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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 33-11634
TRANS-RESOURCES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 36-2729497
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<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
9 West 57th Street, New York, New York 10019
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's Telephone number, including area code (212) 888-3044
Indicate by check mark whether 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 registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
At November 12, 1999, there were outstanding 3,000 shares of common stock, par
value of $.01 per share, all of which were owned by TPR Investment Associates,
Inc., a privately-held Delaware corporation.
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TRANS-RESOURCES, INC.
Form 10-Q Index
September 30, 1999
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Page
PART I Number
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Item 1. - Financial Statements:
Consolidated Statements of Operations.......................................... 3
Consolidated Balance Sheets.................................................... 4
Consolidated Statements of Stockholder's Equity and Comprehensive Income....... 5
Consolidated Statements of Cash Flows.......................................... 6
Notes to Unaudited Consolidated Financial Statements........................... 7
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 10
Item 3. - Quantitative and Qualitative Disclosures About Market Risk..................... 22
PART II
Item 6. - Exhibits and Reports on Form 8-K............................................... 23
Signatures..................................................................... 24
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- -----
(000's)
<S> <C> <C> <C> <C>
REVENUES ..................................... $ 111,365 $ 88,621 $ 390,097 $ 314,664
COSTS AND EXPENSES:
Cost of goods sold ...................... 88,710 71,077 302,186 247,927
General and administrative .............. 19,318 10,838 51,845 36,364
--------- --------- --------- ---------
OPERATING INCOME ............................. 3,337 6,706 36,066 30,373
Interest expense ........................ (12,205) (9,941) (34,460) (27,982)
Interest and other income (expense) - net 144 (34,698) 1,431 (9,284)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND
CHANGE IN ACCOUNTING PRINCIPLE .......... (8,724) (37,933) 3,037 (6,893)
--------- --------- --------- ---------
INCOME TAX PROVISION (BENEFIT):
Current ................................. (21) 100 1,938 1,209
Deferred ................................ 249 (760) 2,185 702
--------- --------- --------- ---------
Total ............................... 228 (660) 4,123 1,911
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND CHANGE IN ACCOUNTING
PRINCIPLE ............................... (8,952) (37,273) (1,086) (8,804)
EXTRAORDINARY ITEM - Loss on repurchase of
debt (no income tax benefit) ............ -- (196) -- (11,328)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of
income tax benefit of $80,000 ........... -- -- -- (1,253)
--------- --------- --------- ---------
NET INCOME (LOSS) ............................ $ (8,952) $ (37,469) $ (1,086) $ (21,385)
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
(000's)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 7,878 $ 12,387
Accounts receivable ............................................... 111,044 90,998
Inventories:
Finished goods ................................................ 89,426 74,141
Raw materials ................................................. 23,577 21,301
Other current assets .............................................. 49,637 63,608
Prepaid expenses .................................................. 21,265 16,477
--------- ---------
Total Current Assets .......................................... 302,827 278,912
PROPERTY, PLANT AND EQUIPMENT - NET .................................... 325,620 260,585
OTHER ASSETS ........................................................... 54,764 59,789
--------- ---------
Total ......................................................... $ 683,211 $ 599,286
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .............................. $ 10,962 $ 10,183
Short-term debt ................................................... 45,476 39,065
Accounts payable .................................................. 88,590 76,306
Accrued expenses and other current liabilities .................... 35,780 43,224
--------- ---------
Total Current Liabilities ..................................... 180,808 168,778
--------- ---------
LONG-TERM DEBT - NET
Senior indebtedness, notes payable and other obligations .......... 494,434 414,432
--------- ---------
OTHER LIABILITIES ...................................................... 63,812 54,919
--------- ---------
STOCKHOLDER'S EQUITY (NOTE B):
Preferred stock, $1.00 par value, 100,000 shares
authorized, issued and outstanding ............................ 7,960 7,960
Common stock, $.01 par value, 3,000 shares authorized,
issued and outstanding ........................................ -- --
Additional paid-in capital ........................................ 8,682 8,682
Retained earnings ................................................. (39,253) (34,922)
Cumulative translation adjustment ................................. (1,065) (1,462)
Unrealized gains (losses) on marketable securities ................ (32,167) (19,101)
--------- ---------
Total Stockholder's Equity .................................... (55,843) (38,843)
--------- ---------
Total ......................................................... $ 683,211 $ 599,286
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
Nine Month Period Ended September 30, 1999
(Unaudited)
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<CAPTION>
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings
--------- ------ ---------- --------
(000's)
<S> <C> <C> <C> <C>
BALANCE,
January 1, 1999 ....... $ 7,960 $ -- $ 8,682 $(34,922)
Net loss ................. $ (1,086)
Dividends paid:
Common stock ........... (2,607)
Preferred stock ........ (638)
Net change during
period .................
