include a receivable from the subsidiaries in the amount of $711 at June
30, 2000 and $1,499 at June 30, 1999, included in other receivables, which
represent net transactions (merchandise purchases and cash payments) with the
subsidiaries during the three months ended June 30.
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.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 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.
F-7
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Cash and Cash Equivalents:
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents. The effect of foreign
currency changes on cash and cash equivalents is not material for each of the
fiscal years presented.
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, 2000 and 1999 would have been higher by $850 and $735,
respectively. Inventories valued at LIFO amounted to $4,809 at June 30, 2000 and
$5,802 at June 30, 1999.
Inventories consist of the following at June 30, 2000 and 1999:
2000 1999
------- -------
Raw materials ............................ $21,457 $24,499
Work in process .......................... 5,340 5,409
Finished goods ........................... 23,608 21,522
------- -------
$50,405 $51,430
======= =======
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. 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:
In connection with the issuance of notes described in Note 2, the Company
has recorded deferred financing costs which are being amortized using the
interest method over the ten year life of the notes.
F-8
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Intangibles:
The excess of cost over fair value of net assets of purchased subsidiaries
is being amortized over 10 to 20 years. Identifiable intangible assets are being
amortized on a straight-line basis over their estimated useful lives ranging
from 5 to 10 years. Accumulated amortization amounted to $12,448 and $10,925 at
June 30, 2000 and 1999, 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 and the cost
of label registration rights 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 (1949) Ltd.
("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 for these operations and
translation gains and losses are included in determining net income or loss.
Translation (gains) and losses relating to short and long-term debt of the
Company's Israeli and Norwegian subsidiaries that are denominated or linked to
foreign currencies are included in other expense, net in the amounts of $2,142,
$1,829, and $979 in the accompanying consolidated statements of operations for
the years ended June 30, 2000, 1999 and 1998, respectively. Other foreign
currency transaction gains and losses are not material.
Derivative Financial Instruments:
The Company uses derivative financial instruments, primarily foreign
currency forward contracts as a means of hedging exposure to foreign currency
risks. Gains or losses on foreign currency forward contracts are included in
income when currency fluctuations occur. 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. The gains or losses on these instruments are included in income
when the related inventory is sold. The Company and its subsidiaries do not
utilize these instruments for speculative purposes. The Company monitors the
financial stability and credit standing of its major counterparties.
Advertising Costs:
Advertising expenditures, expensed when incurred, were $953, $1,077 and
$826 for the years ended June 30, 2000, 1999 and 1998, respectively.
Impairment of Long-Lived Assets:
The Company evaluates the recoverability of long-lived assets, including
intangible assets and goodwill, at each balance sheet date, 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
F-9
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
environment in which the business operates, or if the expected future net cash
flows (undiscounted and without interest) 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.
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 $1,564, $1,536 and $774 for the
years ended June 30, 2000, 1999 and 1998, respectively.
New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 was originally effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999,
the Financial Accounting Standards Board issued Statements of Financial
Accounting Standard No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the effective Date of FASB Statement No. 133" (SFAS
137). SFAS 137 defers the effective date of FASB 133 for all fiscal quarters of
all fiscal years beginning after June 15, 2000 (July 1, 2000 for the Company).
SFAS 133 requires that all derivative intruments be recorded on the balance
sheet at their fair value. Gain or losses resulting from changes in the values
of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. In June 2000, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 138 "Accounting for Certain Derivative Instruments and
F-10
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
1. Organization and Summary of Significant Accounting Policies--(Continued)
Certain Hedging Activities an amendment of FASB Statement No. 133" (SFAS
138). SFAS 138 amends the accounting and reporting standards of SFAS 133 for
certain derivative instruments and certain hedging activities.
The Company's foreign currency contracts are currently marked to market
with corresponding charges or credits to income, therefore there will be no
impact on accounting for these contracts for the adoption of SFAS 133. With
respect to commodity contracts, the difference between fair value and carrying
value at June 30, 2000 is not significant; however, implementation of this
standard may have a material effect on earnings, comprehensive income and
financial position of future annual or interim periods.
In December 1999, the Securities and Executive Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The
effective date of SAB 101 is no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. This SAB clarifies proper methods of
revenue recognition given certain circumstances surrounding sales transactions.
The Company continues to evaluate the impact of SAB 101, but believes it is in
compliance with the provisions of the SAB and accordingly, does not expect SAB
101 to have a material effect on its financial statements.
Reclassification:
Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2000
presentation. Such reclassifications include a reclassification of customer
rebates of $6,202, $5,030 and $2,406 from selling, general and administrative
expenses to net sales on the consolidated statements of operations and
comprehensive income, as a result of the adoption of the Emerging Issues Task
Force Issue No. 00-14 "Accounting for Certain Sales Incentives."
2. Issuance of Senior Subordinated Notes and Related Transactions
On June 11, 1998, the Company issued $100 million aggregate principal
amount of 9-7/8% Senior Subordinated Notes due June 1, 2008. Proceeds from the
note offering were used to repay indebtedness of the Company.
In connection with the issuance of the Senior Subordinated Notes, the
Company (i) acquired Koffolk, Inc. ("Koffolk USA") from its principal
shareholder, (ii) acquired the interest in Mineral Resource Technologies, L.L.C.
("MRT") owned by its principal shareholder and (iii) forgave certain
indebtedness of executives related to stock ownership of a subsidiary.
Koffolk USA was acquired from the principal shareholder of the Company for
$1.5 million in cancellation of advances due from the principal shareholder,
representing the fair value of the assets acquired based upon a valuation
performed on behalf of the principal shareholder of the Company. As a result of
common ownership, Koffolk USA has been included in the financial statements in a
manner similar to a pooling of interests. Consequently, the net assets of
Koffolk USA have been recorded at the carryover basis of the principal
shareholder (a net deficit of $66) and the $1.5 million consideration has been
reflected as a distribution of paid-in capital. The results of operations for
fiscal 1998 include the results of Koffolk USA from the beginning of the year.
Prior year financial statements have not been restated due to the immateriality
of Koffolk USA to the consolidated results of operations and financial position
of the Company.
Prior to issuance of the Notes, the Company owned 58% of MRT. As part of
the transaction, the Company acquired the principal shareholder's interest in
MRT of 29.2% for $25.
Additionally, in June 1998, a subsidiary of the Company canceled the
limited recourse notes issued by executives related to acquiring 10.7% of the
stock of the subsidiary and forgave all amounts owed the Company thereunder. The
Company also paid the executives an additional aggregate amount of $2,740 as
reimbursement for their income tax liability related to the forgiveness. The
forgiveness of the notes and the
F-11
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
3. Acquisition
income tax reimbursement totaling $5,604 is reflected as compensation expense in
selling, general and administrative expenses in the accompanying 1998
consolidated statement of operations.
On October 1, 1998, the Company acquired all of the outstanding capital
stock of ODDA Smelteverk, AS, a Norwegian company, and certain assets of the
business of BOC Carbide Industries in the United Kingdom (together "ODDA") from
the BOC Group Plc for $19 million in cash and $18.2 million in debt. The
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their fair values at the acquisition
date. The operating results of ODDA are included in the Company's consolidated
statements of operations from the date of acquisition. The fair value of assets
acquired, including goodwill, was $40,811, and liabilities assumed totaled
$18,195. Goodwill related to this acquisition of $3,916 is being amortized over
20 years on a straight-line basis.
The unaudited consolidated results of operations on a pro-forma basis, as
if such acquisition had occurred at the beginning of fiscal 1999 and 1998 are as
follows:
1999 1998
--------- ---------
Net sales ...................................... $ 306,653 $ 316,752
Income (loss) before extraordinary item ........ $ (2,246) $ (7,408)
Net (loss) ..................................... $ (2,246) $ (9,370)
The Company's subsidiary, ODDA Smelteverk, AS, had a minority equity
investment in a local hydroelectric power company and also held contracts for
the purchase of hydroelectric power through the years 2006 to 2010. As a result
of legislative, regulatory and market developments occurring in Norway since the
1998 acquisition, the Company was able to sell its investment and related power
rights to a Norwegian "state-governed" power production company in January 2000.
