<PAGE> 1
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 June 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.
Delaware 36-2729497
------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9 West 57th Street, New York, New York 10019
---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code (212)888-3044
(Exact name of registrant as specified in its charter)
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 August 13, 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
June 30, 1999
<TABLE>
<CAPTION>
Page
PART I Number
- ------ ------
<S> <C>
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.................................................. 21
PART II
Item 1. - Legal Proceedings..................................... 22
Item 6. - Exhibits and Reports on Form 8-K...................... 23
Signatures ...................................................... 24
</TABLE>
2
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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 Six Month Period
Ended June 30, Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(000's)
<S> <C> <C> <C> <C>
REVENUES ........................................... $ 150,975 $ 121,081 $ 278,732 $ 226,043
COSTS AND EXPENSES:
Cost of goods sold ............................. 114,134 91,874 213,476 176,850
General and administrative ..................... 16,949 13,776 32,527 25,526
--------- --------- --------- ---------
OPERATING INCOME ................................... 19,892 15,431 32,729 23,667
Interest expense ............................... (11,713) (9,821) (22,255) (18,041)
Interest and other income (expense) - net ...... 1,231 1,594 1,287 25,414
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND
CHANGE IN ACCOUNTING PRINCIPLE ................. 9,410 7,204 11,761 31,040
--------- --------- --------- ---------
INCOME TAX PROVISION (BENEFIT):
Current ........................................ 1,152 585 1,959 1,109
Deferred ....................................... 1,231 1,350 1,936 1,462
--------- --------- --------- ---------
Total ...................................... 2,383 1,935 3,895 2,571
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY
ITEM AND CHANGE IN ACCOUNTING
PRINCIPLE ...................................... 7,027 5,269 7,866 28,469
EXTRAORDINARY ITEM - Loss on repurchase of
debt (no income tax benefit) ................... --
(192) -- (11,132)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
net of income tax benefit of $80,000 ........... -- -- -- (1,253)
--------- --------- --------- ---------
NET INCOME ......................................... $ 7,027 $ 5,077 $ 7,866 $ 16,084
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
(Unaudited)
(000's)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 7,166 $ 12,387
Accounts receivable .................................... 125,827 90,998
Inventories:
Finished goods ....................................... 76,606 74,141
Raw materials ........................................ 17,603 21,301
Other current assets ................................... 47,646 63,608
Prepaid expenses ....................................... 19,787 16,477
--------- ---------
Total Current Assets ................................. 294,635 278,912
PROPERTY, PLANT AND EQUIPMENT - NET ........................ 296,408 260,585
OTHER ASSETS ............................................... 73,996 59,789
--------- ---------
Total ................................................ $ 665,039 $ 599,286
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................... $ 10,600 $ 10,183
Short-term debt ........................................ 49,164 39,065
Accounts payable ....................................... 93,777 76,306
Accrued expenses and other current liabilities ......... 37,624 43,224
--------- ---------
Total Current Liabilities ............................ 191,165 168,778
--------- ---------
LONG-TERM DEBT - NET -
Senior indebtedness, notes payable and other obligations 458,503 414,432
--------- ---------
OTHER LIABILITIES .......................................... 58,930 54,919
--------- ---------
STOCKHOLDER'S EQUITY:
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 ...................................... (29,869) (34,922)
Cumulative translation adjustment ...................... (1,601) (1,462)
Unrealized gains (losses) on marketable securities ..... (28,731) (19,101)
--------- ---------
Total Stockholder's Equity ........................... (43,559) (38,843)
--------- ---------
Total ................................................ $ 665,039 $ 599,286
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
4
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
Six Month Period Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Additional Cumulative Unrealized
Preferred Common Paid-In Retained Translation Gains (Losses) Comprehensive
Stock Stock Capital Earnings Adjustment on Securities Total Income
----- ----- ------- -------- ---------- ------------- ----- ------
(000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1999 $ 7,960 $ -- $ 8,682 $(34,922) $(1,462) $(19,101) $(38,843)
Net income ......... 7,866 7,866 $ 7,866
Dividends paid:
Common stock ..... (2,388) (2,388)
Preferred stock .. (425) (425)
Net change during
period ........ (139) (9,630) (9,769) (9,769)
------- ------- ------- -------- ------- -------- -------- -------
BALANCE,
June 30, 1999 . $ 7,960 $ -- $ 8,682 $(29,869) $(1,601) $(28,731) $(43,559) $(1,903)
======= ======= ======= ======== ======= ======== ======== =======
</TABLE>
See notes to unaudited consolidated financial statements.