--------- -------- -------- ---------
BALANCE,
September 30, 1999 ..... $ 7,960 $ -- $ 8,682 $(39,253)
======== ======== ======== ========
Cumulative Unrealized
Translation Gains (Losses) Comprehensive
Adjustment on Securities Total Income
----------- -------------- ----- -------------
<S> <C> <C> <C> <C>
BALANCE,
January 1, 1999 ....... $ (1,462) $(19,101) $(38,843)
Net loss ................. (1,086) (1,086)
Dividends paid:
Common stock ........... (2,607) |
Preferred stock ........ (638) |
Net change during
period ................. 397 (13,066) (12,669) (12,669)
-------- -------- --------- --------
BALANCE,
September 30, 1999 ..... $ (1,065) $(32,167) $(55,843) $(13,755)
-------- ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
5
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
Nine Month Period
Ended September 30,
-----------------------
1999 1998
---- ----
(000's)
<S> <C> <C>
OPERATING ACTIVITIES AND WORKING CAPITAL MANAGEMENT:
Operations:
Net income (loss) .................................................... $ (1,086) $ (21,385)
Items not requiring (providing) cash:
Depreciation and amortization of property, plant and equipment
and other assets ............................................ 20,263 16,142
Amortization of deferred financing costs and accretion of
interest expense ............................................ 8,174 5,621
Gain on Laser/ESC share exchange ................................. -- (22,946)
Extraordinary item - loss on repurchase of debt .................. -- 11,328
Cumulative effect of change in accounting principle .............. -- 1,253
Provision for loss on settlement of Bogalusa Litigation .......... -- 35,760
Deferred taxes and other - net ................................... 2,447 (2,686)
--------- ---------
Total ....................................................... 29,798 23,087
Working capital management:
Accounts receivable and other current assets ..................... (2,610) (5,538)
Inventories ...................................................... (10,617) (14,655)
Prepaid expenses ................................................. (4,745) (201)
Accounts payable ................................................. 3,837 7,600
Accrued expenses and other current liabilities ................... (8,388) (20,674)
--------- ---------
Cash provided (used) by operations and working
capital management ...................................... 7,275 (10,381)
--------- ---------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ........................... (66,437) (42,155)
Purchases of marketable securities and other short-term investments .. (25,695) (25,946)
Sales of marketable securities and other short-term investments ...... 21,497 7,573
Other - net, including approximately $10.0 million and $11.0 million
relating to the purchase of equity investments in Lego in 1999
and 1998, respectively ....................................... (13,685) (12,761)
--------- ---------
Cash used by investment activities .......................... (84,320) (73,289)
--------- ---------
FINANCING ACTIVITIES:
Increase in short-term debt .......................................... 3,165 4,880
Increase in long-term debt ........................................... 82,478 230,074
Repurchases, payments and current maturities of long-term debt ....... (9,862) (145,313)
Cash dividends to stockholder ........................................ (3,245) (11,764)
--------- ---------
Cash provided (used) by financing activities ................ 72,536 77,877
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (4,509) (5,793)
CASH AND CASH EQUIVALENTS:
Beginning of period .................................................. 12,387 19,757
--------- ---------
End of period ........................................................ $ 7,878 $ 13,964
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
6
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION AND OTHER MATTERS
The consolidated financial statements of Trans-Resources, Inc. ("TRI"),
include TRI and its direct and indirect independently managed and financed
subsidiaries, after elimination of intercompany accounts and transactions. TRI's
principal subsidiaries are Cedar Chemical Corporation ("Cedar"), and Cedar's
wholly-owned subsidiary, Vicksburg Chemical Company ("Vicksburg"); Na-Churs
Plant Food Company; Haifa Chemicals Ltd. ("HCL") and HCL's wholly-owned
subsidiary, Haifa Chemicals South, Ltd.; and Plant Products Co. Ltd. ("Plant
Products"). TRI is a wholly-owned subsidiary of TPR Investment Associates, Inc.
Unless the context otherwise requires, as used herein, the term "the Company"
means TRI together with its direct and indirect subsidiaries. Certain prior
period amounts have been reclassified to conform to the manner of presentation
in the current period.
Substantially all of the Company's revenues, operating profits and
identifiable assets are related to the chemical industry. The Company is a
global developer, producer and marketer of specialty plant nutrients and
specialty industrial and agricultural chemicals and distributes its products
internationally.
During 1998 and 1999, the Company completed several small acquisitions.
Effective January 1, 1998, the Company acquired a Spanish company engaged in the
manufacturing and distribution of specialty plant nutrients; effective May 1,
1998, the Company acquired EMV Kft., a Hungarian business engaged in the
manufacturing and marketing of organic chemicals; effective October 30, 1998,
the Company acquired Plant Products, headquartered in Ontario, Canada, which
manufactures and markets specialty plant nutrients for commercial horticulture,
specialty high value crops and retail markets; effective December 18, 1998, the
Company acquired Alpine Plant Foods, Inc. (including a Canadian subsidiary),
which manufactures and distributes high purity liquid fertilizers; and effective
February 19, 1999, the Company acquired a majority interest in V-J Growers
Supply, Inc., which markets specialty plant nutrients and other products for
commercial horticulture.