The Company realized net sales proceeds of $18,750 and recorded a pre-tax gain
of $13,763. Approximately $1,300 of additional net gain has been deferred and
will be recognized over the period of a related power purchase contract with the
buyer.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following at June 30:
2000 1999
-------- --------
Land ......................................... $ 3,875 $ 4,053
Buildings and improvements ................... 25,814 25,408
Machinery and equipment ...................... 117,011 97,429
-------- --------
146,700 126,890
Less: Accumulated depreciation ............... 70,520 62,596
-------- --------
$ 76,180 $ 64,294
======== ========
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 $10,343, $9,963 and $8,023 for the years
ended June 30, 2000, 1999 and 1998, respectively.
5. Related Party Transactions
In January 2000, the owners 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 at
F-12
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
5. Related Party Transactions--(Continued)
cost, adjusted, if necessary, for the Company's share of investee losses based
on the seniority of its investment relative to other investors. No adjustment to
carrying value was required in fiscal 2000.
In June 1998, the Company acquired the stock of Koffolk USA from the
principal shareholder of the Company (refer to Note 2). Koffolk USA was formed
on February 6, 1996 to purchase from Merck & Co., Inc. ("Merck") the United
States distribution rights for Nicarb and Amprol, together with certain labels
and trademarks relating to Nicarb. These drugs are used in the poultry
production industry to prevent and treat a parasitic disease.
In November 1995, the Company formed MRT Management Corp. ("MMC"), to
manage MRT. Before giving effect to the acquisition by MMC of membership units
in MRT from the principal shareholder of the Company, MMC owned 57.6% of the
membership interests in MRT, and the principal shareholder and certain employees
owned 29.2% and 13.2% interests in MRT, respectively. The principal shareholder
has from time to time made loans and advances to MRT when and as needed, in
response to MRT's working capital requirements. In June 1998, the Company
acquired the principal shareholder's interest in MRT for $25 and repaid $995 of
loans made by him to MRT.
A subsidiary of the Company leases the property underlying its Santa Fe
Springs, California plant from an affiliate which is controlled by shareholders
of the Company. The lease requires annual base rent of $250. The Company is
responsible under the lease agreement to pay all real property taxes. In
connection with the sale by the Company of its Senior Subordinated Notes due
2008, (refer to Note 2) the term of such lease was extended to June 30, 2008.
The Company periodically advances funds to the principal shareholder on a
short-term, non-interest-bearing basis. Amounts outstanding at June 30, 1999 and
at June 30, 1998 have been reflected as a reduction of stockholders' equity.
There were no amounts outstanding at June 30, 2000.
6. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities at June
30, 2000 and 1999 are as follows:
2000 1999
------- -------
Product registration rights ..................... $ 2,016 $ 3,704
Commissions and rebates ......................... 5,952 4,628
Employee related expense ........................ 4,512 3,729
Other accrued liabilities ....................... 11,677 13,679
------- -------
$24,157 $25,740
======= =======
F-13
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
7. Debt
Long-term debt consists of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Domestic:
Senior Subordinated Notes due June 1, 2008 (a) ..................... $100,000 $100,000
Bank borrowings under revolving credit loan agreements (b) ......... 29,700 13,400
Environmental litigation settlement, with interest at 8.57%,
payable in annual installments through March 2001, interest
imputed at 10% (c) .............................................. 351 605
Obligation, payable without interest, less unamortized discount of
$59 in 1999, based on an effective interest rate of 8.5% (d) .... 200 941
Capitalized lease obligations and other ............................ 1,913 656
Foreign:
Bank loans with interest at NIBOR plus .75% payable in Norwegian
Krone (NOK) maturing through 2004 (e) ........................... 5,838 11,215
Revolving credit bank loan with interest at NIBOR plus 2% payable in
Norwegian Krone (NOK) maturing through 2003 (e) ................. 2,919 8,254
Capitalized lease obligations and other ............................ 1,097 467
-------- --------
142,018 135,538
Less: Current maturities ........................................... 2,296 1,450
-------- --------
$139,722 $134,088
======== ========
</TABLE>
(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 August 31, 1998, the Company entered into a $60 million senior
credit facility with PNC Bank, National Association, as agent and on behalf of
the lenders thereunder ("Credit Facility"). The Credit Facility is structured as
a five year, $35 million revolving credit facility and a two year, $25 million
acquisition line of credit. The $35 million revolving credit facility is subject
to availability under a borrowing base formula for domestic accounts receivable
and inventories, which also serve as collateral on the borrowing. In addition to
amounts outstanding under the revolving credit facility, the Company had $5.3
and $21.6 million available under the borrowing base formula as of June 30, 2000
and 1999, respectively. Drawdowns under the acquisition line of credit shall
amortize on a five-year basis with the balances due at maturity. No amounts have
been drawn down under the acquisition line of credit. The acquisition line of
credit expired in August 2000. The Company, under terms of the Credit Facility,
may choose between two interest rate options: (i) base rate, as defined, or (ii)
Euro rate, as defined, plus 11/4%-2% depending on the Company's operating
performance.
F-14
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
7. Debt--(Continued)
The Credit Facility requires, among other things, the maintenance of
certain fixed charge coverage ratios and a certain level of net worth for the
domestic operations of the Company, each calculated quarterly, and contains an
acceleration clause should a material adverse event occur (as defined). In
addition, there are certain restrictions on additional borrowings, additional
liens on the Company's assets, guarantees, dividend payments, redemption or
purchase of the Company's stock, sale of subsidiaries stock, disposition of
assets, investments, and mergers and acquisitions.
At June 30, 1999, the Company was not in compliance with the domestic net
worth requirements of the Credit Facility. The lenders have waived the default
as of June 30, 1999 and amended domestic net worth requirements for fiscal 2000.
The Company was in compliance with the financial covenants of the Credit
Facility during fiscal 2000.
(c) The New Jersey Department of Environmental Protection Division of
Hazardous Waste Management and the Division of Water Resources and a subsidiary
of the Company entered into an Administrative Consent Order ("ACO") effective
March 11, 1991, which resolved all previous enforcement actions against the
Company's subsidiary. The ACO required payment of a penalty, which was provided
for in prior years, in the amount of $2,200 with interest calculated at 8.57%
per annum, in 10 equal annual installments.
(d) This obligation is in connection with the acquisition of certain
intangible assets acquired by Koffolk USA (see Note 2).
(e) The Company's Norwegian subsidiary 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 (approximately $11,335 as of June 30, 1999), in agreed
Euro-currencies. Borrowings under such facility bear interest at the LIBOR or
NIBOR rate as defined plus 0.475%, 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 (approximately $8,120 as of June 30, 1999), 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 be 3/4% or 1%). The subsidiary has agreed
to pay a commitment fee equal to 50% of the applicable margin. In connection
with both such facilities, the subsidiary may choose the duration (one, three or
six months) for which the interest rate may apply. Indebtedness under both such
currency 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.
In connection with the subsidiary's sale of its minority interest in the
local hydroelectric power Company and related contract rights, (see Note 3) 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 (approximately $9,970 at January 2000) as a permanent
reduction in the maximum borrowings allowed. As of June 30, 2000, the subsidiary
has borrowed the maximum amount available under the facilities.
At June 30, 1999, the subsidiary was not in compliance with the debt
service and liabilities to equity ratios. Subsequently a waiver was obtained
from the lenders. The subsidiary was in compliance with the financial covenants
of the credit facilities during fiscal 2000
F-15
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
7. Debt--(Continued)
The aggregate maturities of long-term debt after June 30, 2000 are as
follows:
Year Ended June 30,
-------------------
2001 ............................................ $ 2,296
2002 ............................................ 1,874
2003 ............................................ 982
2004 ............................................ 36,077
2005 ............................................ 296
Thereafter ...................................... 100,493
--------
Total ....................................... $142,018
========
8. Redeemable Common Stock of Subsidiary
In fiscal 1995, a subsidiary of the Company sold restricted shares of
Class B common stock to certain key executives at fair market value, which
resulted in the executives having a 10.7% ownership in the subsidiary. The
Company received, as consideration for the shares, limited recourse notes in the
amount of $2,225 which were forgiven in connection with the issuance of the
Senior Subordinated Notes, referred to in Note 2. The subsidiary's shares are
redeemable at fair market value, based on independent appraisal, upon 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 pretax
earnings, as defined, and which are subject to certain restrictions pursuant to
terms of the PNC Bank Credit Facility. At June 30, 2000 and 1999 aggregate
severance payments of approximately $412 and $588 respectively, would have been
due the executives if they were terminated.
