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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
|X|*QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 333-64641
----------------------------------------
Philipp Brothers Chemicals, Inc.
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| * No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Number of shares of each class of common stock outstanding as of December 31,
2002:
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
* By virtue of Section 15(d) of the Securities Act of 1934, the Registrant
is not subject to such filing requirements and not required to file this
Quarterly Report, but has provided all such reports as if so required
during the preceding 12 months.
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PHILIPP BROTHERS CHEMICALS, INC.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Financial Statements.......................... 3
Condensed Consolidated Balance Sheets................... 4
Condensed Consolidated Statements of Operations
and Comprehensive Income.............................. 5
Condensed Consolidated Statements of Changes
in Stockholders' Deficit.............................. 6
Condensed Consolidated Statements of Cash Flows......... 7
Notes to Condensed Consolidated Financial Statements.... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................... 29
Item 4. Control and Procedures.................................. 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................... 30
Item 5. Other Information...................................... 30
Item 6. Exhibits and Reports on Form 8-K........................ 30
SIGNATURES ............................................................... 31
CERTIFICATIONS ........................................................... 32
2
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2002
and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this
Form 10-Q under the caption "Certain Factors Affecting Future Operating
Results." Unless the context otherwise requires, references in this report to
the "Company" refers to the Company and/or one or more of its subsidiaries, as
applicable.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
3
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
December 31, June 30,
2002 2002
------------ --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,788 $ 6,419
Trade receivables, less allowance for
doubtful accounts of $1,812 at December 31,
2002 and $1,893 at June 30, 2002 59,483 65,161
Other receivables 2,599 3,912
Inventories 97,995 93,517
Prepaid expenses and other current assets 14,190 15,965
--------- ---------
TOTAL CURRENT ASSETS 188,055 184,974
PROPERTY, PLANT AND EQUIPMENT, net 73,415 84,730
INTANGIBLES 12,654 13,200
OTHER ASSETS 11,927 13,540
--------- ---------
$ 286,051 $ 296,444
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 2,416 $ 7,767
Loans payable to banks 38,219 41,535
Current portion of long-term debt 8,449 8,851
Accounts payable 48,993 42,280
Accrued expenses and other current liabilities 37,156 34,080
--------- ---------
TOTAL CURRENT LIABILITIES 135,233 134,513
LONG-TERM DEBT 128,418 136,641
OTHER LIABILITIES 39,873 29,877
--------- ---------
TOTAL LIABILITIES 303,524 301,031
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 60,847 56,602
--------- ---------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 740 740
Retained earnings (61,888) (49,652)
Accumulated other comprehensive (loss) income:
(Loss) gain on derivative instruments (179) 1,062
Cumulative currency translation adjustment (17,516) (13,862)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (78,320) (61,189)
--------- ---------
$ 286,051 $ 296,444
========= =========
See notes to unaudited Condensed Consolidated Financial Statements.
4
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (Unaudited)
(In Thousands)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES $ 99,118 $ 97,987 $ 196,159 $ 192,646
COST OF GOODS SOLD 76,985 73,692 152,222 147,886
--------- --------- --------- ---------
GROSS PROFIT 22,133 24,295 43,937 44,760
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 18,523 19,681 35,969 38,737
ASSET WRITEDOWNS 7,781 -- 7,781 --
--------- --------- --------- ---------
OPERATING (LOSS) INCOME (4,171) 4,614 187 6,023
OTHER:
Interest expense 3,656 4,674 8,160 9,317
Interest income 30 (233) (96) (303)
Other (income) expense, net (1,442) 1,220 (1,752) 1,025
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (6,415) (1,047) (6,125) (4,016)
PROVISION FOR INCOME TAXES 1,420 652 1,867 48
--------- --------- --------- ---------
NET LOSS (7,835) (1,699) (7,992) (4,064)
OTHER COMPREHENSIVE (LOSS) INCOME:
(Loss) gain on derivative instruments (158) 288 (1,241) 433
Change in currency translation adjustment (827) 2,354 (3,654) 788
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (8,820) $ 943 $ (12,887) $ (2,843)
========= ========= ========= =========
See notes to unaudited Condensed Consolidated Financial Statements.
5
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Unaudited)
For the Three Months and Six Months Ended December 31, 2002
(In Thousands)
Preferred Common
Stock Stock
--------- ----------- Accumulated Other
Class Class Paid-in Retained Comprehensive
Series A "A" "B" Capital Earnings (Loss) income- Total
-------- ----- ----- ------- -------- -------------- -----
BALANCE , JULY 1, 2002 $ 521 $ 1 $ 1 $ 740 $(49,652) $(12,800) $(61,189)
Dividends on Series B and C
redeemable preferred stock (2,123) (2,123)
Loss on derivative
instruments (1,083) (1,083)
Foreign currency translation
adjustment (2,827) (2,827)
Net loss (157) (157)
------ --- --- ----- -------- -------- --------
BALANCE, SEPTEMBER 30, 2002 $ 521 $ 1 $ 1 $ 740 $(51,932) $(16,710) $(67,379)
====== === === ===== ======== ======== ========
Dividends on Series B and C
redeemable preferred stock (2,121) (2,121)
Loss on derivative
instruments (158) (158)
Foreign currency translation
adjustment (827) (827)
Net loss (7,835) (7,835)
------ --- --- ----- -------- -------- --------
BALANCE, DECEMBER 31, 2002 $ 521 $ 1 $ 1 $ 740 $(61,888) $(17,695) $(78,320)
====== === === ===== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended December 31, 2002 and 2001
(In Thousands)
2002 2001
--------- -------
OPERATING ACTIVITIES:
Net loss $ (7,992) $ (4,064)
Adjustments to reconcile net loss to
net cash provided
by operating activities:
Depreciation and amortization 8,025 8,044
Asset writedowns 7,781 --
Other 308 1,666
Changes in operating assets and liabilities:
Accounts receivable 4,110 11,968
Inventories (4,861) (13,927)
Prepaid expenses and other current assets 1,554 (372)
Other assets (1,107) (507)
Accounts payable 17,988 (2,218)
Accrued expenses and other current liabilities 1,636 3,714
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 27,442 4,304
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (7,351) (6,634)
Acquisition of a business -- (4,422)
Proceeds from sales of assets 5,956 --
Other investing -- (38)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,395) (11,094)
-------- --------
FINANCING ACTIVITIES:
Cash overdraft (5,351) 751
Net increase (decrease) in short-term debt (3,426) 10,402
Proceeds from long-term debt 1,660 2,042
Payments of long-term debt (11,752) (3,963)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (18,869) 9,232
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 191 29
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,369 2,471
CASH AND CASH EQUIVALENTS at beginning of period 6,419 14,845
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 13,788 $ 17,316
======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
7
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
1. General
In the opinion of Philipp Brothers Chemicals, Inc. (the "Company"), the
accompanying unaudited condensed consolidated financials statements contain all
adjustments (consisting only of normal recurring adjustments, except for asset
writedowns) necessary to present fairly its financial position as of December
31, 2002 and its results of operations and cash flows for the three months and
six months ended December 31, 2002 and 2001.
The condensed consolidated balance sheet as of June 30, 2002 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. Additionally, it should be noted
that the accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with accounting standards appropriate
for interim financial statements. While the Company believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the Company's consolidated financial statements for the year
ended June 30, 2002.
Certain prior year amounts in the accompanying condensed consolidated
financial statements and related notes have been reclassified to conform to the
fiscal 2003 presentation.
The results of operations for the three months and six months ended
December 31, 2002 may not be indicative of results for the full year.
Effective July 1, 2002 the Company adopted Statements of Financial
Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and No.
142 "Goodwill and Other Intangibles" ("SFAS No. 142"). SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 establishes specific criteria for
recognition of intangible assets separately from goodwill. The statement
requires that goodwill and indefinite lived intangible assets no longer be
amortized and be tested for impairment at least annually. The amortization
period of intangible assets with finite lives will no longer be limited to forty
years. The Company has no goodwill, but has assessed the useful lives of its
intangible assets. The adoption of SFAS No. 141 and No. 142 did not result in an
impact on the Company's financial statements.
Effective July 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 143 "Accounting for Asset Retirement Obligations"
("SFAS No. 143"). SFAS No. 143 established accounting standards for the
recognition and measurement of an asset retirement obligation and its associated
asset retirement cost. The Company has reviewed its tangible long-lived assets
for associated asset retirement obligations ("AROs") in accordance with SFAS No.