In addition, effective February 4, 1998, a subsidiary of HCL purchased
a 42% equity interest in Lego Irrigation, Ltd. ("Lego"), an Israeli developer,
manufacturer and marketer of drip irrigation systems. On March 9, 1999, as
contemplated by the terms of the initial purchase of the Lego shares, the
subsidiary of HCL purchased, pursuant to an option, an additional 35% equity
interest in Lego. The remaining 23% equity interest in Lego is publicly traded
on the Tel Aviv (Israel) stock exchange.
7
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Each of the acquisitions described in the above two paragraphs have
been accounted for using the purchase method of accounting. The aggregate
purchase price paid for these acquisitions was approximately $46 million and
resulted in approximately $11 million in goodwill (generally being amortized
over a 20 year period). The acquisitions described in the above two paragraphs
are collectively referred to as the "Acquired Businesses".
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 (the "Form 10-K"), the Company is a party to
litigation arising out of an October 23, 1995 release of nitrogen tetroxide at a
Bogalusa, Louisiana plant of a customer of Vicksburg. The nitrogen tetroxide had
been produced and sold by Vicksburg. The plaintiffs in these suits seek
unspecified damages arising out of the alleged exposure to toxic fumes. The
Louisiana class action and the Mississippi suits (collectively referred to
herein as the "Bogalusa Litigation") named a number of other defendants, in
addition to TRI and certain of its subsidiaries. During August, 1998, the
Company entered into conditional agreements to settle the claims in the Bogalusa
Litigation. During March, 1999, amended and restated conditional agreements to
settle the claims were executed by the parties. If the conditions of the
settlement are satisfied, the Company's funding obligation would be an aggregate
of approximately $32.4 million plus (i) an amount (estimated to eventually be in
excess of $4.5 million) equal to the amount which one of the settling insurance
companies shall have paid to the Company for reimbursement of defense costs (the
"Defense Depletion Amount") and (ii) interest payments at 6.25% per annum
beginning April 1, 1999 on the not as yet escrowed portion of $17 million, as
described below. The initial $10 million of the funding obligation was deposited
in escrow on August 31, 1998. In addition, two settling insurance companies are
to contribute an aggregate of $25 million, less the Defense Depletion Amount,
and the Company will assign to the plaintiffs its rights under another $26
million of insurance coverage. The Company escrowed an additional $5 million on
March 31, 1999, and is scheduled to escrow an additional $6.8 million on
December 31, 2000, and $5.1 million on both June 30, 2001 and December 31, 2001.
In 1998, the Company recorded a charge of approximately $36.2 million ($35.8
million in the nine month period ended September 30, 1998, included herein) to
cover the cost of the conditional settlement and the related legal expenses
(included in the caption "Interest and other income (expense)-net" in the
Company's December 31, 1998 Consolidated Statement of Operations in the Form
10-K).
For further information regarding the Bogalusa Litigation and the
conditional settlement relating thereto see Part I - Item 3 - "Legal
Proceedings" in the Form 10-K.
Effective January 1, 1998, the Company changed its method of accounting
for start-up costs incurred relating to the start-up of newly constructed
manufacturing facilities to conform with AICPA Statement of Position No. 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires
that such costs be currently charged to
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operations. As of January 1, 1998, the Company has reported the cumulative
effect of the change in the method of accounting for start-up costs in the
Consolidated Statement of Operations. The effect of adopting SOP 98-5 in 1998
was the write-off of unamortized start-up costs of approximately $1.33 million
and a reduction in net income for the cumulative effect of the change in
accounting principle of approximately $1.25 million (net of income taxes).
In the opinion of management, the unaudited consolidated financial
statements for the nine month periods ended September 30, 1999 and 1998,
respectively, include all adjustments, which comprise only normal recurring
accruals, necessary for a fair presentation of the results for such periods. The
results of operations for the nine month period ended September 30, 1999 are not
necessarily indicative of results that may be expected for any other interim
period or the full fiscal year. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Form 10-K.