In connection with the separation of employment of a senior executive, in
the 1999 fiscal year and pursuant to the stock buyback and severance provisions
of the aforementioned agreements, the Company recorded a charge of $1.5 million
in selling, general and administrative expenses and reclassified $1.3 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 4%.
Effective June 30, 1999, the limited liability company interests in MRT
owned by the employees of MRT were exchanged for non-voting common stock of MMC,
and the employees' right to contingent member units of MRT was converted into
the right to "phantom shares" of MMC. The shareholders agreement of MMC 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 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.
9. Preferred Stock, Common Stock and Paid-in Capital
Preferred Stock:
In connection with the death of the Chairman of the Board of the Company
in May 1997, pursuant to terms of an agreement with shareholders, the Company
redeemed 59,573 shares of special and second preferred stock and reduced this
number of shares from the amount outstanding. An insurance policy with a face
value of $6,000 on the life of the Chairman funded such redemption. The
redemption obligation of $6,131 was paid in fiscal 1998.
F-16
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
9. Preferred Stock, Common Stock and Paid-in Capital--(Continued)
Common Stock:
Common stock consisted of the following at June 30, 2000 and 1999.
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 one 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 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 the Class B
shares of such shareholder upon his death, disability, termination of employment
or upon his exercise of the right to sell such shares at any time at a price
based on the book value of the Company's common shares. Adjustments to record
the shares at redeemable value have been charged or credited to compensation
expense.
F-17
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
10. 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 also maintains a funded noncontributory
defined benefit pension plan for all eligible employees, with benefits based on
employee compensation and service.
The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the plans.
<TABLE>
<CAPTION>
Domestic Norwegian
--------------------- ---------------------
June 2000 June 1999 June 2000 June 1999(1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year ....... $ 7,279 $ 6,240 $ 10,030 $ 11,193
Service cost .................................. 905 826 250 228
Interest cost ................................. 548 452 635 523
Benefits paid ................................. (81) (69) (743) (526)
Actuarial (gain) or loss ...................... 81 (171) (210) (188)
-------- -------- -------- --------
Benefit obligation at end of year ............. $ 8,732 $ 7,278 $ 9,962 $ 11,230
======== ======== ======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 5,626 $ 4,834 $ 9,736 $ 10,710
Actual return on plan assets .................. 1,095 (3) 768 434
Employer contributions ........................ 790 863 262 284
Benefits paid ................................. (81) (69) (743) (527)
-------- -------- -------- --------
Fair value of plan assets at end of year ...... $ 7,430 $ 5,625 $ 10,023 $ 10,901
======== ======== ======== ========
Funded Status
Funded status of the plan ..................... $ (1,303) $ (1,653) $ 61 $ (329)
Unrecognized net actuarial (gain) or loss ..... (630) (105) (294) 7
Unrecognized prior service cost ............... (1,082) (1,247) -- --
Unrecognized transition obligation/asset ...... (21) (24) 94 --
-------- -------- -------- --------
(Accrued) prepaid pension cost ................ $ (3,036) $ (3,029) $ (139) $ (322)
======== ======== ======== ========
</TABLE>
----------
(1) For the period October 1, 1998 - June 30, 1999.
F-18
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
10. Employee Benefit Plans--(Continued)
<TABLE>
<CAPTION>
June 2000 June 1999 June 1998
--------- --------- ---------
<S> <C> <C> <C>
Assumptions (Domestic)
Discount rate ........................................................ 7.50% 7.50% 7.50%
Expected rate of return on plan assets ............................... 7.50% 7.50% 7.50%
Rate of compensation increase ........................................ 5.00% 5.00% 5.00%
Components of net periodic pension costs (Domestic)
Service cost - benefits earned during the year ....................... $ 905 $ 826 $ 899
Interest cost on benefit obligation .................................. 549 452 374
Expected return on plan assets ....................................... (487) (393) (288)
Amortization of initial unrecognized net transition obligation (asset) (3) (3) (3)
Amortization of prior service costs .................................. (165) (164) (164)
Amortization of (gain) or loss ....................................... (2) (6) --
----- ----- -----
Net periodic pension cost ............................................ $ 797 $ 712 $ 818
===== ===== =====
<CAPTION>
June 2000 June 1999(2)
--------- ---------
<S> <C> <C>
Assumptions (Norwegian)
Discount rate ........................................................ 6.50% 6.50%
Expected rate of return on plan assets ............................... 8.00% 8.00%
Rate of compensation increase ........................................ 3.30% 3.30%
Components of net periodic pension costs (Norwegian)
Service cost - benefits earned during the period ..................... $ 250 $ 228
Interest cost on benefit obligation .................................. 635 523
Expected return on plan assets ....................................... (759) (628)
Amortization of initial unrecognized net transition obligation (asset) (18) --
Amortization of (gain) or loss ....................................... 5 --
----- -----
Net periodic pension cost ............................................ $ 113 $ 123
===== =====
</TABLE>
----------
(2) For the period October 1, 1998 - June 30, 1999.
The Company and its domestic subsidiaries have a 401(k) plan, under which
an employee may make a pretax contribution of up to 6% 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 in
excess of 3% of base compensation. All contributions are subject to the maximum
amount deductible for federal income tax purposes. The Company's contribution
amounted to $575, $547 and $529 in 2000, 1999 and 1998, 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 $97, $92 and $89 in 2000, 1999 and 1998,
respectively. At June 30, 2000 and 1999, the aggregate liability under this plan
amounted to $637 and $482, 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, 2000 and 1999 had cash
surrender values of $1,098 and $941, respectively, and are included in other
asssets
F-19
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
10. Employee Benefit Plans--(Continued)
In addition to Norway, 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 $349, $509 and $441 for 2000, 1999 and 1998, respectively. The
Norwegian plan used the following assumptions as of October 1, 1998, 6.0%
discount rate, 8.0% expected rate of return on plan assets and 3.3% rate of
compensation increase.
11. Income Taxes
Income (loss) from operations before provision for income taxes and
extraordinary item consisted of:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Domestic ..................................................... $ (2,332) $ (755) $(15,750)
Foreign ...................................................... 16,331 468 3,996
-------- -------- --------
$ 13,999 $ (287) $(11,754)
======== ======== ========
</TABLE>
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current tax provision (benefit):
U.S. Federal ............................................. $ -- $ -- $ (306)
State and local .......................................... 245 160 64
Foreign .................................................. 2,264 792 782
-------- -------- --------
Total current tax provision .............................. 2,509 952 540
-------- -------- --------
Deferred tax provision (benefit):
U.S. Federal ............................................. (287) 220 (5,121)
State and local .......................................... 5 (125) (115)
Foreign .................................................. 2,047 (868) 7
Change in valuation allowance ............................ (327) -- --
-------- -------- --------
Total deferred tax provision (benefit) ................... 1,438 (773) (5,229)
-------- -------- --------
Provision (benefit) for income taxes before extraordinary item 3,947 179 (4,689)
Benefit for extraordinary item ............................... -- -- (1,011)
-------- -------- --------
Provision (benefit) for income taxes ......................... $ 3,947 $ 179 $ (5,700)
======== ======== ========
</TABLE>
A reconciliation of the Federal statutory rate and the Company's effective
tax rate follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
U.S. Federal income tax rate ................................. 34.0% (34.0)% (34.0)%
State and local taxes, net of federal income tax effect ...... 0.9 8.0 (0.2)
Tax rate differences on foreign operations ................... (13.1) (81.9) (3.5)
Expenses with no tax benefit ................................. 3.9 104.9 --
U.S. losses with no state tax benefit ........................ 1.4 79.1 --
Change in valuation allowance ................................ (2.3) -- --
Other ........................................................ 3.4 (13.7) (1.0)
-------- -------- --------
28.2% 62.4% (38.7)%
======== ======== ========
</TABLE>
F-20
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
11. Income Taxes--(Continued)
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 2009.