143. The Company has not recognized liabilities associated with AROs since the
associated assets have indeterminate useful lives.
Effective July 1, 2002 the Company adopted Statement of Financial
Accounting Standard No. 144 "Accounting for Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"). SFAS No. 144 addresses significant issues relating to
the implementation of FASB Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"),
and the development of a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The adoption of SFAS No. 144
did not result in an impact on the Company's financial statements.
Effective July 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment
of SFAS 13, and Technical Corrections" ("SFAS No. 145"). Under the current
rules, SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
requires that all gains and losses from the extinguishment of debt be classified
as extraordinary on the Company's consolidated statement of operations, net of
applicable taxes. SFAS No. 145 rescinds the automatic classification as
extraordinary and requires that the Company evaluate whether the gains or losses
qualify as extraordinary under Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The adoption of SFAS No. 145 did not result in an
impact on the Company's financial statements.
8
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred rather than
at the date of a commitment to an exit or disposal plan. Costs covered by SFAS
No. 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing
or other exit or disposal activity. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company does
not expect the adoption of SFAS No. 146 to have a material impact on the
financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN No. 45 are required for financial statements of periods ending after
December 15, 2002. The initial measurement provisions of FIN No. 45 are
applicable on a prospective basis for guarantees issued or modified after
December 31, 2002. The Company does not expect the adoption of FIN No. 45 to
have a significant impact on the financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 requires consolidation by business enterprises of variable
interest entities (commonly referred to as special purpose entities), which meet
certain characteristics. FIN No. 46 applies to variable interest entities
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after January 31, 2003. The Company does not
expect the adoption of FIN No. 46 to have an impact on the financial statements.
2. Reclassifications
Freight and warehousing expenses of $6,598, $6,994, $6,428 and $9,245 for
the three months ended September 30, 2001, December 31, 2001, March 31, 2002 and
June 30, 2002, respectively, are being reclassified from selling, general and
administrative expenses to cost of goods sold on the Company's condensed
consolidated statements of operations and comprehensive income. The
reclassification had no impact on net sales, operating income (loss) or net loss
for each of the periods presented below. Results for the prior fiscal year are
as follows:
3 Months 3 Months 3 Months 3 Months 12 Months
Ended Ended Ended Ended Ended
September 30, December 31, March 31, June 30, June 30,
2001 2001 2002 2002 2002
------------- ------------ --------- -------- --------
Net Sales $94,659 $97,987 $96,310 $ 99,857 $388,813
Gross Profit 20,465 24,295 16,539 5,167 66,466
Operating Income (Loss) 1,409 4,614 (3,729) (23,958) (21,664)
Net (Loss) (2,365) (1,699) (9,072) (38,634) (51,770)
9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
3. Risks and Uncertainties
As of December 31, 2002, the Company was in compliance with the financial
covenants included in its amended senior credit facility ("credit facility")
with its lending banks, for which PNC Bank serves as agent. The credit facility
was amended in October 2002 to: waive noncompliance with financial covenants as
of June 30, 2002; amend financial covenants prospectively until maturity; amend
the borrowing base formula and also reduce maximum availability under the
revolving credit portion of the credit facility from $70 million to $55 million;
limit borrowings under the capital expenditure line of the credit facility to
the outstanding balance as of the amendment date; and increase the interest rate
to 1.5% to 1.75% per annum over the base rate (as defined in the agreement).
Management believes that the reduced maximum availability and the revised
borrowing base formula under the revolving credit portion of the credit facility
will not adversely affect the Company's ability to meet its cash requirements
through the remaining term of the credit facility (see below).
The Company's ability to fund its operating plan relies upon continued
availability of the credit facility which, in turn, requires the Company to
maintain compliance with the amended financial covenants. The Company believes
that it will be able to comply with the terms of the amended covenants based on
its forecasted operating plan. In the event of adverse operating results and
resultant violation of the covenants through the remaining term of the credit
facility (see below), the Company cannot be certain it will be able to obtain
waivers or amendments on favorable terms, if at all.
The Company's credit facility and its note payable to Pfizer, Inc. mature
in November 2003 and March 2004, respectively. The Company may not have
sufficient cash resources to repay this debt and management has undertaken
actions to improve the Company's operating performance and overall liquidity in
order to reduce debt levels and allow for ultimate refinancing of this debt
prior to their maturities. These actions include cost reduction activities,
working capital improvement programs, shutdown of unprofitable operations,
deferral and forbearance of certain obligations to Pfizer, and possible sale of
certain business operations and other assets.
The Company intends to refinance its current credit facility and the
Pfizer note payable. The ability to refinance such debt on terms acceptable to
the Company is, among other things, dependent upon the success of the management
actions referred to above. There can be no assurance that the Company will be
able to refinance such debt on terms acceptable to the Company. The inability to
refinance the debt on terms acceptable to the Company would have a material
adverse impact on the Company's financial position, results of operations, and
cash flow.
In October 2002, the Company entered into an agreement with Pfizer whereby
Pfizer agreed to defer until March 1, 2004, without interest, unpaid contingent
purchase price amounts existing at May 31, 2002 and to waive contingent purchase
price payments on future net revenues from June 1, 2002 through March 1, 2004.
In October 2002, Odda entered into an agreement with its Norwegian banks
to restructure its loans and to obtain waivers for its non-compliance with the
financial covenants. The agreement establishes a periodic payment schedule
through November 30, 2003. The Company is the guarantor of certain portions of
this debt.
The Company has completed the sale of certain fixed assets of Odda and
certain assets of its Phibro-tech etchant business during the second quarter of
fiscal year 2003 for aggregate proceeds of $5,956. The Company is actively
pursuing the sale of certain business operations to generate cash for debt
repayment. However, there can be no assurance that such sales will be completed
on terms acceptable to the Company, and there are no disposal transactions which
the Company considers probable at December 31, 2002. Disposal transactions could
result in recording losses for financial statement purposes.
The issue of the potential for increased bacterial resistance to certain
antibiotics used in certain food-producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotics in these food-producing animals. The sale
of feed additives containing antibiotics is a material portion of the Company's
business. Should regulatory or other developments result in further restrictions
on the sale of such products, it could have a material adverse impact on the
Company's financial position, results of operations and cash flows.
On February 14, 2003, the Company was advised that the Joint Expert
Committee on Food Additives of the Food and Agricultural Organization of the
United Nations and the World Health Organization ("JECFA"), at its meeting held
February 6-12, 2003, had determined to withdraw the maximum residue limits
("MRL's") for Carbadox. It is not known at this time whether any national
regulatory authorities will adopt this determination, which could result in
reduced overall sales of the product. Carbadox is a significant product for the
Company's Phibro Animal Health business. The Company is presently assessing the
impact of this determination on the Company.
10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
4. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average cost methods;
however, certain subsidiaries of the Company use the last-in, first-out (LIFO)
method for valuing inventories. Obsolete or unsaleable inventory is reflected at
its estimated net realizable value. Inventory costs include materials, direct
labor and manufacturing overhead.
Inventories consist of the following at December 31, 2002 and June 30,
2002:
December 31, June 30,
2002 2002
------------ --------
Raw Materials $21,011 $23,524
Work-in-process 1,785 2,098
Finished goods 75,199 67,895
------- -------
Total inventory $97,995 $93,517
======= =======
5. Asset Writedowns and Restructuring
The Company's Odda, Norway operation has suffered operating losses during
fiscal years 2002 and 2001. Odda is included in the Company's Industrial
Chemicals segment.
In November 2002, the Company announced a temporary shutdown of the Odda
operation due to continuing operating losses, higher than planned operating
costs, and delays in the market acceptance of calcium oxide, a by-product of the
manufacturing process of its primary product, dicyandiamide. The Company
continues to assess various alternatives for its Odda operation, including
complete shutdown.
The Company has reevaluated the carrying value of Odda's long-lived assets
(consisting of property, plant and equipment and certain other assets) at
December 31, 2002, based upon its estimate of future net cash flows under the
possible scenarios being considered by management. As a result, an impairment
charge of $7,781 has been recorded in the Company's condensed consolidated
statements of operations and comprehensive income for the three months and six
months ended December 31, 2002 to reduce the carrying value of Odda's long-lived
assets to their estimated salvage values.