B. STOCKHOLDER'S EQUITY
The Company has received investment grants from the Israeli Government
for certain capital investments made by HCL. The Company initially records
investment grants received as a reduction of the capitalized asset which are
then amortized over the estimated useful life of the respective asset. From 1986
through September 30, 1999 the Company received cumulative gross investment
grants of approximately $66 million. If the Company had not followed such a
policy and instead recorded the capitalized assets at their cost, the Company's
Stockholder's Equity at September 30, 1999, net of accumulated depreciation that
would have been charged of approximately $19 million, would have been ($8.8)
million.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain items
appearing in the unaudited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------------------------------
Three Month Nine Month
Period Ended Period Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Specialty Plant Nutrients ................. 63.1% 55.3% 61.3% 57.1%
Industrial Chemicals ...................... 26.7 34.2 25.9 29.7
Organic Chemicals ......................... 10.2 10.5 12.8 13.2
---- ----- ---- ----
Total Revenues ............................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold ........................ 79.7 80.2 77.4 78.8
General and administrative ................ 17.3 12.2 13.3 11.6
---- ----- ---- ----
Operating income ............................... 3.0 7.6 9.3 9.6
Interest expense .......................... (10.9) (11.2) (8.8) (8.9)
Interest and other income (expense)- net .. 0.1 (39.2) 0.3 (2.9)
---- ----- ---- ----
Income (loss) before income taxes, extraordinary
item and change in accounting principle ... (7.8) (42.8) 0.8 (2.2)
Income tax provision (benefit) ................. 0.2 (0.7) 1.1 0.6
---- ----- ---- ----
Income (loss) before extraordinary item and
change in accounting principle ............ (8.0) (42.1) (0.3) (2.8)
Extraordinary item ............................. -- (0.2) -- (3.6)
Cumulative effect of change in accounting
principle - net ........................... -- -- -- (0.4)
---- ----- ---- ----
Net income (loss) .............................. (8.0)% (42.3)% (0.3)% (6.8)%
==== ===== ==== ====
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements herein (and in the Form 10-K) constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than statements of
historical facts included herein (and in the Form 10-K) are forward-looking
statements, including, but not limited to, statements concerning future
revenues; expenses; capital requirements; access to lending sources and Israeli
Government entitlements; inflation in Israel; Year 2000 matters; outcomes of
legal proceedings and statements identified or qualified by words such as
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"likely," "will," "suggests," "may," "would," "could," "should," "expects,"
"anticipates," "estimates," "plans," "projects," "believes," or similar
expressions (and variants of such words or expressions. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
("Cautionary Factors") which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The Cautionary Factors include, among others, the following:
political stability, inflation and currency rates in those foreign countries
(including, without limitation, Israel) in which the Company generates a
significant portion of its production, sales and earnings; current or future
environmental developments or government regulations which would require the
Company to make substantial expenditures, and changes in, or the failure of the
Company to comply with, such government regulations; the potentially hazardous
nature of certain of the Company's products; the ability to achieve and sustain
anticipated labor cost reductions at HCL; the Company's ability to continue to
service and refinance its debt; new plant start-up costs; competition; changes
in business strategy or expansion plans; raw material costs and availability;
the final outcome of the legal proceedings to which the Company is a party and
the conditional settlement of the Bogalusa Litigation, including, without
limitation, satisfaction by the parties of the terms and numerous conditions of
such conditional settlement (see Part I - Item 3 - "Legal Proceedings" in the
Form 10-K); and other factors referenced in this Form 10-Q (or in the Form
10-K).
Given these uncertainties, investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements. All
subsequent forward-looking statements attributable to the Company or persons
acting on behalf of the Company are expressly qualified in their entirety by the
Cautionary Factors.
INVESTMENT IN LASER/ESC
On November 9, 1997, Laser Industries Limited ("Laser"), a publicly
traded manufacturer of lasers for medical use in which the Company had an
ownership interest accounted for by the equity method, and ESC Medical Systems
Ltd. ("ESC"), signed a definitive agreement (the "Agreement") to combine the two
companies through an exchange of shares. The transaction closed on February 23,
1998. ESC develops, manufactures, and markets medical devices utilizing both
state-of-the-art lasers and proprietary intense pulsed light source technology
for non-invasive treatment of varicose veins and other benign vascular lesions,
as well as for hair removal, skin cancer, skin rejuvenation and other clinical
applications. ESC shares are traded in the United States on the NASDAQ National
Market System. The Company's investment in ESC is accounted for pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115").
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As of December 31, 1997, the Company carried its investment in the
Laser shares at approximately $9.1 million. Based on the quoted market value of
the ESC shares ($35.00 per share), as of February 20, 1998, the last day of
trading before the combination, the Company recognized a pre-tax gain of
approximately $22.9 million during the first quarter of 1998, which gain is
included in the caption "Interest and other income (expense) - net" in the
accompanying September 30, 1998 Consolidated Statement of Operations. Subsequent
to the exchange of shares, the Company carries its investment in the ESC shares
in "Other current assets" in the accompanying September 30, 1999 and December
31, 1998 Consolidated Balance Sheets. As of September 30, 1999, the quoted
market value of the ESC shares was approximately $4.94 per share, resulting in
the Company recording an unrealized loss of approximately $29.6 million. The
unrealized loss relating to ESC is included in the caption "Unrealized gains
(losses) on marketable securities" in the accompanying September 30, 1999
Consolidated Balance Sheet. With respect to the Company's investment in ESC,
Management of the Company is not aware of any events that have occurred
regarding ESC that would indicate an other than temporary impairment of the
Company's investment in ESC.
In addition to the ownership of the Laser shares described above, the
Company also owned a warrant (the "Laser Warrant") which enabled the Company to
purchase 250,000 Laser shares. The Laser Warrant, which had a carrying value of
$0.75 million, was distributed as a dividend in February, 1998.
RESULTS OF OPERATIONS
Three month period ended September 30, 1999 compared with the three
month period ended September 30, 1998:
Revenues increased by 25.7% to $111.4 million in 1999 from $88.6
million in 1998, an increase of $22.8 million. The increase resulted from (a)
increased sales of Specialty Plant Nutrients and Industrial Chemicals of
approximately $20.7 million principally due to an increase of quantities sold in
the 1999 period versus the corresponding prior year period, primarily as a
result of the Acquired Businesses and (b) increased Organic Chemicals' revenues
of approximately $2.1 million (which primarily relates to one of the Acquired
Businesses).