Provision has not been made for United States or additional foreign taxes
on undistributed earnings of foreign subsidiaries of approximately $33,000,
whose earnings have been or are primarily 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.
The tax effects of significant temporary differences which comprise the
deferred tax assets and liabilities at June 30, 2000 and 1999 are as follows:
2000 1999
-------- --------
Deferred tax assets:
Employee benefits .................................. $ 2,264 $ 2,302
Depreciation ....................................... 780 1,347
Insurance .......................................... 316 262
Receivables allowances ............................. 615 578
Inventory .......................................... 869 1,140
Plant curtailment and environmental remediation .... 2,402 3,140
Alternative minimum tax ............................ 144 572
Net operating loss carryforward -- domestic ........ 4,523 3,104
-- foreign ......... 2,420 1,756
Other .............................................. 389 470
-------- --------
14,722 14,671
Valuation allowance ................................ (425) (758)
-------- --------
14,297 13,913
Deferred tax liabilities
Property, plant and equipment ...................... (4,136) (2,179)
Gain on property damage ............................ (1,858) (1,480)
Other .............................................. (662) (763)
-------- --------
(6,656) (4,422)
-------- --------
Net deferred tax asset ................................. $ 7,641 $ 9,491
======== ========
F-21
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
11. Income Taxes--(Continued)
Deferred taxes are included in the following line items in the
consolidated balance sheets:
2000 1999
------- -------
Prepaid expenses and other current assets ................ $ 5,075 $ 3,088
Accrued expenses, taxes and other current liabilities .... (88) (68)
Other assets ............................................. 7,128 8,379
Other liabilities ........................................ (4,474) (1,908)
------- -------
$ 7,641 $ 9,491
======= =======
The Company has domestic net operating loss carryforwards of approximately
$12,000 that expire in 2019 through 2020 and foreign net operating loss
carryforwards of approximately $7,000 that begin to expire in 2009. Valuation
allowances have been provided against the tax benefit of domestic state net
operating loss carryforwards, which are considered not likely to be realized.
The valuation allowance provides for certain foreign operating loss
carryforwards for 1999 which were reversed in 2000 and the benefit of the losses
were realized. A portion of such tax benefits were allocated to reduce goodwill
of the Company's Brazilian subsidiary. Realized preacquisition deferred taxes
amounted to $110 and $184 for the years ended June 30, 2000 and 1999,
respectively.
12. Commitments and Contingencies
(a) Leases:
The Company leases equipment and office, warehouse and manufacturing
facilities through fiscal 2007 for minimum annual rentals (plus certain cost
escalations) as follows:
Capital Operating
Year Ended June 30 Leases Leases
----------------- ------- ---------
2001 ................................................. $ 516 $1,478
2002 ................................................. 504 1,436
2003 ................................................. 495 1,371
2004 ................................................. 398 1,242
2005 ................................................. 133 848
Thereafter ........................................... -- 1,245
------ ------
Total minimum lease payments ......................... $2,046 $7,620
====== ======
Amounts representing interest ........................ 458
------
Present value of minimum lease payments .............. $1,588
======
Equipment under capitalized leases included in the consolidated balance
sheets at June 30, 2000 and 1999 amounted to $224 and $126, net of accumulated
depreciation of $1,092 and $1,202, respectively.
The commitment for facilities includes $2,000 with an affiliate controlled
by shareholders of the Company. (Refer to Note 5.)
Rent expense under operating leases for the years ended June 30, 2000,
1999 and 1998 amounted to $1,734, $1,619 and $2,126, respectively.
F-22
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
12. Commitments and Contingencies--(Continued)
(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,
2000, 1999 and 1998 were $3,630, $2,014 and $407, respectively. The Company's
subsidiary, Odda Smelteverk, AS, has entered into a minimum purchase commitment
to purchase power at fixed prices over periods of up to 10 years. Power
purchased under this minimum purchase agreement for the year ended June 30, 2000
was $574.
At June 30, 2000, the Company had minimum purchase commitments, as
follows:
Fly Ash Power
Year Ended June 30, Minimum Purchase Minimum Purchase
------------------- ---------------- ----------------
2001 ............................. $ 6,006 $ 1,060
2002 ............................. 6,669 1,084
2003 ............................. 7,343 1,107
2004 ............................. 7,025 1,130
2005 ............................. 6,192 1,154
Thereafter ....................... 41,552 5,384
------- -------
Total minimum purchase commitments $74,787 $10,919
======= =======
(c) Litigation:
The Company's subsidiary, Phibro-Tech, Inc., has been named as a
potentially responsible party ("PRP") in connection with an action commenced by
the EPA, involving a third party fertilizer manufacturing site in South
Carolina. While the outcome of ongoing negotiation is uncertain, the Company has
accrued its best estimate of the amount for which this matter can be settled.
Phibro-Tech, Inc. was also named as a PRP involving a third party site in
California. The Company is not, at this time, in a position to assess the extent
of any liability.
The Company and its subisidiary, C.P. Chemicals, Inc., are involved in
litigation alleging that operations at the Sewaren, New Jersey site have
affected the adjoining owner's property. The Company is not, at this time, in a
position to assess the extent of any liability.
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 which govern the management of
chemical wastes. The most significant regulation governing the Company's
recycling activities is the Resource Conservation and Recovery Act of 1976
("RCRA"). The Company has been issued final RCRA "Part B" permits to operate as
hazardous waste treatment and storage facilities at its facilities in Santa Fe
Springs, California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina;
and Sewaren, New Jersey. The Company has also obtained an interim status RCRA
permit for its Union City, California facility.
F-23
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
12. Commitments and Contingencies--(Continued)
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.
Based upon information available, management estimates the cost of further
investigation and remediation of identified soil and groundwater problems at
operating sites, closed sites and third party sites to be approximately $1,558,
which is included in current and long-term liabilities in the June 30, 2000
consolidated balance sheet (approximately $1,706 in 1999). Such amounts
represent primarily 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 $252, $167 and $925
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively, and are
included in selling, general and administrative expenses in the consolidated
statements of operations. In addition, such amounts exclude the fiscal 1998
accrual related to the Sewaren facility described in Note 12(e).
(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. During fiscal 1999, the Company expended $480 related to site
restoration and groundwater and remediation activities and reversed $500 to
income based upon a reassessment of site restoration and ongoing cost
requirements. During fiscal 2000, the Company expended $377 related to site
restoration and groundwater and remediation activities.
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 $351 recorded in long-term debt for the remaining payments 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, 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.
(f) Employee Terminations:
In connection with the plant curtailment noted above and certain other
personnel changes, the Company implemented a plan to reduce its workforce
resulting in a non-recurring charge for severance and other employee benefits of
$1,173 in fiscal 1998 (reflected in selling, general and administrative expenses
in the accompanying consolidated statement of operations). Included in the
charge were 21 employees associated with the curtailed Sewaren facility, of
which 19 were terminated in fiscal 1999 and 2 in the first quarter of fiscal
2000. All severance aggregating $129 has been paid.
F-24
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
13. Financial Instruments--(Continued)
13. 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, 2000 and 1999, the fair value of the Company's Senior Subordinated Notes was
$70,800 and $94,650, respectively and the related carrying amount is $100,000.
At June 30, 1999 and 1998, 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 and frequent repricing 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, 2000 and
1999 were $2,250, and $2,000, respectively. The carrying values and fair values
of these letters of credit and surety bonds were not material.
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. At June 30, 2000 and 1999,
unrealized gains and losses on these contracts were immaterial.