The Company continues to carry a cumulative translation adjustment of
$6,314 related to Odda's operations. Pending management's ultimate decision on
the future of Odda, such amount may be charged to operating results.
Operating results for Odda are as follows:
Three Months Ended December 31, 2002 2001
-------- ---------
Total revenues $ 3,069 $ 8,517
Operating loss $(10,702) $ (970)
Other income (expense) $ 814 $ (420)
Depreciation $ 325 $ 728
Six Months Ended December 31, 2002 2001
-------- ---------
Total revenues $ 7,781 $ 15,964
Operating loss $(12,904) $ (3,232)
Other income (expense) $ 2,211 $ 802
Depreciation $ 643 $ 1,454
11
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
During the third quarter of fiscal year 2002 the Company decided to cease
production of two of Odda's three primary products as of June 30, 2002, and
focus its resources on the remaining product line. During the fourth quarter of
fiscal year 2002, due to further deterioration of the Odda business, the
Company's review of certain long-lived assets of Odda for impairment, under the
scenarios of continuing production of Odda's remaining primary product or
complete shutdown of the Odda operation, resulted in the Company recording an
impairment charge of $5,133.
During fiscal 2002 Odda incurred restructuring charges and terminated
approximately 120 employees as of June 30, 2002. During the six months ended
December 31, 2002 Odda paid $32 of these restructuring charges. An accrual of
$847 for restructuring costs still to be paid at December 31, 2002 remains on
the Company's condensed consolidated balance sheets at December 31, 2002.
6. Contingencies
(a) Litigation:
On or about April 17, 1997, the Company and CP Chemicals, Inc. ("CP") were
served with a complaint filed by Chevron USA, Inc. ("Chevron") in the United
States District Court for the District of New Jersey, alleging that operations
of CP at its Sewaren plant affected adjoining property owned by Chevron and that
the Company, as the parent of CP, is also responsible to Chevron. In July 2002,
a phased settlement agreement was reached under which the Company and another
defendant will, subject to certain conditions, take title to the property,
subject to a period of due diligence investigation of the property. The
Company's portion of the settlement for past costs and expenses is $495 and was
included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income, and was paid in July 2002. The
Company and the other defendant will, if the sale becomes final, share equally
in the costs of remediation. While the costs cannot be estimated at this time,
the Company believes the costs will not be material and insurance recoveries
will be available to offset a portion of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency (the "EPA"),
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which the Company has agreed to
contribute up to $900 of which $500 was paid during fiscal year 2002. The
Company has accrued its best estimate of any future costs under the agreement.
Partial recovery from insurance and other sources is expected.
The Company and its subsidiaries are a party to a number of claims and
lawsuits arising in the normal course of business, including patent
infringement, product liabilities and governmental regulation concerning
environmental and other matters. Certain of these actions seek damages in
various amounts. All such claims are being contested, and management believes
the resolution of these matters will not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
(b) Environmental Remediation:
The Company's domestic subsidiaries are subject to various federal, state
and local environmental laws and regulations that govern the management of
chemical wastes. The most significant regulation governing the Company's
recycling activities is the Resource Conservation and Recovery Act of 1976
("RCRA"). The Company has been issued final RCRA "Part B" permits to operate as
hazardous waste treatment and storage facilities at its facilities in Santa Fe
Springs, California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina;
and Sewaren, New Jersey. The Company has ceased operations at its Union City,
California facility. Costs accrued for closure were $109 as of December 31,
2002.
12
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
On or about November 15, 2001, the Company was advised by the State of
California that the State intended to file a civil complaint against the Company
for alleged violations arising out of operations at the Santa Fe Springs,
California facility. The Company is engaged in negotiations with the State of
California at this time. The amount of any penalty that may be assessed cannot
be determined at this time, but is not expected to be material.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the United States
Environmental Protection Agency (the "EPA") relating to a third-party superfund
site in Rhode Island. The Company is investigating the matter, which relates to
events in the 1950's and 1960's. The Company does not believe there will be any
material costs or liabilities.
In connection with applying for RCRA "Part B" permits, the Company has
been required to perform extensive site investigations at certain of its
operating facilities and inactive sites to identify possible contamination and
to provide the regulatory authorities with plans and schedules for remediation.
Some soil and groundwater contamination has been identified at several plant
sites and will require corrective action over the next several years.
Based upon information available, management estimates the cost of further
investigation and remediation of identified soil and groundwater problems at
operating sites, closed sites and third-party sites to be approximately $1,532,
which is included in current and long-term liabilities in the December 31, 2002
condensed consolidated balance sheets.
7. Business Segments
The Company has four reportable segments--Animal Health and Nutrition,
Industrial Chemicals, Distribution, and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets a broad range of feed
additive products including trace minerals, anticoccidials, antibiotics,
vitamins, vitamin premixes and other animal health products. The Company's
Industrial Chemicals segment manufactures and markets pigments and other mineral
products. Certain of these products include copper oxide, which is produced by
the Company's recycling operation, mineral oxides, and alkaline etchants. The
Company's Distribution segment markets and distributes a variety of industrial,
specialty and fine organic chemicals and intermediates produced primarily by
third parties. The Company's All Other segment manufactures and markets a
variety of specialty custom chemicals, and copper-based fungicides, as well as
providing management and recycling of coal combustion residues.
Segment data for the three months and six months ended December 31, 2002
and 2001 is as follows:
Animal Corporate
Health & Industrial All Expenses &
Three Months Ended December 31, 2002 Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ ----- ----------- -----
Revenues -external customers $66,650 $ 13,913 $8,894 $9,661 $ -- $99,118
-intersegment 718 2,538 499 3 (3,758) --
------- -------- ------ ------ ------- -------
Total revenues $67,368 $ 16,451 $9,393 $9,664 $(3,758) $99,118
======= ======== ====== ====== ======= =======
Operating income/(loss) $11,457 $(11,616) $ 824 $ (703) $(4,133) $(4,171)
======= ======== ====== ====== ======= =======
Animal Corporate
Health & Industrial All Expenses &
Three Months Ended December 31, 2001 Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ ----- ----------- -----
Revenues -external customers $63,156 $ 17,394 $8,383 $9,054 $ -- $97,987
-intersegment 857 4,474 442 19 (5,792) --
------- -------- ------ ------ ------- -------
Total revenues $64,013 $ 21,868 $8,825 $9,073 $(5,792) $97,987
======= ======== ====== ====== ======= =======
Operating income/(loss) $10,259 $ (2,542) $ 751 $ (229) $(3,625) $ 4,614
======= ======== ====== ====== ======= =======
13
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Animal Corporate
Health & Industrial All Expenses &
Six Months Ended December 31, 2002 Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ ----- ----------- -----
Revenues -external customers $126,626 $ 31,235 $18,467 $19,831 $ -- $196,159
-intersegment 1,645 5,431 850 7 (7,933) --
-------- -------- ------- ------- ------- --------
Total revenues $128,271 $ 36,666 $19,317 $19,838 $(7,933) $196,159
======== ======== ======= ======= ======= ========
Operating income/(loss) $ 21,159 $(13,726) $ 1,567 $ (618) $(8,195) $ 187
======== ======== ======= ======= ======= ========
Animal Corporate
Health & Industrial All Expenses &
Six Months Ended December 31, 2001 Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ ----- ----------- -----
Revenues -external customers $121,099 $34,739 $17,818 $18,990 $ -- $192,646
-intersegment 2,267 8,140 996 30 (11,433) --
-------- ------- ------- ------- -------- --------
Total revenues $123,366 $42,879 $18,814 $19,020 $(11,433) $192,646
======== ======= ======= ======= ======== ========
Operating income/(loss) $ 17,624 $(6,742) $ 1,589 $ (110) $ (6,338) $ 6,023
======== ======= ======= ======= ======== ========
Animal
Health & Industrial All Corporate &
Identifiable Assets Nutrition Chemicals Distribution Other Adjustments Total
--------- --------- ------------ ----- ----------- -----
At June 30, 2002 $186,118 $57,419 $11,826 $30,688 $10,393 $296,444
At December 31, 2002 $195,819 $35,347 $12,345 $28,030 $14,510 $286,051
8. Consolidating Financial Statements
In June 1998, the Company issued $100 million in Senior Subordinated Notes
due 2008 (the "Notes"). In connection with the issuance of these Notes, the
Company's U.S. Subsidiaries fully and unconditionally guaranteed such Notes on a
joint and several basis. Foreign subsidiaries do not presently guarantee the
Notes.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent, Guarantors
and Non-Guarantor Subsidiaries. The Parent is Philipp Brothers Chemicals, Inc.