6
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period
Ended June 30,
--------------------------
1999 1998
-------- ---------
(000's)
<S> <C> <C>
OPERATING ACTIVITIES AND WORKING CAPITAL
MANAGEMENT:
Operations:
Net income .............................................................. $ 7,866 $ 16,084
Items not requiring (providing) cash:
Depreciation and amortization of property, plant and equipment
and other assets ................................................... 12,453 10,830
Amortization of deferred financing costs and accretion of
interest expense ................................................... 5,386 3,126
Gain on Laser/ESC share exchange ...................................... -- (22,946)
Extraordinary item - loss on repurchase of debt ....................... -- 11,132
Cumulative effect of change in accounting principle ................... -- 1,253
Deferred taxes and other - net ........................................ 830 (1,425)
-------- ---------
Total .............................................................. 26,535 18,054
Working capital management:
Accounts receivable and other current assets .......................... (23,191) (19,118)
Inventories ........................................................... 3,973 (2,781)
Prepaid expenses ...................................................... (3,310) (2,682)
Accounts payable ...................................................... 13,880 7,919
Accrued expenses and other current liabilities ........................ (4,778) (2,791)
-------- ---------
Cash provided (used) by operations and working
capital management .............................................. 13,109 (1,399)
-------- ---------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment .............................. (47,035) (22,654)
Purchases of marketable securities and other short-term investments ..... (23,592) (24,724)
Sales of marketable securities and other short-term investments ......... 21,165 4,251
Other - net, including approximately $10 million and $11 million
relating to the purchase of equity investments in Lego in 1999
and 1998, respectively ....................................... (13,719) (22,449)
-------- ---------
Cash provided (used) by investment activities ...................... (63,181) (65,576)
-------- ---------
FINANCING ACTIVITIES:
Increase in short-term debt ............................................. 8,176 2,892
Increase in long-term debt .............................................. 45,690 216,605
Repurchases, payments and current maturities of long-term debt .......... (6,202) (140,651)
Cash dividends to stockholder ........................................... (2,813) (11,332)
-------- ---------
Cash provided (used) by financing activities ....................... 44,851 67,514
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................ (5,221) 539
CASH AND CASH EQUIVALENTS:
Beginning of period ..................................................... 12,387 19,757
-------- ---------
End of period ........................................................... $ 7,166 $ 20,296
======== =========
</TABLE>
See notes to unaudited consolidated financial statements.
6
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 VJ Growers
Supply, Inc., which markets specialty plant nutrients and other products for
commercial horticulture. The acquisitions described in this paragraph are
collectively referred to as the "Acquired Businesses".
Each of the Acquired Businesses have been accounted for using the purchase
method of accounting. The aggregate purchase price paid for these Acquired
Businesses was approximately $25.5 million and resulted in approximately $11
million in goodwill (generally being amortized over a 20 year period).
7
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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, for a purchase price of
approximately $11 million. 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 34% equity interest in Lego for approximately $10
million. The remaining 24% equity interest in Lego is publicly traded on the Tel
Aviv (Israel) stock exchange.
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 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.
8
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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 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 six month periods ended June 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 six month period ended June 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 which has been filed with the Securities and
Exchange Commission.
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 Six Month
Period Ended Period Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Specialty Plant Nutrients .............. 61.9% 62.2% 60.6% 60.9%
Industrial Chemicals ................... 24.0 24.6 25.6 24.8
Organic Chemicals ...................... 14.1 13.2 13.8 14.3
------ ------ ------ ------
Total Revenues ......................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold ..................... 75.6 75.9 76.6 78.2
General and administrative ............. 11.2 11.4 11.7 11.3
------ ------ ------ ------
Operating income .......................... 13.2 12.7 11.7 10.5
Interest expense ....................... (7.8) (8.1) (8.0) (8.0)
Interest and other income (expense)- net 0.8 1.4 0.5 11.2
------ ------ ------ ------
Income before income taxes, extraordinary
item and change in accounting principle 6.2 6.0 4.2 13.7
Income tax provision (benefit) ............ 1.5 1.6 1.4 1.1
------ ------ ------ ------
Income before extraordinary item and
change in accounting principle ......... 4.7 4.4 2.8 12.6
Extraordinary item ........................ -- (0.2) -- (4.9)
Cumulative effect of change in accounting
principle - net ........................ -- -- -- (0.6)
------ ------ ------ ------
Net income ................................ 4.7% 4.2% 2.8% 7.1%
====== ====== ====== ======
</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
(e.g., impact of the HCL Labor Dispute (as defined in the Form 10-K) and
inflation in Israel); expenses (e.g., labor savings resulting from HCL's new
Specific Collective Agreement ("SCA"), future environmental costs and capital
expenditures); access to lending sources and Israeli Government entitlements;
Year 2000 matters; outcomes of
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legal proceedings and statements identified or qualified by words such as
"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
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. Such factors
("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 Company's
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 June 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 June 30, 1999 and December 31, 1998 Consolidated Balance
Sheets. As of June 30, 1999, the quoted market value of the ESC shares was
approximately $6.38 per share, resulting in the Company recording an unrealized
loss of approximately $26.5 million. The unrealized loss relating to ESC is
included in the caption "Unrealized gains (losses) on marketable securities" in
the accompanying June 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 June 30, 1999 compared with the three month
period ended June 30, 1998:
Revenues increased by 24.7% to $151.0 million in 1999 from $121.1 million
in 1998, an increase of $29.9 million. The increase resulted from (a) increased
sales of Specialty Plant Nutrients and Industrial Chemicals of approximately
$24.6 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, with such increased sales partially offset by less
favorable currency exchange rates in the 1999 period and (b) increased Organic
Chemicals' revenues of approximately $5.3 million (which primarily relates to
one of the Acquired Businesses).