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. At June 30, 2000 and 1999, the Company has $5,152 and $1,760,
respectively, in carrying amounts of commodity contracts with a fair value of
$5,182 and $1,945, respectively.
14. Business Segments
The Company operates in two business segments: AgChem and Industrial
Chemicals. The AgChem segment manufactures and markets a variety of animal
nutrition and health products, copper based fungicides and growth regulators.
The Industrial Chemicals segment manufactures and markets a number of specialty
organic and inorganic intermediate chemicals for use in a broad variety of
industrial chemical applications.
The Company aggregates certain operating segments into its reportable
segments. Management evaluates the performance of its operating segments and
allocates resources based on operating income. Transfers between segments are
priced at amounts that include a manufacturing profit except that certain
domestic transfers of $9,606, $11,422 and $10,512 from the Industrial Chemicals
group to the AgChem group for fiscal 2000, 1999 and 1998, respectively, are
recorded at the cost of product transferred. Other includes corporate expenses
and elimination of intersegment revenues. Expenditures for property plant and
equipment includes assets acquired in business combinations.
F-25
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
14. Business Segments--(Continued)
<TABLE>
<CAPTION>
Industrial
Agchem Chemicals
Group Group Other Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
2000 Segment Detail
Revenues -- external customers ............... $ 179,911 $ 138,145 $ -- $ 318,056
-- intersegment ..................... 4,722 21,931 (26,653) --
--------- --------- --------- ---------
Total revenues ............................... $ 184,633 $ 160,076 $ (26,653) $ 318,056
========= ========= ========= =========
Operating income (loss) ...................... $ 15,658 $ 9,098 $ (9,082)(1) $ 15,674
Depreciation and amortization ................ 4,689 6,641 536 11,866
Total assets ................................. 115,621 119,990 22,840 258,451
Expenditures for property, plant and equipment 2,418 20,067 119 22,604
<CAPTION>
Industrial
Agchem Chemicals
Group Group Other Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999 Segment Detail
Revenues -- external customers ............... $ 172,084 $ 125,210 $ -- $ 297,294
-- intersegment ..................... 5,327 25,835 (31,162) --
--------- --------- --------- ---------
Total revenues ............................... $ 177,411 $ 151,045 $ (31,162) $ 297,294
========= ========= ========= =========
Operating income (loss) ...................... $ 11,412 $ 9,079 $ (10,136)(2) $ 10,355
Depreciation and amortization ................ 4,429 6,285 531 11,245
Total assets ................................. 104,361 118,481 15,937 238,779
Expenditures for property, plant and equipment 3,776 32,286 219 36,281
<CAPTION>
Industrial
Agchem Chemicals
Group Group Other Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1998 Segment Detail
Revenues -- external customers ............... $ 175,455 $ 100,122 $ -- $ 275,577
-- intersegment ..................... 6,362 27,294 (33,656) --
--------- --------- --------- ---------
Total revenues ............................... $ 181,817 $ 127,416 $ (33,656) $ 275,577
========= ========= ========= =========
Operating income (loss) ...................... $ 9,532 $ (2,389)(3) $ (11,370)(4) $ (4,227)
Depreciation and amortization ................ 3,937 4,780 536 9,253
Total assets ................................. 100,014 60,432 31,750 192,196
Expenditures for property, plant and equipment 1,981 5,483 567 8,031
</TABLE>
----------
(1) Includes corporate expenses of $9,442 and inventory profit elimination of
$(350).
(2) Includes corporate expenses of $7,461, intercompany inventory profit
elimination of $1,150 and $1,525 related to the severance of a key
executive.
(3) Operating income was reduced $10,000 related to a nonrecurring plant
curtailment charge.
(4) Includes corporate expenses of $5,518, intercompany inventory profit
elimination of $248 and $5,604 for the forgiveness of limited recourse
notes receivable from certain executives of the Company and payment for
related income taxes resulting from the cancellation.
F-26
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
15. 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.
2000 1999 1998
--------- --------- ---------
Revenues:
United States ......................... $ 204,374 $ 182,959 $ 179,242
Western Europe ........................ 59,120 57,723 30,152
Israel ................................ 49,917 51,889 62,399
South America ......................... 4,645 4,723 3,784
--------- --------- ---------
Total revenues ..................... $ 318,056 $ 297,294 $ 275,577
========= ========= =========
2000 1999 1998
--------- --------- ---------
Operating income (loss):
United States ......................... $ 13,715 $ 10,872 $ (599)
Western Europe ........................ 3,182 3,989 2,980
Israel ................................ 7,119 5,059 4,711
South America ......................... 740 571 51
Other ................................. (9,082) (10,136) (11,370)
--------- --------- ---------
Total operating income (loss) ...... $ 15,674 $ 10,355 $ (4,227)
========= ========= =========
2000 1999 1998
--------- --------- ---------
Property, plant and equipment
United States ......................... $ 25,032 $ 17,377 $ 12,590
Western Europe ........................ 32,465 27,362 5,642
Israel ................................ 15,899 16,276 18,292
South America ......................... 2,082 2,315 2,823
Other ................................. 702 964 1,163
--------- --------- ---------
Total property, plant and equipment $ 76,180 $ 64,294 $ 40,510
========= ========= =========
16. Valuation and Qualifying Accounts:
Activity in the allowance for doubtful accounts consisted of the following
for the fiscal years ended June 30:
2000 1999 1998
--------- --------- ---------
Balance at beginning of period .......... $ 886 $ 751 $ 656
Provision for bad debts ................. -- 153 144
Bad debt write-offs ..................... (130) (18) (49)
--------- --------- ---------
Balance at end of period ................ $ 756 $ 886 $ 751
========= ========= =========
F-27
<PAGE>
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
17. Insurance Recoveries:
In April 1999, the Company suffered inventory, real property and equipment
loss at its Bowmanstown, Pennsylvania facility resulting from 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. The receivable of $4,097 in other receivables as of
its June 30, 2000 balance sheet date has been subsequently collected.
18. Extraordinary Loss:
On August 31, 1994, the Company issued a 10-year $20,000 senior unsecured
note ("Note") with interest at 11%, payable semi-annually. On that same date,
the Company entered into a three-year renewable revolving credit facility
("Revolving Facility") with a bank for up to $20,000 in revolving credit
advances. In connection with the issuance of the Company's Senior Subordinated
Notes, the Company terminated the Note and Revolving Facility agreements and
repaid all amounts outstanding under the Note and Revolving Facility agreement
in June 1998 and paid a prepayment fee of $2,600, terminated certain interest
rate caps on floating rate debt that was repaid for a charge of $163 and wrote
off unamortized financing costs of $210. These charges of $1,962 (net of $1,011
in taxes) are reflected as an extraordinary item in the accompanying
consolidated statements of operations.
19. Condensed Consolidating Financial Statements
In June 1998 the Company issued $100 million in Senior Subordinated Notes
as described in Note 2. In connection with the issuance of these Notes, the
Company's U.S. Subsidiaries fully and unconditionally guaranteed such Notes on a
joint and several basis. Foreign subsidiaries do not presently guarantee the
Notes.
The following condensed consolidating financial data summarizes the
assets, liabilities, and results of operations and cash flows of the Parent,
Guarantors and Non-Guarantor subsidiaries. The Parent is Philipp Brothers
Chemicals, Inc. ("PBC"). The U.S. Guarantor Subsidiaries include all domestic
subsidiaries of PBC including the following: C.P. Chemicals, Inc., Koffolk,
Inc., Phibro-Tech, Inc., MRT Management Corp., Mineral Resource Technologies,
L.L.C., Prince Agriproducts, Inc., The Prince Manufacturing Company (PA), The
Prince Manufacturing Company (IL) Phibrochem, Inc., Phibro Chemicals, Inc.,
Western Magnesium Corp. The Non-Guarantor Subsidiaries include the following:
Koffolk (1949) Ltd., Agtrol International, Ferro Metal and Chemical Corporation
and ODDA Smelteverk, AS. The U.S. and foreign Guarantor and Non-Guarantor
Subsidiaries are wholly owned as to voting common stock, directly or indirectly,
by the Parent.