("PBC"). The U.S. Guarantor Subsidiaries include all domestic subsidiaries of
PBC including the following: C.P. Chemicals, Inc., Phibro-Tech, Inc., Mineral
Resource Technologies, Inc., Prince Agriproducts, Inc., The Prince Manufacturing
Company, Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp.,
Phibro Animal Health Holdings, Inc. and Phibro Animal Health U.S., Inc. All
Guarantor and Non-Guarantor Subsidiaries are directly or indirectly wholly owned
as to voting stock by PBC.
Investments in subsidiaries are accounted for by the Parent using the
equity method. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
The principal consolidation adjustments are to eliminate investments in
subsidiaries and intercompany balances and transactions. Separate financial
statements of the U.S. Guarantor Subsidiaries and the Non-Guarantor Subsidiaries
are not presented because management has determined that such financial
statements would not be material to investors.
14
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of December 31, 2002
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 131 $ 2,005 $ 11,652 $ 13,788
Trade receivables 2,722 26,070 30,691 59,483
Other receivables 583 615 1,401 2,599
Inventory 3,430 53,087 41,478 97,995
Prepaid expenses and other 1,319 1,075 11,796 14,190
--------- --------- --------- --------- ---------
Total current assets 8,185 82,852 97,018 -- 188,055
--------- --------- --------- --------- ---------
Property, plant & equipment, net 266 27,924 45,225 73,415
Intangibles 32 1,375 11,247 12,654
Investment in subsidiaries 69,299 3,621 -- (72,920) --
Intercompany 63,395 (33,967) 1,273 (30,701) --
Other assets 9,835 1,417 675 11,927
--------- --------- --------- --------- ---------
Total assets $ 151,012 $ 83,222 $ 155,438 $(103,621) $ 286,051
========= ========= ========= ========= =========
Liabilities and Stockholders' Deficit
Current Liabilities:
Cash overdraft $ 1,055 $ 1,361 $ -- $ 2,416
Loan payable to banks 33,375 -- 4,844 38,219
Current portion of long term debt 4,011 469 3,969 8,449
Accounts payable 1,746 29,043 18,204 48,993
Accrued expenses and other 5,641 6,691 24,824 37,156
--------- --------- --------- --------- ---------
Total current liabilities 45,828 37,564 51,841 -- 135,233
Long term debt 120,110 (71,563) 110,572 (30,701) 128,418
Other liabilities 2,547 16,989 20,337 39,873
--------- --------- --------- --------- ---------
Total liabilities 168,485 (17,010) 182,750 (30,701) 303,524
--------- --------- --------- --------- ---------
Redeemable securities:
Series B and C preferred stock 60,847 -- -- 60,847
--------- --------- --------- --------- ---------
Stockholders' Deficit
Series A preferred stock 521 -- -- 521
Common stock 2 32 -- (32) 2
Paid in capital 740 110,885 8,166 (119,051) 740
Retained earnings (61,888) (10,524) (17,945) 28,469 (61,888)
Accumulated other comprehensive
(loss) income-
loss on derivative instruments (179) (179) -- 179 (179)
cumulative currency translation adjustment (17,516) 18 (17,533) 17,515 (17,516)
--------- --------- --------- --------- ---------
Total stockholders' deficit (78,320) 100,232 (27,312) (72,920) (78,320)
--------- --------- --------- --------- ---------
Total liabilities and deficit $ 151,012 $ 83,222 $ 155,438 $(103,621) $ 286,051
========= ========= ========= ========= =========
15
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended December 31, 2002
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 6,035 $ 58,799 $ 36,795 $ (2,511) $ 99,118
Cost of goods sold 4,753 46,674 28,069 (2,511) 76,985
-------- -------- -------- -------- --------
Gross profit 1,282 12,125 8,726 -- 22,133
Selling, general, and administrative
expenses 5,396 7,447 5,680 18,523
Asset writedowns -- -- 7,781 7,781
-------- -------- -------- -------- --------
Operating (loss) income (4,114) 4,678 (4,735) -- (4,171)
Interest expense 286 675 2,695 3,656
Interest (income) -- -- 30 30
Other expense (income) 212 (710) (944) (1,442)
Intercompany allocation (4,473) 4,167 306 --
Loss (profit) relating to subsidiaries 7,540 -- -- (7,540) --
-------- -------- -------- -------- --------
(Loss) income before income taxes (7,679) 546 (6,822) 7,540 (6,415)
Provision for income taxes 156 149 1,115 1,420
-------- -------- -------- -------- --------
Net (loss) income $ (7,835) $ 397 $ (7,937) $ 7,540 $ (7,835)
======== ======== ======== ======== ========
16
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Six Months Ended December 31, 2002
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Net sales $13,143 $115,016 $73,275 $(5,275) $196,159
Cost of goods sold 10,540 89,487 57,470 (5,275) 152,222
------- -------- ------- ------- --------
Gross profit 2,603 25,529 15,805 -- 43,937
Selling, general, and administrative
expenses 9,754 14,921 11,294 35,969
Asset writedowns
-- 7,781 7,781
------- -------- ------- ------- --------
Operating (loss) income (7,151) 10,608 (3,270) -- 187
Interest expense 672 1,487 6,001 8,160
Interest income (1) -- (95) (96)
Other expense (income) 309 (571) (1,490) (1,752)
Intercompany allocation (8,641) 8,335 306 --
Loss (profit) relating to subsidiaries 8,346 -- -- (8,346) --
------- -------- ------- ------- --------
(Loss) income before income taxes (7,836) 1,357 (7,992) 8,346 (6,125)
Provision for income taxes 156 226 1,485 1,867
------- -------- ------- ------- --------
Net (loss) income $(7,992) $ 1,131 $(9,477) $ 8,346 $ (7,992)
======= ======== ======= ======= ========
17
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Six Months Ended December 31, 2002
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (7,992) $ 1,131 $ (9,477) $ 8,346 $ (7,992)
Adjustments to reconcile net (loss)
income to cash provided by
operating activities:
Depreciation and amortization 750 2,859 4,416 8,025
Asset writedowns -- -- 7,781 7,781
Other 189 (75) 194 308
Changes in operating assets and liabilities:
Accounts receivable 383 3,301 426 4,110
Inventory (723) (8,617) 4,479 (4,861)
Prepaid expenses and other 1,500 1,152 (1,098) 1,554
Other assets (849) (145) (113) (1,107)
Intercompany 15,913 (7,489) (78) (8,346) --
Accounts payable 722 16,004 1,262 17,988
Accrued expenses and other (1,740) (2,212) 5,588 1,636
-------- -------- -------- -------- --------
Net cash provided by
operating activities 8,153 5,909 13,380 -- 27,442
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures -- (2,606) (4,745) (7,351)
Proceeds from sales of assets -- 2,472 3,484 5,956
Other investing -- -- -- --
-------- -------- -------- -------- --------
Net cash used in
investing activities -- (134) (1,261) -- (1,395)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft 479 (4,141) (1,689) (5,351)
Net decrease in short term debt (4,616) -- 1,190 (3,426)
Proceeds from long term debt -- -- 1,660 1,660
Payments of long term debt (4,342) (262) (7,148) (11,752)
-------- -------- -------- -------- --------
Net cash used in
financing activities (8,479) (4,403) (5,987) -- (18,869)
-------- -------- -------- -------- --------
Effect of exchange rate changes
on cash -- (19) 210 191
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (326) 1,353 6,342 -- 7,369
Cash and cash equivalents
at beginning of year 457 652 5,310 6,419
-------- -------- -------- -------- --------
Cash and cash equivalents
at end of year $ 131 $ 2,005 $ 11,652 $ -- $ 13,788
======== ======== ======== ======== ========
18
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of June 30, 2002
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 457 $ 130 $ 5,832 $ 6,419
Trade receivables 3,150 28,671 33,340 65,161
Other receivables 392 855 2,665 3,912
Inventory 2,707 44,929 45,881 93,517
Prepaid expenses and other 3,010 2,460 10,495 15,965
-------- -------- -------- --------- ---------
Total current assets 9,716 77,045 98,213 -- 184,974
-------- -------- -------- --------- ---------
Property, plant & equipment, net 409 29,781 54,540 84,730
Intangibles 32 1,495 11,673 13,200
Investment in subsidiaries 82,540 3,621 -- (86,161) --
Intercompany 73,359 (36,074) (5,240) (32,045) --
Other assets 9,738 1,918 1,884 13,540
-------- -------- -------- --------- ---------