Cost of goods sold as a percentage of revenues decreased to 75.6% in 1999
compared with 75.9% in 1998. Gross profit was $36.8 million in 1999, or 24.4% of
revenues, compared with $29.2 million or 24.1% of revenues in 1998, an increase
of $7.6 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) increased production efficiencies
at HCL in the 1999 period as compared to the corresponding period in the prior
year. These increases were partially offset by (i) less favorable
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<PAGE> 13
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 $16.9 million in 1999 from $13.8 million in
1998, an increase of $3.1 million but did not materially differ as a percentage
of revenues during the periods (11.2% of revenues in 1999 compared to 11.4% of
revenues in 1998). This increase was principally due to the general and
administrative expenses recorded by the Acquired Businesses.
As a result of the matters described above, the Company's operating income
increased by $4.5 million to $19.9 million in 1999 as compared with $15.4
million in 1998.
Interest expense increased by $1.9 million to $11.7 million in 1999
compared with $9.8 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 did not materially differ during the
periods.
As a result of the above factors, income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
increased by $2.2 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 $2.3 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.
Six month period ended June 30, 1999 compared with the six month period
ended June 30, 1998:
Revenues increased by 23.3% to $278.7 million in 1999 from $226.0 million
in 1998, an increase of $52.7 million. The increase resulted from (a) increased
sales of Specialty Plant Nutrients and Industrial Chemicals of approximately
$46.5 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, with such increased sales partially offset by less
favorable currency exchange rates in the 1999 period and (b) increased Organic
Chemicals' revenues of approximately $6.2 million (which primarily relates to
one of the Acquired Businesses).
Cost of goods sold as a percentage of revenues decreased to 76.6% in 1999
compared with 78.2% in 1998. Gross profit was $65.3 million in 1999, or 23.4% of
revenues, compared with $49.2 million or 21.8% of revenues in 1998, an increase
of $16.1 million. The primary factors resulting in the increased gross profit in
1999 were (i) increased
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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) increased production efficiencies at HCL in the 1999 period
as 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 $32.5 million
in 1999 from $25.5 million in 1998, an increase of $7.0 million (11.7% of
revenues in 1999 compared to 11.3% of revenues in 1998). This increase was
principally due to the general and administrative expenses recorded by the
Acquired Businesses.
As a result of the matters described above, the Company's operating income
increased by $9.0 million to $32.7 million in 1999 as compared with $23.7
million in 1998.
Interest expense increased by $4.3 million to $22.3 million in 1999
compared with $18.0 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 most 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 decreased in 1999 by $24.1 million,
principally as the result of the 1998 gain related to the Laser/ESC combination
(see "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
decreased by $19.3 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 $112.4 million principal amount of
its 11 7/8% Senior Subordinated Notes, which resulted in a loss of $11.1 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 June 30, 1999 and December
31, 1998 was $103.5 million and $110.1 million, respectively.
Operations for the six month periods ended June 30, 1999 and 1998, after
adding back non-cash items, provided cash of approximately $26.5 million and
$18.1 million, respectively. During such periods other changes in working
capital used cash of approximately $13.4 million and $19.5 million,
respectively, resulting in cash being provided (used) by operating activities
and working capital management of approximately $13.1 million and ($1.4)
million, respectively.
Investment activities during the six month periods ended June 30, 1999 and
1998 used cash of approximately $63.2 million and $65.6 million, respectively.