Investments in subsidiaries are accounted for by the Parent using the
equity method. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
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-28
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Balance Sheet
As of June 30, 2000
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
--------- -------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............... $ 11 $ 99 $ 2,293 $ 2,403
Trade receivables ....................... 6,172 45,378 27,826 79,376
Other receivables ....................... 4,855 550 3,074 8,479
Inventory ............................... 3,267 25,072 22,066 50,405
Prepaid expenses and other .............. 3,065 2,443 3,590 9,098
--------- --------- --------- --------- ---------
Total current assets ............. 17,370 73,542 58,849 -- 149,761
--------- --------- --------- --------- ---------
Property, plant & equipment, net ........ 702 25,032 50,446 76,180
Intangibles ............................. 87 2,292 3,918 6,297
Investment in subsidiaries .............. 78,028 1,533 (6,129) (73,432) --
Intercompany ............................ 63,874 (32,463) 3,197 (34,608) --
Other assets ............................ 15,236 8,542 2,435 26,213
--------- --------- --------- --------- ---------
Total assets ..................... $ 175,297 $ 78,478 $ 112,716 $(108,040) $ 258,451
========= ========= ========= ========= =========
Liabilities and Stockholders Equity
Current Liabilites:
Cash overdraft .......................... $ 158 $ 1,302 $ 660 $ 2,120
Loans payable to banks .................. -- -- 8,650 8,650
Current portion of long term debt ....... 31 893 1,372 2,296
Accounts payable ........................ 2,140 14,999 15,503 32,642
Accrued expenses and other .............. 3,892 13,118 7,147 24,157
--------- --------- --------- --------- ---------
Total current liabilites ................ 6,221 30,312 33,332 -- 69,865
--------- --------- --------- --------- ---------
Long term debt .......................... 130,600 1,435 42,295 (34,608) 139,722
Other liabilities ....................... 2,022 4,431 6,829 -- 13,282
Redeemable securities
Common stock ............................ 2,389 -- 1,124 3,513
Common stock of subsidiary .............. -- 451 -- 451
--------- --------- --------- --------- ---------
2,389 451 1,124 -- 3,964
Stockholders' equity
Series "A" preferred stock .............. 521 -- -- 521
Common stock ............................ 2 32 -- (32) 2
Paid in capital ......................... 878 34,040 -- (34,040) 878
Retained earnings ....................... 32,808 7,747 31,613 (39,360) 32,808
Accumulated other comprehensive
(loss) income--cumulative currency
translation adjustment .............. (144) 30 (2,477) (2,591)
--------- --------- --------- --------- ---------
Total Stockholders' equity ....... 34,065 41,849 29,136 (73,432) 31,618
--------- --------- --------- --------- ---------
Total liabilities and equity ..... $ 175,297 $ 78,478 $ 112,716 $(108,040) $ 258,451
========= ========= ========= ========= =========
</TABLE>
F-29
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Income Statement
For the Year Ended June 30, 2000
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- -------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales ..................................... $ 35,927 $184,828 $132,918 $ (35,617) $318,056
Cost of goods sold ............................ 29,091 136,975 99,104 (35,617) 229,553
-------- -------- -------- -------- --------
Gross profit ........................... 6,836 47,853 33,814 -- 88,503
Selling, general, and administrative
expenses .................................. 12,537 38,203 23,570 74,310
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)
Gain from property damage claim ............... -- (946) -- (946)
Gain on sale of assets ........................ -- -- (13,763) (13,763)
Other expense ................................. (912) -- 3,142 2,230
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
======== ======== ======== ======== ========
</TABLE>
F-30
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Statement of Cash Flows
For the Year Ended June 30, 2000
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- -------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) .............................. $ 10,053 $ 1 $ 10,966 $(10,967) $ 10,053
Adjustments to reconcile net income (loss)
Cash provided by operating activities:
Depreciation and amortization .............. 536 4,224 7,106 11,866
Deferred income taxes ...................... (337) (272) 2,047 1,438
Excess provision for curtailment of
manufacturing operations ................. -- (1,481) -- (1,481)
Gain from sale of assets ................... -- -- (13,763) (13,763)
Change in redemption of
redeemable securities .................... 13 (130) 1,124 1,007
Gain on property damage claim .............. -- (946) (107) (1,053)
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:
Proceeds from property damage claim ............ -- 3,999 -- 3,999
Capital expenditures ........................... (119) (11,276) (11,209) (22,604)
Proceeds from sale of investment in utility .... -- -- 18,750 18,750
Other investments .............................. (3,000) -- -- (3,000)
Other investing ................................ (157) -- (1,046) (1,203)
-------- -------- -------- -------- --------
Net cash used in investing activities .......... (3,276) (7,277) 6,495 -- (4,058)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft ................................. (119) 1,089 (288) 682
Net (decrease) 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)
Proceeds from principal shareholder ............ -- -- 62 62
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ....................... 16,159 1,384 (6,195) -- 11,348
-------- -------- -------- -------- --------
Net increase (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
======== ======== ======== ======== ========
</TABLE>
F-31
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Balance Sheet
As of June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- -------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ...................... $ 393 $ 166 $ 2,463 $ 3,022
Trade receivables .............................. 6,091 31,838 32,248 70,177
Other receivables .............................. 993 5,684 3,919 10,596
Inventory ...................................... 4,212 26,543 20,675 51,430
Prepaid expenses and other ..................... 1,963 1,580 2,590 6,133
-------- -------- -------- --------- --------
Total current assets .................... 13,652 65,811 61,895 -- 141,358
-------- -------- -------- --------- --------
Property, plant & equipment, net ............... 964 17,377 45,953 64,294
Intangibles .................................... 268 2,668 4,023 6,959
Investment in subsidiaries ..................... 66,881 1,386 (5,838) (62,429) --
Intercompany ................................... 52,393 (13,790) 364 (38,967) --
Other assets ................................... 11,604 8,833 5,731 26,168
-------- -------- -------- --------- --------
Total assets ............................ $145,762 $ 82,285 $112,128 $(101,396) $238,779
======== ======== ======== ========= ========
Liabilities and Stockholders Equity
Current Liabilites:
Cash overdraft ................................. $ 277 $ 213 $ 948 $ 1,438
Loan payable to banks .......................... -- -- 3,734 3,734
Current portion of long term debt .............. 94 1,345 11 1,450
Accounts payable ............................... 1,967 14,312 20,131 36,410
Accrued expenses and other ..................... 2,692 17,385 5,663 25,740
-------- -------- -------- --------- --------
Total current liabilites ....................... 5,030 33,255 30,487 -- 68,772
-------- -------- -------- --------- --------
Long term debt ................................. 113,541 620 58,894 (38,967) 134,088
Other liabilities .............................. 1,876 5,981 3,657 11,514
Redeemable securities
Common stock ................................... 2,376 -- -- 2,376
Common stock of subsidiary ..................... -- 581 -- 581
-------- -------- -------- --------- --------
2,376 581 -- -- 2,957
Stockholders' equity
Series "A" preferred stock ..................... 521 -- 1 (1) 521
Common stock ................................... 2 32 2 (34) 2
Paid in capital ................................ 816 34,040 (39) (34,001) 816
Retained earnings .............................. 22,755 7,745 20,648 (28,393) 22,755
Accumulated other comprehensive
(loss) income--cumulative currency
translation adjustment ..................... (1,155) 31 (1,522) (2,646)
-------- -------- -------- --------- --------
Total Stockholders' equity .............. 22,939 41,848 19,090 (62,429) 21,448
-------- -------- -------- --------- --------
Total liabilities and equity ............ $145,762 $ 82,285 $112,128 $(101,396) $238,779