Total assets $175,794 $ 77,786 $161,070 $(118,206) $ 296,444
======== ======== ======== ========= =========
Liabilities and Stockholders' Deficit
Current Liabilities:
Cash overdraft $ 576 $ 5,502 $ 1,689 $ 7,767
Loan payable to banks 37,991 -- 3,544 41,535
Current portion of long term debt 3,216 530 5,105 8,851
Accounts payable 1,024 24,716 16,540 42,280
Accrued expenses and other 7,579 8,092 18,409 34,080
-------- -------- -------- --------- ---------
Total current liabilities 50,386 38,840 45,287 -- 134,513
-------- -------- -------- --------- ---------
Long term debt 127,643 (68,271) 109,314 (32,045) 136,641
Other liabilities 2,352 6,156 21,369 29,877
Redeemable securities:
Series B and C preferred stock 56,602 -- -- 56,602
Stockholders' Deficit
Series A preferred stock 521 -- -- 521
Common stock 2 32 -- (32) 2
Paid in capital 740 110,885 8,166 (119,051) 740
Retained earnings (49,652) (10,271) (9,852) 20,123 (49,652)
Accumulated other comprehensive income (loss)-
gain (loss) on derivative instruments 1,062 384 678 (1,062) 1,062
cumulative currency translation adjustment (13,862) 31 (13,892) 13,861 (13,862)
-------- -------- -------- --------- ---------
Total stockholders' deficit (61,189) 101,061 (14,900) (86,161) (61,189)
-------- -------- -------- --------- ---------
Total liabilities and deficit $175,794 $ 77,786 $161,070 $(118,206) $ 296,444
======== ======== ======== ========= =========
19
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended December 31, 2001
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 6,071 $56,267 $42,994 $(7,345) $97,987
Cost of goods sold 4,765 43,123 33,149 (7,345) 73,692
------- ------- ------- ------- -------
Gross profit 1,306 13,144 9,845 -- 24,295
Selling, general, and administrative
expenses 4,120 8,308 7,253 19,681
------- ------- ------- ------- -------
Operating (loss) income (2,814) 4,836 2,592 -- 4,614
Interest expense 521 635 3,518 4,674
Interest income (13) -- (220) (233)
Other (income) expense (421) (12) 1,653 1,220
Intercompany allocation (3,942) 3,942 -- --
Loss (profit) relating to subsidiaries 2,225 -- -- (2,225) --
------- ------- ------- ------- -------
(Loss) income before income taxes (1,184) 271 (2,359) 2,225 (1,047)
Provision (benefit) for income taxes 515 544 (407) 652
------- ------- ------- ------- -------
Net (loss) income $(1,699) $ (273) $(1,952) $ 2,225 $(1,699)
======= ======= ======= ======= =======
20
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Six Months Ended December 31, 2001
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Net sales $13,179 $107,861 $85,398 $(13,792) $192,646
Cost of goods sold 10,397 84,284 66,997 (13,792) 147,886
------- -------- ------- -------- --------
Gross profit 2,782 23,577 18,401 -- 44,760
Selling, general, and administrative
expenses 7,857 16,850 14,030 38,737
------- -------- ------- -------- --------
Operating (loss) income (5,075) 6,727 4,371 -- 6,023
Interest expense 1,195 1,568 6,554 9,317
Interest income (10) -- (293) (303)
Other (income) expense (304) 7 1,322 1,025
Intercompany allocation (4,935) 4,935 -- --
Loss (profit) relating to subsidiaries 3,323 -- -- (3,323) --
------- -------- ------- -------- --------
(Loss) income before income taxes (4,344) 217 (3,212) 3,323 (4,016)
(Benefit) provision for income taxes (280) 864 (536) 48
------- -------- ------- -------- --------
Net (loss) income $(4,064) $ (647) $(2,676) $ 3,323 $ (4,064)
======= ======== ======= ======== ========
21
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Six Months Ended December 31, 2001
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (4,064) $ (647) $ (2,676) $ 3,323 $ (4,064)
Adjustments to reconcile net (loss)
income to cash (used in) provided by
operating activities:
Depreciation and amortization 532 2,643 4,869 8,044
Other (190) 286 1,570 1,666
Changes in operating assets and liabilities:
Accounts receivable 1,292 3,692 6,984 11,968
Inventory (587) (2,931) (10,409) (13,927)
Prepaid expenses and other 727 863 (1,962) (372)
Other assets 185 (587) (105) (507)
Intercompany (8,599) 3,535 8,387 (3,323) --
Accounts payable (608) (1,726) 116 (2,218)
Accrued expenses and other 410 (3,337) 6,641 3,714
-------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities (10,902) 1,791 13,415 -- 4,304
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures (72) (2,368) (4,194) (6,634)
Acquisition of a business -- -- (4,422) (4,422)
Other investing (541) 412 91 (38)
-------- -------- -------- -------- --------
Net cash used in
investing activities (613) (1,956) (8,525) -- (11,094)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft 15 817 (81) 751
Net increase (decrease)
in short term debt 12,570 -- (2,168) 10,402
Proceeds from long term debt 2,000 -- 42 2,042
Payments of long term debt (2,524) (242) (1,197) (3,963)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 12,061 575 (3,404) -- 9,232
-------- -------- -------- -------- --------
Effect of exchange rate changes
on cash -- -- 29 29
-------- -------- -------- -------- --------
Net increase in cash and
cash equivalents 546 410 1,515 -- 2,471
Cash and cash equivalents
at beginning of year 1,292 700 12,853 14,845
-------- -------- -------- -------- --------
Cash and cash equivalents
at end of year $ 1,838 $ 1,110 $ 14,368 $ -- $ 17,316
======== ======== ======== ======== ========
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of specialty agricultural and industrial chemicals, which are sold
world-wide for use in numerous markets, including animal health and nutrition,
agriculture, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company also provides recycling and hazardous waste services
primarily to the electronics and metal treatment industries. These operations
are classified into four segments: Animal Health and Nutrition; Industrial
Chemicals; Distribution; and, All Other.
The Company recorded operating income of $.2 million for the six months
ended December 31, 2002. Excluding an asset writedown of $7.8 million related to
the Company's Odda operations, operating income was $8.0 million for the six
months ended December 31, 2002, compared to an operating income of $6.0 million
in the prior year six-month period. The year-to-year comparison was also
affected by purchase accounting adjustments relating to inventory acquired in
the acquisition of the Phibro Animal Health ("PAH") business in November 2000,
that resulted in a $2.9 million increase to cost of goods sold for the six
months ended December 31, 2001.
At December 31, 2002, the Company was in compliance with the financial
covenants included in its amended domestic senior credit facility ("credit
facility") with its lending banks. During fiscal 2003, the Company amended the
credit facility and obtained a waiver for noncompliance at June 30, 2002. In
addition, the Company entered into an agreement with its Norwegian banks to
restructure loans and to obtain a waiver for noncompliance at June 30, 2002.
Further, the Company entered into an agreement with Pfizer whereby Pfizer agreed
to defer until March 1, 2004, without interest, unpaid contingent purchase price
amounts existing at May 31, 2002 and to waive contingent purchase price payments
on future net revenues from June 1, 2002 through March 1, 2004.
In November 2002, the Company announced a temporary shutdown of the Odda
facility due to continuing operating losses, higher than planned operating costs
and delays in the market acceptance of calcium oxide, a by-product of the
manufacturing process to produce dicyandiamide. Various alternatives are under
consideration by the Company including complete shutdown. The Company recorded
an asset write-down charge of $7.8 million at December 31, 2002 to reflect
impairment of long-lived assets at the Odda facility. Long-lived assets at Odda
have now been reduced to their estimated salvage values.
The Company continues to carry a cumulative translation adjustment of
$6,314 related to Odda's operations. Pending management's ultimate decision on
the future of Odda, such amount may be charged to operating results.