Cost of goods sold as a percentage of revenues decreased to 79.7% in
1999 compared with 80.2% in 1998. Gross profit was $22.7 million in 1999, or
20.3% of revenues, compared with $17.5 million or 19.8% of revenues in 1998, an
increase of $5.2 million. The primary factors resulting in the increased gross
profit in 1999 were (i) increased Specialty Plant Nutrients and Industrial
Chemicals quantities sold as compared to the 1998 period, including the gross
profits relating to the Acquired Businesses and (ii) lower raw material and
energy costs at HCL in the 1999 period as
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compared to the corresponding period in the prior year. These increases were
partially offset by (i) less favorable currency exchange rates in 1999 and (ii)
decreases in the selling price of chlorine, one of the Company's industrial
chemical products. General and administrative expense increased to $19.3 million
in 1999 from $10.8 million in 1998, an increase of $8.5 million (17.3% of
revenues in 1999 compared to 12.2% of revenues in 1998). This increase was
principally due to the general and administrative expenses added as a result of
the Acquired Businesses, some of which are more marketing intensive.
As a result of the matters described above, the Company's operating
income decreased by $3.4 million to $3.3 million in 1999 as compared with $6.7
million in 1998.
Interest expense increased by $2.3 million to $12.2 million in 1999
compared with $9.9 million in 1998 primarily as a result of certain increased
borrowings relating to the Company's investment and capital expenditure program,
including borrowings related to the acquisition of the Acquired Businesses.
Interest and other income (expense) - net increased in 1999 by $34.8 million,
principally as the result of the 1998 provision for loss relating to the
conditional settlement of the Bogalusa Litigation (see Notes to Unaudited
Consolidated Financial Statements).
As a result of the above factors, income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
increased by $29.2 million in 1999. The Company's provisions for income taxes
are impacted by the mix between domestic and foreign earnings and vary from the
U.S. Federal statutory rate principally due to the impact of foreign operations
and certain items which are not taxable.
In the 1998 period the Company acquired $2.7 million principal amount
of its 11 7/8% Senior Subordinated Notes, which resulted in a loss of $0.2
million (see "Refinancing" below). Such loss (which has no tax benefit) is
classified as an extraordinary item in the accompanying Consolidated Statement
of Operations. No such debt was acquired in the 1999 period.
Nine month period ended September 30, 1999 compared with the nine month
period ended September 30, 1998:
Revenues increased by 24.0% to $390.1 million in 1999 from $314.7
million in 1998, an increase of $75.4 million. The increase resulted from (a)
increased sales of Specialty Plant Nutrients and Industrial Chemicals of
approximately $67.1 million principally due to an increase of quantities sold in
the 1999 period versus the corresponding prior year period, primarily as a
result of the Acquired Businesses, and (b) increased Organic Chemicals' revenues
of approximately $8.3 million (which primarily relates to one of the Acquired
Businesses).
Cost of goods sold as a percentage of revenues decreased to 77.4% in
1999 compared with 78.8% in 1998. Gross profit was $87.9 million in 1999, or
22.6% of revenues, compared with $66.7 million or 21.2% of revenues in
13
<PAGE> 14
1998, an increase of $21.2 million. The primary factors resulting in the
increased gross profit in 1999 were (i) increased Specialty Plant Nutrients and
Industrial Chemicals quantities sold as compared to the 1998 period, including
the gross profits relating to the Acquired Businesses, (ii) increased production
efficiencies at HCL in the 1999 period as compared to the corresponding period
in the prior year and (iii) improved margins of Organic Chemicals. These
increases were partially offset by (i) less favorable currency exchange rates in
1999 and (ii) decreases in the selling price of chlorine, one of the Company's
industrial chemical products. General and administrative expense increased to
$51.8 million in 1999 from $36.4 million in 1998, an increase of $15.4 million
(13.3% of revenues in 1999 compared to 11.6% of revenues in 1998). This increase
was principally due to the general and administrative expenses added as a result
of the Acquired Businesses, some of which are more marketing intensive.
As a result of the matters described above, the Company's operating
income increased by $5.7 million to $36.1 million in 1999 as compared with $30.4
million in 1998.
Interest expense increased by $6.5 million to $34.5 million in 1999
compared with $28.0 million in 1998 primarily as a result of (i) the issuance by
the Company of its 10 3/4% Senior Notes and 12% Senior Discount Notes, partially
offset by the Company's repurchase of substantially all of its 11 7/8% Senior
Subordinated Notes on March 16, 1998 (see "Refinancing" below) and (ii) certain
increased borrowings relating to the Company's investment and capital
expenditure program, including borrowings related to the acquisition of the
Acquired Businesses. Interest and other income (expense) - net increased in 1999
by $10.7 million, principally as the result of the 1998 provision for loss
relating to the conditional settlement of the Bogalusa Litigation, partially
offset by the 1998 gain related to the Laser/ESC combination described above
(see Notes to Unaudited Consolidated Financial Statements and "Investment in
Laser/ESC" above).
