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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 March 31, 2003
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 March 31, 2003:
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.................... 25
Item 3. Quantitative and Qualitative
Disclosures About Market Risk ......................... 32
Item 4. Control and Procedures.................................... 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................... 34
Item 5. Other Information........................................ 34
Item 6. Exhibits and Reports on Form 8-K.......................... 34
SIGNATURES ................................................................ 35
CERTIFICATIONS ............................................................ 36
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 Consolidated Financial Statements
3
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
March 31, June 30,
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,031 $ 6,419
Trade receivables, less allowance
for doubtful accounts
of $1,629 at March 31, 2003 and
$1,802 at June 30, 2002 59,902 61,157
Other receivables 2,669 3,184
Inventories 93,312 86,925
Prepaid expenses and other current assets 15,950 15,520
Current assets from discontinued operations 1,693 11,769
--------- ---------
TOTAL CURRENT ASSETS 185,557 184,974
PROPERTY, PLANT AND EQUIPMENT, net 73,368 76,496
INTANGIBLES 11,169 11,789
OTHER ASSETS 12,379 12,753
OTHER ASSETS FROM DISCONTINUED OPERATIONS -- 10,432
--------- ---------
$ 282,473 $ 296,444
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 4,646 $ 7,767
Loans payable to banks 35,215 41,535
Current portion of long-term debt 29,741 8,851
Accounts payable 46,047 39,715
Accrued expenses and other current
liabilities 52,096 29,985
Current liabilities from
discontinued operations 1,148 6,660
--------- ---------
TOTAL CURRENT LIABILITIES 168,893 134,513
LONG-TERM DEBT 103,027 136,641
OTHER LIABILITIES 22,138 28,597
OTHER LIABILITIES FROM DISCONTINUED OPERATIONS -- 1,280
--------- ---------
TOTAL LIABILITIES 294,058 301,031
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 63,129 56,602
--------- ---------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 740 740
Accumulated deficit (66,442) (49,652)
Accumulated other comprehensive (loss) income:
Gain on derivative instruments 51 1,062
Cumulative currency translation adjustment (9,586) (13,862)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (74,714) (61,189)
--------- ---------
$ 282,473 $ 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 Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
NET SALES $ 93,739 $ 88,164 $ 280,614 $ 265,607
COST OF GOODS SOLD 71,018 67,613 211,140 200,438
--------- --------- --------- ---------
GROSS PROFIT 22,721 20,551 69,474 65,169
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(includes income from litigation of
$2,195 and $2,755 for the three months
and nine months ended March 31, 2003,
respectively) 18,453 18,469 51,559 54,265
--------- --------- --------- ---------
OPERATING INCOME 4,268 2,082 17,915 10,904
OTHER:
Interest expense 3,978 4,609 12,138 13,926
Interest income (39) (8) (135) (311)
Other expense, net 112 511 1,317 2,414
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 217 (3,030) 4,595 (5,125)
PROVISION FOR INCOME TAXES 599 806 2,440 1,840
--------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING
OPERATIONS (382) (3,836) 2,155 (6,965)
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations
(net of income taxes) (548) (5,236) (11,077) (6,171)
(Loss) on disposal of discontinued
operations (net of income taxes) (1,342) -- (1,342) --
--------- --------- --------- ---------
NET LOSS (2,272) (9,072) (10,264) (13,136)
OTHER COMPREHENSIVE INCOME (LOSS):
Gain (loss) on derivative instruments 230 109 (1,011) 542
Change in currency translation adjustment 7,930 (984) 4,276 (196)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 5,888 $ (9,947) (6,999) $ (12,790)
========= ========= ========= =========
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 Nine Months Ended March 31, 2003
(In Thousands)
Preferred Common
Stock Stock Accumulated Other
---------- -------------------
Class Class Paid-in Accumulated Comprehensive
Series A "A" "B" Capital Deficit (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)
======== ======== ======== ======== ======== ======== ========
Dividends on Series B and C
redeemable preferred stock (2,282) (2,282)
Gain on derivative
instruments 230 230
Foreign currency translation
adjustment 7,930 7,930
Net loss (2,272) (2,272)
-------- -------- -------- -------- -------- -------- --------
BALANCE, MARCH 31, 2003 $ 521 $ 1 $ 1 $ 740 $(66,442) $ (9,535) $(74,714)
======== ======== ======== ======== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements.