In light of continued declines in the printed circuit board business in
the United States, during the second quarter of fiscal 2003, Phibro-Tech
disposed of that portion of its ammoniacal etchant business associated with its
Joliet, Illinois and Sumter, South Carolina facilities. The transaction included
the migration of the customers of such business to the purchaser and the
exclusive license to the purchaser of know-how for the fresh ammoniacal etchant
sold in certain states. No manufacturing facilities, equipment or inventory was
included in the transaction. The purchaser has agreed to pay future royalties
based on sales levels exceeding certain specified minimums. The gain on the
transaction was not material.
Certain prior year amounts have been reclassified to conform to the fiscal
2003 presentation. Freight and warehousing expenses of $7.0 million and $13.6
million for the three and six months ended December 31, 2001, respectively, were
reclassified from general and administrative expenses to cost of goods sold.
Results of Operations
Sales
($000's)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -----------------
Operating Segments 2002 2001 2002 2001
---- ---- ---- ----
Animal Health and Nutrition .. $67,368 $64,013 $128,271 $123,366
Industrial Chemicals ......... 16,451 21,868 36,666 42,879
Distribution ................. 9,393 8,825 19,317 18,814
All Other .................... 9,664 9,073 19,838 19,020
Elimination of inter-segment
sales ...................... (3,758) (5,792) (7,933) (11,433)
------- ------- -------- --------
$99,118 $97,987 $196,159 $192,646
======= ======= ======== ========
23
Operating Income (Loss)
($000's)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
Operating Segments 2002 2001 2002 2001
---- ---- ---- ----
Animal Health and Nutrition .. $ 11,457 $10,259 $ 21,159 $17,624
Industrial Chemicals ......... (11,616) (2,542) (13,726) (6,742)
Distribution ................. 824 751 1,567 1,589
All Other .................... (703) (229) (618) (110)
Corporate expenses and
eliminations ............... (4,133) (3,625) (8,195) (6,338)
-------- ------- -------- -------
$ (4,171) $ 4,614 $ 187 $ 6,023
======== ======= ======== =======
Comparison of Three Months Ended December 31, 2002 and 2001
Net Sales. Net sales increased by $1.1 million, or 1%, to $99.1 million in
the three months ended December 31, 2002, as compared to the same period of the
prior year. The increase was primarily due to higher sales in the Animal Health
segment offset in part by declines in the Industrial Chemicals segment.
The Animal Health and Nutrition segment's net sales increased by $3.4
million, or 5%, to $67.4 million for the three months ended December 31, 2002.
The Company's PAH operations improved due to higher unit volume sales of its
antibacterial and anticoccidial products offset in part by lower average selling
prices. Higher revenues were also recorded at the Company's Prince Agri
operations due to higher unit volumes associated with its core inorganic
materials, trace mineral premixes and other specialty ingredients. The Company's
Koffolk sales also improved due to sales of its core organic materials.
The Industrial Chemicals segment's net sales decreased by $5.4 million, or
25%, to $16.5 million in the three months ended December 31, 2002 as compared to
the prior period. The Company's Odda revenues declined by $5.4 million due to
discontinued production and sale of the CY-50 and calcium carbide product lines
in the fourth quarter of fiscal year 2002. In addition, in the quarter ended
December 31, 2002 Odda began a temporary shutdown of production which reduced
sales of its remaining dicyandiamide product line. Sales by the Company's
Phibro-Tech subsidiary decreased slightly from the prior year. During the
quarter ended December 31, 2002, Phibro-Tech disposed of its etchant business
operated out of the Joliet, Illinois and Sumter, South Carolina facilities.
Phibro-Tech will maintain its existing etchant business at its other facilities.
The Company's Prince operations reported slightly higher sales due to
improvements in average selling prices during the current fiscal quarter.
Net sales for the Distribution segment increased by $.6 million, or 6%, to
$9.4 million in 2002, as compared to the prior period. Improved performance in
the Company's Ferro operations were offset by lower carbide sales, related to
the discontinuance of carbide production at Odda.
Net sales for the All Other segment increased by $.6 million, or 7%, to
$9.7 million in 2002, as compared to the prior period. The Company's fly ash
business increased revenues by approximately $.8 million due to higher unit
volumes offset in part by declines in average selling prices. A decrease in
specialized lab projects and formulations at the segment's U.K. operations
lowered revenues by $.2 million.
Gross Profit. Gross profit decreased by $2.2 million, or 9%, to $22.1
million in the three months ended December 31, 2002, as compared to the prior
period. Purchase accounting adjustments relating to inventory acquired in the
PAH acquisition resulted in an increase to cost of goods sold of $0 and $.9
million for the three months ended December 31, 2002 and 2001, respectively.
Excluding the purchase accounting adjustments, gross profit decreased by
approximately $.4 million in the Animal Health segment primarily due to lower
average selling prices. The Industrial Chemicals segment decreased by
approximately $3.4 million primarily due to lower revenues and higher production
costs at the Company's Odda facility, lower revenues and higher production costs
at Phibro-Tech facilities, offset in part by higher margins at the Company's
Prince Manufacturing operations. The Distribution segment increased $.1 million
primarily as a result of lower material costs and product mix. The All Other
segment declined by approximately $.2 million primarily due to higher freight
and warehousing costs associated with the Company's fly ash operations and
decreases in specialized lab projects and formulations at the Company's U.K.
operations. Elimination of inter-company profit in inventory accounted for the
remainder.
24
Selling, General and Administrative Expenses. Costs decreased by $1.2
million, or 6% to $18.5 million in 2002, as compared to the prior period. Costs
declined primarily at the Company's Phibro-Tech, Koffolk and Odda operations due
to cost reduction programs and lower levels of production activity. Corporate
expenses increased due to increased staff levels and costs related to debt
restructuring activities.
Asset Write-down. During the quarter ended December 31, 2002, the Company
recorded a charge of $7.8 million related to the impairment of long-lived assets
at the Company's Odda, Norway operations. (See Note 5 to the Condensed
Consolidated Financial Statements).
Operating (Loss) Income. Operating income decreased by $8.8 million to a
loss of $4.2 million in 2002, as compared to the prior period. The Animal Health
and Nutrition segment, after the exclusion of purchase accounting adjustments in
fiscal 2002, increased due to higher unit volumes and cost reductions. The
Industrial Chemicals segment worsened due to asset impairment charges at the
Company's Odda facilities offset in part by lower general and administrative
expenses at Phibro-Tech and also higher sales and production volumes at Prince
Manufacturing. The Company's Distribution segment approximated the prior year.
The All Other segment declined from the prior period due to higher costs at MRT
and sales decreases at the Company's U.K. operations.
Interest Expense, Net. Costs decreased by $.8 million or 17% to $3.7
million for the three months ended December 31, 2002 as compared to the prior
period primarily due to lower interest rates offset in part by slightly higher
average borrowing levels.
Other (Income) Expense, Net. Other (income) expense, net principally
reflects foreign currency transaction/translation gains and losses of the
Company's foreign subsidiaries (principally Norwegian Kroner and the Israeli
Shekel). In addition, the Company recognized a gain of $.6 million resulting
from a class action litigation against European vitamin manufacturers. The
Company also recorded a gain of $.4 million on a power purchase derivative
instrument at its Odda facility.
Income Taxes. An income tax provision of $1.4 million was reported on a
consolidated pre-tax loss of $6.4 million in fiscal 2003 primarily due to income
tax provisions in profitable foreign jurisdictions and also for state income
taxes. In addition, domestic pre-tax income was recorded without a tax provision
due to the utilization of net operating loss carryforwards with a full valuation
allowance. The Company's Odda losses were not given any tax benefit. The Company
continues to carry a full valuation allowance on its domestic, Brazilian and
Norwegian operating losses. These deferred tax assets will continue to be
evaluated each reporting period based on actual and expected operating
performance.
Comparison of Six Months Ended December 31, 2002 and 2001
Net Sales. Net sales increased by $3.5 million, or 2%, to $196.2 million
in the six months ended December 31, 2002, as compared to the same period of the
prior year. The increase was primarily due to higher sales in the Animal Health
and Nutrition segment offset in part by declines in the Industrial Chemical
segment.
The Animal Health and Nutrition segment's net sales increased by $4.9
million, or 4% to $128.3 million for the six months ended December 31, 2002. The
Company's PAH operations improved due to higher unit volume sales of its
antibacterial products offset in part by lower average selling prices. Higher
revenues were also recorded at the Company's Prince Agri operations due to
higher unit volumes associated with its core inorganic materials, trace mineral
premixes and other specialty ingredients. The Company's Koffolk sales declined
due to unfavorable currency impacts at its Brazilian subsidiary offset in part
by improved sales of its core organic materials.