As a result of the above factors, income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
increased by $9.9 million in 1999. The Company's provisions for income taxes are
impacted by the mix between domestic and foreign earnings and vary from the U.S.
Federal statutory rate principally due to the impact of foreign operations and
certain items which are not taxable.
In the 1998 period the Company acquired the total amount outstanding
($115.0 million principal amount) of its 11 7/8% Senior Subordinated Notes,
which resulted in a loss of $11.3 million (see "Refinancing" below). Such loss
(which has no tax benefit) is classified as an extraordinary item in the
accompanying Consolidated Statement of Operations. No such debt was acquired in
the 1999 period.
14
<PAGE> 15
In the 1998 period the Company changed its method of accounting for
start-up costs incurred relating to the start-up of newly constructed
manufacturing facilities to conform with SOP 98-5. This change in accounting
method resulted in a net charge of approximately $1.3 million.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated working capital at September 30, 1999 and
December 31, 1998 was $122.0 million and $110.1 million, respectively.
Operations for the nine month periods ended September 30, 1999 and
1998, after adding back non-cash items, provided cash of approximately $29.8
million and $23.1 million, respectively. During such periods other changes in
working capital used cash of approximately $22.5 million and $33.5 million,
respectively, resulting in cash being provided (used) by operating activities
and working capital management of approximately $7.3 million and ($10.4)
million, respectively.
Investment activities during the nine month periods ended September 30,
1999 and 1998 used cash of approximately $84.3 million and $73.3 million,
respectively. These amounts include: (i) additions to property in 1999 and 1998
of approximately $66.4 million and $42.2 million, respectively; (ii) purchases
of marketable securities and other short-term investments of approximately $25.7
million and $25.9 million, respectively; (iii) sales of marketable securities
and other short-term investments of approximately $21.5 million and $7.6
million, respectively; and (iv) other items using cash of approximately $13.7
million and $12.8 million, respectively (including purchases of equity interests
in Lego of approximately $10 million and $11 million in 1999 and 1998,
respectively). The property additions in both periods relate primarily to the
Company's expansion of its potassium nitrate and food grade phosphates capacity
in the United States and Israel and the construction of a plant at the Company's
Vicksburg facility in the United States to produce monoammonium phosphate
("MAP") and monopotassium phosphate ("MKP").
Financing activities during the nine month periods ended September 30,
1999 and 1998 provided cash of approximately $72.5 million and $77.9 million,
respectively. The 1998 amount relates primarily to the Refinancing described
below; the 1999 amount relates primarily to borrowings in connection with the
Company's investment and capital expenditure program.
As of September 30, 1999, the Company had outstanding long-term debt
(excluding current maturities) of $494.4 million. The Company's primary sources
of liquidity are cash flows generated from operations and its unused credit
lines.
15
<PAGE> 16
REFINANCING
On March 16, 1998, the Company completed a private placement of $100.0
million principal amount of 10 3/4% Senior Notes due 2008 (the "Senior Notes")
and $135.0 million principal amount at maturity of 12% Senior Discount Notes due
2008 (the "Senior Discount Notes"). The Senior Discount Notes provided gross
proceeds to the Company of approximately $75.4 million. A substantial portion
(approximately $118.0 million) of the net proceeds from the sale was used in
March, 1998 to purchase (pursuant to a tender offer and consent solicitation)
approximately $110.0 million principal amount of the Company's 11 7/8% Senior
Subordinated Notes (the "11 7/8% Notes") (the "Refinancing"). In addition, in
the four month period ended July, 1998, the Company repurchased or redeemed the
remaining $5.0 million principal amount of its 11 7/8% Notes. As a result of the
Refinancing and the subsequent repurchases or redemptions of the 11 7/8% Notes,
combined with the write-off of certain unamortized issuance costs associated
with the 11 7/8% Notes, the Company recognized an extraordinary charge for the
early extinguishment of debt of approximately $11.3 million, which is classified
as an extraordinary item in the accompanying September 30, 1998 Consolidated
Statement of Operations and in the December 31, 1998 Consolidated Statement of
Operations included in the Form 10-K.
The Senior Notes and the Senior Discount Notes are unsecured
obligations of the Company and are pari passu in right of payment with all
existing and future unsecured and unsubordinated indebtedness of TRI and senior
in right to payment to all subordinated indebtedness of TRI. Interest on the
Senior Notes is payable semi-annually. Interest on the Senior Discount Notes
accretes and compounds semi-annually but is not payable until 2003, after which
interest on the accreted principal amount will be payable semi-annually.
See Note G of Notes to Consolidated Financial Statements included in
the Form 10-K.