These amounts include: (i) additions to property in 1999 and 1998 of
approximately $47.0 million and $22.7 million, respectively; (ii) purchases of
marketable securities and other short-term investments of approximately $23.6
million and $24.7 million, respectively; (iii) sales of marketable securities
and other short-term investments of approximately $21.2 million and $4.3
million, respectively; and (iv) other items using cash of approximately $13.7
million and $22.5 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 six month periods ended June 30, 1999 and
1998 provided cash of approximately $44.9 million and $67.5 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 June 30, 1999, the Company had outstanding long-term debt
(excluding current maturities) of $458.5 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 11, 1998, the Company commenced 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. The sale of the Senior
Notes and the Senior Discount Notes closed on March 16, 1998. 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
(including approximately $11.1 million during the six month period ended June
30, 1999), which is classified as an extraordinary item in the December 31, 1998
Consolidated Statement of Operations included in the Company's 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 six month period ended June 30, 1999 the majority of the Company's capital
16
<PAGE> 17
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 the credit facilities of the Company. As of June 30, 1999,
the Company had approximately $64 million of borrowing availability, consisting
of $18 million of borrowing availability of TRI and the remainder at the
Company's subsidiaries. In addition, during 1998 HCL entered into an $80 million
credit facility which is 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, particularly if the Company would
complete any material acquisitions. 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
17
<PAGE> 18
based on the then prevailing foreign currency rates, the Company's income before
income taxes for the six month periods ended June 30, 1999 and 1998, would have
increased (decreased) by approximately ($5.5) million and $0.9 million,
respectively.
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.
18
<PAGE> 19
ENVIRONMENTAL MATTERS
See Part I - Item 1 - "Business" - "Environmental Matters" and Note O of
Notes to Consolidated Financial Statements included in the Company's 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 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 June 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
19
<PAGE> 20
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.
Through June 30, 1999 the Company estimates that it has spent
approximately $1.2 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
June 30, 1999 in its efforts to achieve Y2K compliance will aggregate
approximately $0.3 million. The Company intends to fund 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
20
<PAGE> 21
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Item 7A in the
Company's Form 10-K. No material change has occurred as of June 30, 1999.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed (most recently in the Form 10-K and in the Form
10-Q for the quarter ended March 31, 1999), beginning in April, 1993 a number of
antitrust class action lawsuits were filed in several United States District
Courts, and consolidated for pretrial purposes in the United States District
Court for Minnesota, against the major Canadian and United States potash
producers, including Eddy Potash, Inc. ("EDP"), a direct subsidiary of the
company (whose name was changed to EDP, Inc. upon completion of the sale of its
potash business in August, 1996), and New Mexico Potash Corporation ("NMPC"), an
indirect subsidiary of the Company (whose name was changed to NMPC, Inc. upon
completion of the sale of its potash business in August, 1996), and "unnamed
co-conspirators." On or about December 21, 1995, the defendants filed motions
for summary judgment. On September 13, 1996 Magistrate Judge Erickson issued a
Report and Recommendation recommending that U.S. District Court Judge Kyle grant
the motions for summary judgment as to all of the plaintiffs' claims. On January
2, 1997, Judge Kyle issued an order accepting and adopting Magistrate Judge
Erickson's Report and Recommendation and ordering that the motions for summary
judgment as to all of the plaintiffs' claims be granted. Plaintiffs, by Notice
of Appeal dated January 31, 1997, appealed Judge Kyle's order to the U.S. Court
of Appeals for the Eighth Circuit, before which oral argument on the appeal
occurred on November 17, 1997. On May 7, 1999, a three judge panel of the Court
of Appeals affirmed the grant of summary judgment as to all of the plaintiffs'
claims against NMPC, EDP and two other defendants but reversed the grant of
summary judgment as to the claims against the remaining defendants. Thereafter,
defendants against whom summary judgment was reversed moved for a rehearing
before the entire Court of Appeals. On July 16, 1999, the Court of Appeals
vacated the opinion of the three judge panel (as to all defendants, including
NMPC and EDP) and scheduled a rehearing before the entire Court for September
13, 1999.
22
<PAGE> 23
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: August 13, 1999 Lester W. Youner
--------------------------------
Vice President, Treasurer and
Chief Financial Officer
24
<PAGE> 25
TRANS-RESOURCES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,166
<SECURITIES> 0
<RECEIVABLES> 125,827
<ALLOWANCES> 0
<INVENTORY> 94,209
<CURRENT-ASSETS> 294,635
<PP&E> 448,912
<DEPRECIATION> 152,504
<TOTAL-ASSETS> 665,039
<CURRENT-LIABILITIES> 191,165
<BONDS> 458,503
0
7,960
<COMMON> 0
<OTHER-SE> (51,519)
<TOTAL-LIABILITY-AND-EQUITY> 665,039
<SALES> 278,732
<TOTAL-REVENUES> 278,732
<CGS> 213,476
<TOTAL-COSTS> 213,476
<OTHER-EXPENSES> 32,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22,255)
<INCOME-PRETAX> 11,761
<INCOME-TAX> 3,895
<INCOME-CONTINUING> 7,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,866
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