The Industrial Chemicals segment's net sales decreased by $6.2 million, or
14%, to $36.7 million in the six months ended December 31, 2002 as compared to
the prior period. The Company's Odda subsidiary revenues declined by $8.2
million due to discontinued production and sale of the CY-50 and calcium carbide
product lines in the fourth quarter of fiscal 2002. In addition, in the quarter
ended December 31, 2002 Odda began a temporary shutdown of operations that
reduced sales of its remaining dicyandiamide product line. Sales by the
Company's Phibro-Tech subsidiary increased by $1.3 million due to increased unit
volumes over the prior year comparable period. During the quarter ended December
31, 2002, Phibro-Tech divested its etchant business operated out of the Joliet,
Illinois and Sumter, South Carolina facilities. Phibro-Tech will maintain its
existing etchant business at its other facilities. The Company's Prince
operations reported higher sales due to improvements in average selling prices
during the current period.
25
Net sales for the Distribution segment increased by $.5 million, or 3%, to
$19.3 million in 2002, as compared to the prior period. Improved performance in
the Company's Ferro operations were offset by lower carbide sales, related to
the discontinuance of carbide production at Odda.
Net sales for the All Other segment increased by $.8 million, or 4%, to
$19.8 million in 2002, as compared to the prior period. The Company's fly ash
business increased revenues by approximately $1.6 million due to higher unit
volumes offset in part by declines in average selling prices. A decrease in
specialized lab projects and formulations at the segment's U.K. operations
lowered revenues by $.6 million. Lower sales of crop protection chemicals
accounted for the balance of the decrease.
Gross Profit. Gross profit decreased by $.8 million, or 2%, to $43.9
million in the six months ended December 31, 2002, as compared to the prior
period. Purchase accounting adjustments relating to inventory acquired in the
PAH acquisition resulted in an increase to cost of goods sold of $0 and $2.9
million for the six months ended December 31, 2002 and 2001, respectively.
Excluding the purchase accounting adjustments, gross profit decreased by
approximately $.2 million in the Animal Health segment primarily due to lower
average selling prices. The Industrial Chemicals segment decreased by
approximately $3.2 million primarily due to lower revenues and higher production
costs at the Company's Odda facility; lower revenues and higher production costs
at Phibro-Tech facilities, offset in part by higher margins at the Company's
Prince Manufacturing operations. The Distribution segment approximated the prior
year. The All Other segment declined by approximately $.5 million primarily due
to higher freight and warehouse costs associated with the Company's fly ash
operations and decreases in specialized lab projects and formulations at the
segment's U.K. facility. Elimination of inter-company profit in inventory
accounted for the remainder.
Selling, General and Administrative Expenses. Costs decreased by $2.8
million, or 7% to $36.0 million in 2002, as compared to the prior period. Costs
declined primarily at the Company's Phibro-Tech, Koffolk and Odda operations due
to cost reduction programs and lower levels of production activity. The prior
period included a $.4 million non-cash gain to reflect the decrease in
repurchase value of redeemable common stock of a minority shareholder; no amount
was recorded in the current period. Corporate expenses increased due to
increased staff levels and costs related to debt restructuring activities.
Asset Write-down. During the quarter ended December 31, 2002, the Company
recorded a charge of $7.8 million related to the impairment of long-lived assets
at the Company's Odda, Norway operations. (See Note 5 to the Condensed
Consolidated Financial Statements).
Operating (Loss) Income. Operating income decreased by $5.8 million to $.2
million in 2002, as compared to the prior period. The Animal Health and
Nutrition segment, after the exclusion of purchase accounting adjustments in
fiscal 2002, increased due to higher unit volumes. The Industrial Chemicals
segment worsened due to asset impairment charges at the Company's Odda
facilities offset in part by lower general and administrative costs at the
Company's Phibro-Tech facilities. The Company's Distribution segment
approximated the prior year. The All Other segment declined from the prior
period due to higher costs at MRT and sales decreases at the Company's U.K.
facility.
Interest Expense, Net. Costs decreased by $.9 million or 11% to $8.1
million for the six months ended December 31, 2002 as compared to the prior
period primarily due to lower interest rates offset in part by slightly higher
average borrowing levels.
Other (Income) Expense, Net. Other (income) expense, net principally
reflects foreign currency transaction/translation gains and losses of the
Company's foreign subsidiaries (principally Norwegian Kroner and the Israeli
Shekel). In addition, the Company recognized a gain of $.6 million resulting
from a settlement of a class action against European vitamin manufacturers. The
Company also recorded a gain of $1.1 million on a power purchase derivative
instrument at its Odda facility.
Income Taxes. An income tax provision of $1.9 million was reported on a
consolidated pre-tax loss of $9.6 million in fiscal 2003 primarily due to income
tax provisions in profitable foreign jurisdictions and also for state income
taxes. In addition, domestic pre-tax income was recorded without a tax provision
due to the utilization of net operating loss carryforwards with a full valuation
allowance. The Company's Odda facility losses were not given any tax benefit.
The Company continues to carry a full valuation allowance on its domestic,
Brazilian and Norwegian operating losses. These deferred tax assets will
continue to be evaluated each reporting period based on actual and expected
operating performance.
26
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Cash provided by operations for
the six months ended December 31, 2002 and 2001 was $27.4 million and $4.3
million, respectively. Cash provided by operating activities increased in the
six months ended December 31, 2002, compared with the six months ended December
31, 2001, primarily due to improvements in working capital management.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the six months ended December 31, 2002 and 2001 was $1.4 million
and $11.1 million, respectively. Capital expenditures of $7.4 million and $6.6
million in the respective 2002 and 2001 periods, were for new product
development, maintaining the Company's existing asset base and for
environmental, health and safety projects. Proceeds of $6.0 million from sales
of certain fixed assets of Odda and certain assets of its Phibro-tech etchant
business accounted for the remainder of cash provided by investing activities.
Net Cash (Used In) Provided by Financing Activities. Net cash (used in)
provided by financing activities for the six months ended December 31, 2002 and
2001 was ($18.9) million and $9.2 million, respectively. Borrowings under the
domestic revolving credit facility and other long-term debt were reduced in
fiscal 2003 from cash generated by operating activities.
Liquidity. At December 31, 2002, the Company was in compliance with the
financial covenants included in its amended domestic senior credit facility
("credit facility") with its lending banks. The credit facility was amended in
October 2002 to: waive noncompliance with financial covenants as of June 30,
2002; amend financial covenants prospectively until maturity; amend the
borrowing base formula and also reduce maximum availability under the revolving
credit portion of the facility from $70 million to $55 million; limit borrowings
under the capital expenditure line of the facility outstanding balance as of the
amendment date; and revise the interest rate to 1.5% to 1.75% per annum over the
base rate (as defined in the agreement). Management believes that the reduced
maximum availability and the revised borrowing base formula under the revolving
credit portion of the credit facility will not affect the Company's ability to
meet its cash requirements during fiscal 2003.
The Company's ability to fund its operating plan relies upon continued
availability of the credit facility which, in turn, requires the Company to
maintain compliance with the amended financial covenants. The Company believes
that it will be able to comply with the terms of the amended covenants based on
its forecasted operating plan. In the event of adverse operating results and
resultant violation of the covenants, through the remaining term of the
financing agreement (see below), the Company cannot be certain it will be able
to obtain waivers or amendments on favorable terms, if at all.
The Company's credit facility and its note payable to Pfizer mature in
November 2003 and March 2004, respectively. The Company may not have sufficient
cash resources to repay this debt and management has undertaken actions to
improve the Company's operating performance and overall liquidity in order to
reduce debt levels and allow for ultimate refinancing of this debt in fiscal
2004. These actions include cost reduction activities, working capital
improvement programs, shutdown of unprofitable operations, and possible sale of
certain business operations and other assets. The Company has completed the sale
of certain fixed assets of Odda and certain assets of its Phibro-tech etchant
business during the second quarter of fiscal year 2003 for aggregate proceeds of
$5,956. The Company is actively pursuing the sale of certain business operations
to generate cash for debt repayment. However, there can be no assurance that
such sales will be completed on terms acceptable to the Company, and there are
no disposal transactions which the Company considers probable at December 31,
2002. Disposal transactions could result in recording losses for financial
statement purposes.