6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2003 and 2002
(In Thousands)
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (10,264) $ (13,136)
Adjustment for discontinued operations 12,419 6,171
--------- ---------
Income (loss) from continuing operations 2,155 (6,965)
Adjustments to reconcile income (loss)
from continuing operations to net
cash provided by operating activities:
Depreciation and amortization 10,891 10,041
Other (488) 3,813
Changes in operating assets and liabilities:
Accounts receivable 1,051 12,308
Inventories (6,069) (16,710)
Prepaid expenses and other current assets (557) (2,544)
Other assets (2,190) (842)
Accounts payable 15,078 (699)
Accrued expenses and other liabilities 5,806 2,450
Cash provided by (used in) discontinued operations 2,970 (438)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,647 414
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (7,778) (7,881)
Acquisition of a business -- (7,182)
Proceeds from sales of assets and other investing 3,321 469
Discontinued operations 1,877 (692)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES
(2,580) (15,286)
--------- ---------
FINANCING ACTIVITIES:
Cash overdraft (3,121) 1,481
Net (decrease) increase in short-term debt (6,012) 15,248
Proceeds from long-term debt 2,125 2,316
Payments of long-term debt (13,720) (4,324)
--------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (20,728) 14,721
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 273 (110)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 5,612 (261)
CASH AND CASH EQUIVALENTS at beginning of period 6,419 14,845
--------- ---------
CASH AND CASH EQUIVALENTS at end of period $ 12,031 $ 14,584
========= =========
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 March 31,
2003 and its results of operations and cash flows for the three months and nine
months ended March 31, 2003 and 2002.
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 nine months ended March
31, 2003 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. Identifiable intangible assets with determinable useful lives will
continue to be amortized. 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. As a result of the adoption
of SFAS No. 144, the Company was required to classify the Odda and Carbide
Industries businesses as discontinued operations.
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 adoption of
SFAS No. 146 did not result in an impact on the Company's 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 adoption of FIN No. 45 did not result in a material
impact on the Company's 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 (including 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
adoption of FIN No. 46 did not result in an impact on the Company's financial
statements.
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company is currently assessing the impact of
this statement.
2. Reclassifications
Freight and warehousing expenses of $6,598, $6,994, $6,428 and $9,245 for
the three months ended September 30, 2001, December 31, 2001, March 31, 2002 and
June 30, 2002, respectively, have been 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,
after reclassifications, are as follows:
12 Months
3 Months 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 1,409 4,614 (3,729) (23,958) (21,664)
(Loss)
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 March 31, 2003, 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
from 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), there can be no assurance that the Company 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 is presently seeking 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,
if at all. 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.
During the second quarter of fiscal year 2003, the Company completed the
sale of certain fixed assets of Odda for proceeds of $3,458 and certain assets
of its Phibro-Tech etchant business for proceeds of $2,530. Subsequent to March
31, 2003 the Company completed the sale of its Carbide Industries business; the
proceeds were not material. The Odda and Carbide Industries businesses are
classified as discontinued operations. The Company is actively pursuing the sale
of certain other 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, if at all. There are no other disposal transactions
which the Company considered probable at March 31, 2003. 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.
10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
The Joint Expert Committee on Food Additives of the Food and Agricultural
Organization of the United Nations and the World Health Organization, at its
meeting held February 6-12, 2003, had determined to withdraw the maximum residue
limits for Carbadox. A final report has not yet been issued. 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 continues to assess the impact of this determination on
the Company.
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 of continuing operations consist of the following:
March 31, 2003 June 30, 2002
-------------- -------------
Raw materials $20,651 $22,387
Work-in-process 1,517 2,098
Finished goods 71,144 62,440
------- -------
Total inventory $93,312 $86,925
======= =======
5. Discontinued Operations
In February 2003 the Company determined that it would permanently shutdown
and no longer fund the operations of its Norwegian subsidiary, Odda Smelteverk
("Odda"). On February 28, 2003, Odda filed for bankruptcy in Norway and the
bankruptcy is proceeding in accordance with Norwegian law. The Company has been
advised that, as a result of the bankruptcy, the creditors of Odda have recourse
only to the assets of Odda, except in the case of certain debt guaranteed by the
Company. The Company has removed all assets, liabilities (except as noted
below), and cumulative translation adjustments related to Odda from the
Company's consolidated balance sheets as of March 31, 2003, and has recorded the
net result as a Loss on disposal of discontinued operations. The Company is the
guarantor of certain debt of Odda under two separate multi-currency revolving
credit facilities. As of March 31, 2003, NOK 41,100 ($5,731) was outstanding
under these facilities and continues to be included in the Loans payable to
banks and Current portion of long-term debt captions on the Company's
consolidated balance sheets at March 31, 2003. The Company has entered into
forebearance agreements with the two banks holding guarantees from the Company
for the debt of Odda under which the banks have agreed not to demand immediate
payment on those guarantees, and the Company has agreed to pay the principal
amount plus interest in installments. The Company has been advised by Norwegian
counsel that it will obtain the benefit of the banks' position as a secured
creditor upon payment pursuant to the guarantees. The Company has obtained the
consent of a majority of the holders of its outstanding Senior Subordinated
Notes due 2008 to amend the Indenture governing these notes in such a manner
that the bankruptcy of Odda does not create an event of default thereunder.