FORWARD-LOOKING LIQUIDITY AND CAPITAL RESOURCES
Interest payments on the Senior Notes and interest and principal
repayments under other indebtedness represent significant obligations of the
Company and its subsidiaries. For a description of the amortization required on
the Company's other indebtedness see Note G of Notes to Consolidated Financial
Statements included in the Form 10-K. During the years ended December 31, 1998
and 1997, the Company incurred significant capital expenditures pursuant to its
plan to increase capacity for potassium nitrate, food grade phosphates and the
construction of a plant at the Company's Vicksburg facility to manufacture MAP
and MKP (the "Plan"). The Company plans to complete the Plan during 1999. During
the nine month period ended September 30, 1999 the majority of the Company's
capital expenditures related to the Plan. Ongoing maintenance capital
expenditures are expected to be approximately $16 million per year. The
Company's primary sources of liquidity are cash flows from operations and
borrowings under
16
<PAGE> 17
the credit facilities of the Company. As of September 30, 1999, the Company had
approximately $51 million of borrowing availability, consisting of $15 million
of borrowing availability of TRI and the remainder at the Company's
subsidiaries. In addition, during 1998 HCL entered into $80 million in credit
facilities which are being used to finance its planned capacity expansion at its
Mishor Rotem, Israel facility. Dividends and other distributions from the
Company's subsidiaries are, in part, a source of cash flow available to the
Company. The Company believes that, based on current and anticipated financial
performance, cash flow from operations, borrowings under the Company's credit
facilities and dividends and other distributions available from the Company's
subsidiaries will be adequate to meet anticipated requirements for capital
expenditures, working capital and scheduled interest payments. However, the
Company's capital requirements may change. The ability of the Company to satisfy
its capital requirements and to repay or refinance its indebtedness will be
dependent upon the future financial performance of the Company, which in turn
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond the Company's control. See "Special Note
Regarding Forward-Looking Statements" above.
FOREIGN CURRENCIES
The Company has no significant foreign currency denominated revenues
except at HCL. Approximately $170 million of HCL's total sales for the year
ended December 31, 1998 were made outside of Israel in currencies other than the
U.S. dollar (principally in Western European currencies). Accordingly, to the
extent that the U.S. dollar weakens or strengthens versus the applicable
corresponding foreign currency, HCL's results are favorably or unfavorably
affected. In order to mitigate the impact of currency fluctuations against the
U.S. Dollar, the Company has a general policy of hedging a portion of its
foreign sales denominated in Western European currencies by entering into
forward exchange contracts. The Company determines when to enter into hedging
transactions (and the extent of its foreign currency denominated sales it wishes
to hedge) based on its ongoing review of the currency markets. A portion of
these contracts qualify as hedges pursuant to SFAS No. 52 and, accordingly,
applicable unrealized gains and losses arising therefrom are deferred and
accounted for in the subsequent year as part of sales. Unrealized gains and
losses for the remainder of the forward exchange contracts are recognized in
income currently. If the Company had not followed such a policy of entering into
forward exchange contracts in order to hedge its foreign sales, and instead
recognized income based on the then prevailing foreign currency rates, the
Company's income before income taxes for the nine month periods ended September
30, 1999 and 1998, would have increased (decreased) by approximately ($5.3)
million and $1.4 million, respectively.
17
<PAGE> 18
The principal purpose of the Company's hedging program (which is for
other than trading purposes) is to mitigate the impact of fluctuations against
the U.S. dollar, as well as to protect against significant adverse changes in
exchange rates. Accordingly, the gains and losses recognized relating to the
hedging program in any particular period and the impact on revenues had the
Company not had such a program are not necessarily indicative of its
effectiveness.
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the Euro. On January 1, 1999,
the Euro began trading on currency exchanges and may be used in business
transactions. The conversion to the Euro will eliminate currency exchange rate
risk between the member countries. Beginning in January, 2002, new
Euro-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. HCL, the principal subsidiary of TRI that will be
affected by the Euro conversion, has established plans to address the issues
raised by the Euro currency conversion. These issues include, among others, the
need to adapt computer and financial systems, the competitive impact of
cross-border price transparency which may make it more difficult for businesses
to charge different prices for the same products on a country-by-country basis,
recalculating currency risk and recalibrating derivatives and other financial
instruments. Due to numerous uncertainties, the Company cannot reasonably
estimate the effects one common currency will have on pricing and the resulting
impact, if any, on the Company's financial condition or its results of
operations.
INFLATION
Inasmuch as only approximately $65 million of HCL's annual operating
costs are denominated in New Israeli Shekels ("NIS"), HCL is exposed to
inflation in Israel to a limited extent. The combination of price increases
coupled with devaluation of the NIS have in the past generally enabled HCL to
avoid a material adverse impact from inflation in Israel. However, HCL's
earnings could increase or decrease to the extent that the rate of future NIS
devaluation differs from the rate of Israeli inflation. For the years ended
December 31, 1998 and 1997 the inflation rate of the NIS as compared to the U.S.
Dollar was less than the devaluation rate in Israel by 9.0% and 1.8%,
respectively.
ENVIRONMENTAL MATTERS
See Part I - Item 1 - "Business" - "Environmental Matters" and Note O
of Notes to Consolidated Financial Statements included in the Form 10-K for
information regarding environmental matters relating to the Company's various
facilities.
YEAR 2000 ISSUE
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
18
<PAGE> 19
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 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.