======== ======== ======== ========= ========
</TABLE>
F-32
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Income Statement
For the Year Ended June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- -------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $ 35,339 $166,766 $129,243 $ (34,054) $297,294
Cost of goods sold ............................. 28,545 126,834 101,922 (34,054) 223,247
-------- -------- -------- --------- --------
Gross profit ............................ 6,794 39,932 27,321 -- 74,047
Selling, general, and
administrative expenses .................... 11,575 33,343 19,274 64,192
Curtailment of operations at
manufacturing facility ..................... -- (500) -- (500)
-------- -------- -------- --------- --------
Operating (loss) income ........................ (4,781) 7,089 8,047 -- 10,355
Interest expense ............................... 6,907 289 5,946 13,142
Interest income ................................ (357) -- (271) (628)
Gain from property damage claim ................ -- (3,701) -- (3,701)
Other expense .................................. -- (371) 2,200 1,829
Intercompany allocation ........................ (9,668) 9,528 140 --
(Profit) loss relating to subsidiaries ......... (342) -- -- 342 --
-------- -------- -------- --------- --------
(Loss) income before income taxes .............. (1,321) 1,344 32 (342) (287)
(Benefit) provision for income taxes ........... (855) 1,285 (251) -- 179
-------- -------- -------- --------- --------
Net (loss) income .............................. $ (466) $ 59 $ 283 $ (342) $ (466)
======== ======== ======== ========= ========
</TABLE>
F-33
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Statement of Cash Flows
For the Year Ended June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- ------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income .............................. $ (466) $ 59 $ 283 $ (342) $ (466)
Adjustments to reconcile net (loss) income
Cash provided by operating activities:
Depreciation and amortization .............. 531 3,953 6,761 11,245
Deferred income taxes ...................... (2,771) 2,866 (868) (773)
Provision for curtailment of operations
at manufacturing facility ................ -- (500) -- (500)
Change in redemption amount of
redeemable securities .................... (187) (673) -- (860)
Gain from property damage claim ............ -- (3,701) -- (3,701)
Other ...................................... (912) (523) 3,079 1,644
Changes in operating assets and liabilites
net of effect of business acquired:
Accounts receivable ............................ (405) (3,275) (2,242) (5,922)
Inventory ...................................... (616) (7,181) 4,247 (3,550)
Prepaid expenses and other ..................... 1,783 (2,184) 436 35
Other assets ................................... (1,018) (4,113) (2,312) (7,443)
Intercompany ................................... (23,227) 14,998 7,887 342 --
Accounts payable ............................... (401) 2,513 (2,069) 43
Accrued expenses and other ..................... (1,725) 8,165 707 7,147
-------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities ....................... (29,414) 10,404 15,909 -- (3,101)
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures ........................... (219) (6,431) (5,612) (12,262)
Acquisition of businesses,
net of cash acquired ....................... -- (2,505) (19,000) (21,505)
-------- -------- -------- -------- --------
Net cash used in investing activities .......... (219) (8,936) (24,612) -- (33,767)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft ................................. (636) (789) 948 (477)
Net (decrease) increase in
short term debt ............................ (942) -- 3,169 2,227
Proceeds from long term debt ................... 13,432 82 1,700 15,214
Payments of long term debt ..................... (140) (1,523) (12) (1,675)
Receivable from principal shareholder .......... -- -- 380 380
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ....................... 11,714 (2,230) 6,185 -- 15,669
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents ........................... (17,919) (762) (2,518) -- (21,199)
Cash and cash equivalents at
beginning of year .......................... 18,312 928 4,981 24,221
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year ....... $ 393 $ 166 $ 2,463 $ -- $ 3,022
======== ======== ======== ======== ========
</TABLE>
F-34
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Income Statement
For the Year Ended June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- -------------- -------------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales ...................................... $ 36,318 $164,410 $104,555 $(29,706) $275,577
Cost of goods sold ............................. 29,914 123,828 84,877 (29,706) 208,913
-------- -------- -------- -------- --------
Gross profit ............................ 6,404 40,582 19,678 -- 66,664
Selling, general, and administrative
expenses ................................... 9,878 39,077 11,936 60,891
Curtailment of operations at
manufacturing facility ..................... -- 10,000 -- 10,000
-------- -------- -------- -------- --------
Operating (loss) income ........................ (3,474) (8,495) 7,742 -- (4,227)
Interest expense ............................... 3,798 287 2,780 6,865
Interest income ................................ (253) (97) (33) (383)
Other expense .................................. 74 -- 971 1,045
Intercompany allocation ........................ (5,903) 5,863 40 --
(Profit) loss relating to subsidiaries ......... 6,430 -- -- (6,430) --
-------- -------- -------- -------- --------
(Loss) income before income taxes
and extraordinary item ..................... (7,620) (14,548) 3,984 6,430 (11,754)
(Benefit) provision for income taxes ........... (448) (5,080) 839 -- (4,689)
-------- -------- -------- -------- --------
Net (loss) income before
extraordinary item ......................... (7,172) (9,468) 3,145 6,430 (7,065)
Extraordinary loss (net of $1,011 of tax) ...... (1,855) -- (107) (1,962)
-------- -------- -------- -------- --------
Net (loss) income .............................. $ (9,027) $ (9,468) $ 3,038 $ 6,430 $ (9,027)
======== ======== ======== ======== ========
</TABLE>
F-35
<PAGE>
Philipp Brothers Chemicals Inc.
Consolidating Statement of Cash Flows
For the Year Ended June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
-------- ------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income .............................. $ (9,027) $ (9,468) $ 3,038 $ 6,430 $ (9,027)
Adjustments to reconcile net (loss) income
Cash provided by operating activities:
Depreciation and amortization .............. 536 5,047 3,670 9,253
Deferred income taxes ...................... (1,146) (4,138) 55 (5,229)
Foregiveness of promissory notes ........... -- 2,591 -- 2,591
Provision for curtailment of operations
at manufacturing facility ................ -- 10,000 -- 10,000
Change in redemption amount of
redeemable securities .................... (1,250) -- -- (1,250)
Extraordinary loss on extinguishment
of debt, net of tax ...................... 1,855 -- 107 1,962
Other ...................................... (902) 729 1,564 1,391
Changes in operating assets and liabilites
net of effect of business acquired:
Accounts receivable ............................ (566) (5,994) 1,073 (5,487)
Inventory ...................................... (143) 1,842 (94) 1,605
Prepaid expenses and other ..................... (1,985) 1,569 (2,863) (3,279)
Other assets ................................... (956) (397) 4 (1,349)
Intercompany ................................... (27,945) 742 33,633 (6,430) --
Accounts payable ............................... (1,276) 425 (28) (879)
Accrued expenses and other ..................... 1,117 942 (1,022) 1,037
-------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities ....................... (41,688) 3,890 39,137 -- 1,339
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures ........................... (567) (4,230) (3,234) (8,031)
-------- -------- -------- -------- --------
Net cash used in investing activities .......... (567) (4,230) (3,234) -- (8,031)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft ................................. 913 1,002 -- 1,915
Net (decrease) increase in
short term debt ............................ 149 (350) (13,332) (13,533)
Proceeds from long term debt ................... 100,000 380 -- 100,380
Payments of long term debt ..................... (31,517) (1,570) (19,835) (52,922)
Payments of deferred financing costs ........... (3,724) -- -- (3,724)
Extinguishment of debt ......................... (2,493) -- (107) (2,600)
Proceeds from life insurance ................... 6,045 -- -- 6,045
Distribution to principal shareholder for