The Company intends to refinance its current credit facility and the
Pfizer note payable. The ability to refinance such debt on terms acceptable to
the Company is, among other things, dependent upon the success of the management
actions referred to above. There can be no assurance that the Company will be
able to refinance such debt on terms acceptable to the Company. The inability to
refinance the debt on terms acceptable to the Company would have a material
adverse impact on the Company's financial position, results of operations, and
cash flow.
In October 2002, the Company entered into an agreement with Pfizer whereby
Pfizer agreed to defer until March 1, 2004, without interest, unpaid contingent
purchase price amounts existing at May 31, 2002 and to waive contingent purchase
price payments on future net revenues from June 1, 2002 through March 1, 2004.
In October 2002, Odda entered into an agreement with its Norwegian banks
to restructure these loans and to obtain a waiver for non-compliance of its
financial covenants. The agreement establishes a periodic payment schedule
through November 30, 2003. Philipp Brothers Chemicals, Inc. is the guarantor of
certain portions of this debt.
27
Working capital as of December 31, 2002 was $52.8 million compared to
$50.5 million at fiscal year end June 30, 2002. At December 31, 2002, the amount
of credit extended under the Company's credit facility totaled $33.4 million and
the Company had $7.9 million available under the borrowing base formula in
effect under the credit facility. In addition, certain of the Company's foreign
subsidiaries also had availability totaling $7.3 million under their respective
loan agreements.
The Company anticipates spending approximately $10.4 million for capital
expenditures in fiscal 2003, primarily to cover the Company's asset replacement
needs, improve processes, and for environmental and regulatory compliance,
subject to the availability of funds.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
The Company's significant accounting policies are described in Note 1 to
the Consolidated Financial Statements for the fiscal year ended June 30, 2002
and critical accounting policies are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations. Not all of these
significant accounting policies require management to make difficult, subjective
or complex judgments or estimates. However, management of the Company is
required to make certain estimates and assumptions during the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America. These estimates and
assumptions impact the reported amount of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the consolidated
financial statements. Estimates and assumptions are reviewed periodically and
the effects of revisions are reflected in the period they are determined to be
necessary. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include inventory valuation, allowance for doubtful accounts, useful
lives of tangible and intangible assets and various other operating allowances
and accruals.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred rather than
at the date of a commitment to an exit or disposal plan. Costs covered by SFAS
No. 146 include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing
or other exit or disposal activity. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The Company does
not expect the adoption of SFAS No. 146 to have a material impact on the
financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN No. 45 are required for financial statements of periods ending after
December 15, 2002. The initial measurement provisions of FIN No. 45 are
applicable on a prospective basis for guarantees issued or modified after
December 31, 2002. The Company does not expect the adoption of FIN No. 45 to
have a significant impact on the financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 requires consolidation by business enterprises of variable
interest entities (commonly referred to as special purpose entities), which meet
certain characteristics. FIN No. 46 applies to variable interest entities
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after January 31, 2003. The Company does not
expect the adoption of FIN No. 46 to have an impact on the financial statements.
28
Seasonality of Business
There is some seasonality in the Company's results as sales of certain
industrial chemicals to the wood treatment industry as well as sales of coal fly
ash are typically highest during the peak construction periods of the first and
fourth fiscal quarters.
Quantitative and Qualitative Disclosure About Market Risk
For financial market risks related to changes in interest rates, foreign
currency exchange rates and commodity prices, reference is made to Part II, Item
7, Quantitative and Qualitative Disclosure About Market Risk, in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002 and to Note
14 to the Consolidated Financial Statements of the Company included therein.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among other factors
noted herein, the following: the Company's substantial leverage and potential
inability to service its debt; the Company's dependence on distributions from
its subsidiaries; risks associated with the Company's international operations;
the Company's dependence on its Israeli operations; competition in each of the
Company's markets; potential environmental liability; extensive regulation by
numerous government authorities in the United States and other countries;
significant cyclical price fluctuation for the principal raw materials used by
the Company in the manufacture of its products; the Company's reliance on the
continued operation and sufficiency of its manufacturing facilities; the
Company's dependence upon unpatented trade secrets; the risks of legal
proceedings and general litigation expenses; potential operating hazards and
uninsured risks; the risk of work stoppages; the Company's dependence on key
personnel; and the uncertain impact of the Company's divestiture plans. See also
the discussion under "Risks and Uncertainties" in Note 3 of the Notes to
Condensed Consolidated Financial Statements included in this Report and matters
referred to throughout Item 1of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
In addition, the issue of the potential for increased bacterial resistance
to certain antibiotics used in certain food-producing animals is the subject of
discussions on a worldwide basis and, in certain instances, has led to
government restrictions on the use of antibiotics in these food-producing
animals. The sale of feed additives containing antibiotics is a material portion
of the Company's business. Should regulatory or other developments result in
further restrictions on the sale of such products, it could have a material
adverse impact on the Company's financial position, results of operations and
cash flows.
On February 14, 2003, the Company was advised that the Joint Expert
Committee on Food Additives of the Food and Agricultural Organization of the
United Nations and the World Health Organization ("JECFA"), at its meeting held
February 6-12, 2003, had determined to withdraw the maximum residue limits
("MRL's") for Carbadox. It is not known at this time whether any national
regulatory authorities will adopt this determination, which could result in
reduced overall sales of the product. Carbadox is a significant product for the
Company's Phibro Animal Health business. The Company is presently assessing the
impact of this determination on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Disclosure
About Market Risk."
Item 4. Control and Procedures
(a) Based upon an evaluation by the Company's Chief Executive Officer,
Chairman of the Board and Chief Financial Officer within 90 days prior to
the filing date of this Quarterly Report on Form 10-Q they have concluded
that the Company's disclosure controls and procedures as defined in Rule
15d-14(c) under the Securities Exchange Act of 1934, as amended, are
effective for gathering, analyzing and disclosing information contained in
the Company's periodic reports provided to the Securities and Exchange
Commission.
(b) Since the date of the most recent evaluation of the Company's internal
controls, there have been no significant changes in such internal controls
or in other factors that could significantly affect these controls nor
were there any corrective actions with regard to significant deficiencies
and material weaknesses.
29
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
On or about April 17, 1997, Philipp Brothers Chemicals, Inc. ("Philipp
Brothers") and CP Chemicals, Inc. ("CP") were served with a complaint filed by
Chevron USA, Inc. ("Chevron") in the United States District Court for the
District of New Jersey, alleging that operations of CP at its Sewaren plant
affected adjoining property owned by Chevron and that Philipp Brothers, as the
parent of CP, is also responsible to Chevron. In July 2002, a phased settlement
agreement was reached under which the Company and another defendant will,
subject to certain conditions, take title to the property, subject to a period
of due diligence investigation of the property. The Company's portion of the
settlement for past costs and expenses is $495 and is included in selling,
general and administrative expenses in the June 30, 2002 statement of operations
and comprehensive income. The payable of $495 is included in accrued expenses
and other current liabilities as of June 30, 2002 and was subsequently paid in
July 2002. The Company and the other defendant will, if the sale becomes final,
share equally in the costs of remediation. While the costs cannot be estimated
at this time, the Company believes the costs will not be material and insurance
recoveries will be available to offset some of those costs.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
None.
(b) Reports on Form 8-K.
None.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
Date: February 14, 2003 By: /s/ JACK C. BENDHEIM
-----------------------------------
Jack C. Bendheim
Chairman of the Board
Date: February 14, 2003 By: /S/ GERALD K. CARLSON
-----------------------------------
Gerald K. Carlson
Chief Executive Officer
Date: February 14, 2003 By: /s/ RICHARD G. JOHNSON
-----------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
31
CERTIFICATIONS
I, Gerald K. Carlson, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
/s/Gerald K. Carlson
- ----------------------------
Gerald K. Carlson,
Chief Executive Officer
32
I, Jack C. Bendheim, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
/s/Jack C. Bendheim
- ------------------------------------
Jack C. Bendheim,
Chairman of the Board
33
I, Richard G. Johnson, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Philipp Brothers
Chemicals, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
/s/Richard G. Johnson
- --------------------------------
Richard G. Johnson,
Chief Financial Officer
Since the Company does not have securities registered under Section 12 of
the Securities Exchange Act of 1934 and is not required to file periodic reports
pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company submits periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its senior subordinated notes.
34