In 1997, the Company created project teams to coordinate its activities
relating to becoming Y2K compliant (the "Y2K Project"). The Y2K Project for the
Company's internal systems and equipment covers both traditional computer
systems and infrastructure ("IT Systems") and computer-based manufacturing,
logistical and related systems ("Non-IT Systems"). The Y2K Project generally has
four phases - (i) an identification and inventory of all systems and devices
with potential Y2K problems; (ii) assessment (including prioritization); (iii)
remediation (including modification, upgrading and replacement) and testing; and
(iv) contingency planning. The Company operates on a decentralized independent
operating company basis; consequently, the Y2K Project status may vary across
TRI's various direct and indirect subsidiaries. As of September 30, 1999, for
both IT Systems and Non-IT Systems, phases (i) and (ii) are generally complete
and phase (iii) is in process. Based on its assessment of its major IT systems,
the Company expects that all necessary modifications and/or replacements
required in phase (iii) will be completed in a timely manner to ensure that all
of TRI's various direct and indirect subsidiaries are Y2K compliant.
The Y2K Project also considers the readiness of significant customers,
suppliers and other third party providers. Each of TRI's various direct and
indirect subsidiaries are currently assessing the status of its significant
customers, suppliers and other third party providers with respect to their
becoming Y2K compliant.
The Company is revising its existing business interruption contingency
plans to address internal and external issues specific to the Y2K problem, to
the extent practicable. Such revisions are expected to be completed prior to
December 31, 1999. These plans, which are intended to enable the Company to
continue to operate on January 1, 2000 and beyond, include performing certain
processes manually; repairing or obtaining replacement systems; changing
suppliers; and reducing or suspending operations. These plans are intended to
mitigate both internal risks as well as potential risks in the supply chain of
the Company's suppliers and customers. The Company believes, however, that due
to the widespread nature of potential Y2K issues, the contingency planning
process is an ongoing one which will require further modifications as the
Company obtains additional information regarding the Company's internal systems
and equipment during the completion of the Y2K Project and regarding the status
of its suppliers, customers, and other third party providers in becoming Y2K
compliant.
19
<PAGE> 20
Through September 30, 1999 the Company estimates that it has spent
approximately $1.4 million in its efforts to achieve Y2K compliance, all of
which has been recognized as an expense in the Company's Consolidated Statements
of Operations. The Company estimates that the costs to be incurred subsequent to
September 30, 1999 in its efforts to achieve Y2K compliance will aggregate
approximately $0.1 million. The Company has funded from operations the costs of
becoming Y2K compliant.
The failure to correct a material Y2K problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Y2K readiness of the Company's customers, suppliers, and other
third-party providers, the Company is unable to determine at this time whether
the consequences of any Y2K failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Y2K
Project is expected to significantly reduce the Company's level of uncertainty
about the Y2K problem. The Company believes that, with the implementation of new
business systems and completion of the Company's Y2K Project, the possibility of
significant interruptions of normal operations should be reduced.
The preceding "Y2K problem" discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the "Y2K problem" discussion, the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its Y2K Project as well as its Y2K contingency
plans; its estimated cost of becoming Y2K compliant; and the Company's belief
that its internal systems and equipment will be Y2K compliant in a timely
manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results, including problems that may arise on the part of third
parties. Factors that may cause these differences include, but are not limited
to, the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected systems or
equipment; and the actions of governmental agencies or other third parties with
respect to Y2K problems. If the modifications and conversions required to make
the Company Y2K compliant are not made or are not completed on a timely basis,
the resulting problems could have a material impact on the operations of the
Company. This impact could, in turn, have a material adverse effect on the
Company's results of operations and financial condition.
20
<PAGE> 21
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. Depending on
the intended use of the derivative, changes in derivative fair values may be
charged to operations unless the derivative qualifies as a hedge under certain
requirements. SFAS 133, as amended by SFAS 137, is effective for all quarters of
fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company).
The Company is evaluating the impact, if any, of SFAS 133 on its consolidated
financial statements.
21
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Item 7A in the
Form 10-K. No material change has occurred as of September 30, 1999.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report is filed.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS-RESOURCES, INC.
---------------------
(Registrant)
Date: November 12, 1999 Elan Yaish
-----------------------------
Vice President and Controller
24
<PAGE> 25
TRANS-RESOURCES, INC.
INDEX TO EXHIBITS
Exhibit Description
27 Financial Data Schedule.
25
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,878
<SECURITIES> 0
<RECEIVABLES> 111,044
<ALLOWANCES> 0
<INVENTORY> 113,003
<CURRENT-ASSETS> 302,827
<PP&E> 485,450
<DEPRECIATION> 159,830
<TOTAL-ASSETS> 683,211
<CURRENT-LIABILITIES> 180,808
<BONDS> 494,434
0
7,960
<COMMON> 0
<OTHER-SE> (63,803)
<TOTAL-LIABILITY-AND-EQUITY> 683,211
<SALES> 390,097
<TOTAL-REVENUES> 390,097
<CGS> 302,186
<TOTAL-COSTS> 302,186
<OTHER-EXPENSES> 51,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (34,460)
<INCOME-PRETAX> 3,037
<INCOME-TAX> 4,123
<INCOME-CONTINUING> (1,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,086)
<EPS-BASIC> 0
<EPS-DILUTED> 0
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