purchase of subsidiary ..................... (1,500) -- -- (1,500)
Receivable from principal shareholder .......... -- -- (429) (429)
Redemption of preferred stock .................. (7,569) 757 -- (6,812)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ....................... 60,304 219 (33,703) -- 26,820
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents ....................... 18,049 (121) 2,200 -- 20,128
Cash and cash equivalents at
beginning of year .......................... 263 1,049 2,781 4,093
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year ....... $ 18,312 $ 928 $ 4,981 $ -- $ 24,221
======== ======== ======== ======== ========
</TABLE>
F-36
<PAGE>
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
-------------------------------------
Jack C. Bendheim
President and Chief Executive Officer
Date: September 26, 2000
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/ Jack C. Bendheim September 26, 2000
-----------------------------------------------
Jack C. Bendheim
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Nathan Z. Bistricer September 26, 2000
-----------------------------------------------
Nathan Z. Bistricer
Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Marvin S. Sussman September 26, 2000
-----------------------------------------------
Marvin S. Sussman
Director, Chief Operating Officer
and Executive Vice President
/s/ James O. Herlands September 26, 2000
-----------------------------------------------
James O. Herlands
Director and Executive Vice President
II-1
<PAGE>
Exhibit Index to Report on Form 10-K
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Restated Certificate of Incorporation of Philipp Brothers Chemicals,
Inc.*
3.2 By-laws of Philipp Brothers Chemicals, Inc.*
3.3 Composite Certificate of Incorporation of Phibro-Tech, Inc.****
3.4 By-Laws of Phibro-Tech, Inc.*
3.5 Certificate of Incorporation of C.P. Chemicals, Inc.*
3.6 By-Laws of C.P. Chemicals, Inc.*
3.7 Certificate of Incorporation of Prince Agriproducts, Inc.*
3.8 By-Laws of Prince Agriproducts, Inc.*
3.9 Certificate of Incorporation of The Prince Manufacturing Company, an
Illinois corporation*
3.10 By-Laws of The Prince Manufacturing Company, an Illinois corporation*
3.11 Certificate of Incorporation of The Prince Manufacturing Company, a
Pennsylvania corporation*
3.12 By-Laws of The Prince Manufacturing Company, a Pennsylvania
corporation*
3.13 Certificate of Formation of Mineral Resource Technologies, L.L.C.*
3.14 Amended and Restated Combined Limited Liability Company Agreement of
Mineral Resource Technologies, L.L.C., and Stockholders Agreement of
MRT Management Corp., dated as of June 30, 1999****
3.15 Certificate of Incorporation of MRT Management Corp.*
3.15.1 Amendment to Certificate of Incorporation of MRT Management Corp.****
3.15.2 Composite Certificate of Incorporation of MRT Management Corp.****
3.16 By-Laws of MRT Management Corp.*
3.17 Certificate of Incorporation of Koffolk, Inc.*
3.18 By-Laws of Koffolk, Inc.*
3.19 Certificate of Incorporation of Phibrochem, Inc.*
3.20 By-Laws of Phibrochem, Inc.*
3.21 Certificate of Incorporation of Phibro Chemicals, Inc.*
3.22 By-Laws of Phibro Chemicals, Inc.*
3.23 Certificate of Incorporation of Western Magnesium Corp.*
3.24 By-Laws of Western Magnesium Corp.*
4.1 Indenture, dated as of June 11, 1998, among the Company, the Guarantors
named therein and The Chase Manhattan Bank, as trustee, relating to the
9 7/8% Senior Subordinated Notes due 2008 of the Company, and exhibits
thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of
Company*
Certain instruments which define the rights of holders of long-term
debt of the Company 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 the Company and its subsidiaries on a consolidated basis, as
of June 30, 2000. For a description of such indebtedness, see Note 7 of
Notes to
<PAGE>
Consolidated Financial Statements. The Company hereby agrees to furnish
copies of such instruments to the Securities and Exchange Commission
upon its request.
10.1 Registration Rights Agreement, dated June 11, 1998, among Philipp
Brothers Chemicals, Inc., the Guarantors named therein and Schroder &
Co. Inc.*
10.2 Revolving Credit, Acquisition Term Loan and Security Agreement, dated
August 19, 1998, among Philipp Brothers Chemicals, Inc., as Borrower,
the Guarantors named therein, PNC Bank, N.A. as Agent and Lender, and
the other institutions from time to time party thereto as Lenders*
10.3 Manufacturing Agreement, dated May 15, 1994, by and between Merck &
Co., Inc., Koffolk, Ltd., and Philipp Brothers Chemicals, Inc.+*
10.4 [Intentionally Omitted.]
10.5 Asset Purchase and Trademark Assignment Agreement, dated August 5,
1996, between Koffolk, Inc. and Merck & Co., Inc.; assigned by Merck &
Co., Inc. to Merial Limited.*
10.6 Distributorship Agreement, dated August 5, 1996, by and between Merck &
Co., Inc. and Koffolk, Inc.; assigned by Merck & Co., Inc. to Merial
Limited.+*
10.7 License Agreement, dated May 30, 1996, by and between Michigan
Technological University and Mineral Resource Technologies, L.L.C.+*
10.8 Lease, dated July 25, 1986, between Philipp Brothers Chemicals, Inc.
and 400 Kelby Associates, as amended December 1, 1986 and December 30,
1994*
10.9 Lease, dated June 30, 1995, between First Dice Road Co. and
Phibro-Tech, Inc., as amended May 1998*
10.10 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel
Land Administration*
10.11 Master Lease Agreement, dated February 27, 1998, between General
Electric Capital Corp., Philipp Brothers Chemicals, Inc. and
Phibro-Tech, Inc.*
10.12 Stockholders Agreement, dated December 29, 1987, by and between Philipp
Brothers Chemicals, Inc., Charles H. Bendheim, Jack C. Bendheim and
Marvin S. Sussman*
10.13 Employment Agreement, dated December 29, 1987, by and between Philipp
Brothers Chemicals, Inc. and Marvin S. Sussman* ++
10.14 Stockholders Agreement, dated February 21, 1995, between I. David
Paley, Nathan Z. Bistricer, James O. Herlands and Phibro-Tech, Inc., as
amended as of June 11, 1998*
10.15 Severance Agreement, dated as of February 21, 1995, between I. David
Paley and Phibro-Tech, Inc.* ++
10.16 Form of Severance Agreement, each dated as of February 21, 1995,
between Philipp Brothers Chemicals, Inc. and each of Nathan Z.
Bistricer and James O. Herlands* ++
<PAGE>
10.17 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*
10.18 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred
Compensation Plan Trust, dated as of January 1, 1994, by and between
Philipp Brothers Chemicals, Inc. 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")* ++
10.18.1 First, Second and Third Amendments to Retirement Income and Deferred
Compensation Plan.**** ++
10.19 Form of Executive Income Deferred Compensation Agreement, each dated
March 11, 1990, by and between Philipp Brothers Chemicals, Inc. and
each of Jack Bendheim, James Herlands and Marvin Sussman* ++
10.20 Form of Executive Income Split Dollar Agreement, each dated March 1,
1990, by and between Philipp Brothers Chemicals, Inc. and each of Jack
Bendheim, James Herlands and Marvin Sussman* ++
10.21 Agreement for the Sale and Purchase of the Shares of ODDA Smelteverk
A/S and of the Business and Certain Assets of BOC Carbide Industries, a
division of BOC Ltd., dated June 26, 1998, between The BOC Group plc
and Philipp Brothers Chemicals, Inc.*
10.22 Supply Agreement, dated as of September 28, 1998, between BOC Limited
and Phillip Brothers Chemicals, Inc.*
10.23 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.*
10.24 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****
10.25 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****
10.26 Licensing Agreement, dated January 28, 1980, between Gunness Wharf
Limited and BOC Limited+*
10.27 Agreement, dated January 28, 1980, between BOC Limited and Gunness
Wharf Limited+*
10.28 Subscription and Exchange Agreement, dated as of January 29, 1999 among
I. David Paley, Nathan Z. Bistricer, James O. Herlands and Phibro Tech,
Inc.**
10.29 General Release between Phibro-Tech, Inc. and I. David Paley dated as
of September 1, 1999***
10.30 Separation Agreement between Phibro-Tech, Inc. and I. David Paley dated
as of September 1, 1999*** ++
<PAGE>
10.31 Stock Purchase Agreement between Phibro-Tech, Inc. and I. David Paley
dated as of September 1, 1999***
10.32 Consulting Agreement between Phibro-Tech, Inc. and I. David Paley dated
as of September 1, 1999***
21.1 List of Subsidiaries****
27.1 Financial Data Schedules****
----------
* Filed as an Exhibit to the Registrant's Registration Statement on Form
S-4, No. 333-64641.
** Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 1998.
*** Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1999.
**** Filed herewith.
+ A request for confidential treatment has been granted for portions of
suchdocument. 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.