In February 2003 the Company decided to sell its Carbide Industries
business in the U.K. which had been a sales distributor for one of Odda's
product lines. Subsequent to March 31, 2003, the Company completed the sale of
the Carbide Industries business. Odda was included in the Company's Industrial
Chemicals segment and Carbide Industries was included in the Company's
Distribution segment.
The Company's consolidated financial statements have been reclassified to
report separately the operating results, financial position, and cash flows of
the discontinued operations. Prior year financial statements have been restated
to conform with the fiscal year 2003 presentation of discontinued operations.
11
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Operating results and loss on disposal of the discontinued operations are
as follows:
3 Months Ended 9 Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
OPERATING RESULTS:
Net sales $ 1,933 $10,736 $ 12,890 $30,453
Cost of goods sold 1,623 14,748 15,396 34,323
Selling, general and
administrative expenses 883 1,799 3,175 4,740
Asset writedowns -- -- 7,781 --
Other (expense) income (59) 418 2,327 1,296
------- ------- ------- -------
(Loss) before income taxes (632) (5,393) (11,135) (7,314)
(Benefit) for income taxes (84) (157) (58) (1,143)
------- ------- -------- -------
(Loss) from operations $ (548) $(5,236) $(11,077) $(6,171)
======= ======= ======== =======
Depreciation and amortization $ 192 $ 5,562 $ 894 $ 7,118
======= ======= ======== =======
LOSS ON DISPOSAL:
Assets $(4,018) $ -- $ (4,018) $ --
Liabilities 6,432 -- 6,432 --
Unsecured debt 2,488 -- 2,488 --
Currency translation adjustment (6,244) -- (6,244) --
------ ------- -------- -------
(Loss) on disposal $(1,342) $ -- $ (1,342) --
======= ======= ======== =======
The balance sheet data for the discontinued operations is as follows:
March 31, June 30,
2003 2002
--------- ---------
Trade receivables $1,380 $ 4,004
Other receivables -- 728
Inventories 305 6,592
Prepaid expenses and other current assets 8 445
------ -------
Current assets from discontinued operations $1,693 $11,769
====== =======
Property, plant and equipment, net $ -- $ 8,234
Intangibles -- 1,411
Other assets -- 787
------ -------
Other assets from discontinued operations $ -- $10,432
====== =======
Accounts payable $ 773 2,565
Accrued expenses and other current liabilities 375 4,095
------ -------
Current liabilities from discontinued operations $1,148 $ 6,660
====== =======
12
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Other liabilities $ -- $ 1,280
------ -------
Other liabilities from discontinued operations $ -- $ 1,280
====== =======
In December 2002, the Company reevaluated the carrying value of Odda's
long-lived assets (consisting of property, plant and equipment and certain other
assets), based upon its estimate of future net cash flows under the possible
scenarios then being considered by management. As a result, an impairment charge
of $7,781 was recorded during the second fiscal quarter to reduce the carrying
value of Odda's long-lived assets to their estimated salvage values.
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.
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.
13
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
The South Carolina Department of Health and Environmental Conservation
("DHEC") has informed the Company that its Phibro-Tech, Inc. subsidiary must
begin certain remediation activities and conduct additional RCRA Facility
Investigations ("RFI's") leading to a Corrective Measures Study and Corrective
Measures Implementation. Phibro-Tech, Inc. has proposed several alternative
plans to the South Carolina DHEC and will enter into negotiations with the state
regarding measures to be taken at its Sumter, South Carolina facility.
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 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 costs of
further investigation and remediation of identified soil and groundwater
problems at operating sites, closed sites and third-party sites; closure costs
for closed sites; and any penalties that may be assessed for environmental
violations to be approximately $2,071, which is included in current and
long-term liabilities in the Company's condensed consolidated balance sheets at
March 31, 2003.
8. Income from Litigation
The Company has recognized income of $2,195 and $2,766 for the three
months and nine months ended March 31, 2003, respectively, resulting from the
settlement of class action litigation against European vitamin manufacturers.
This income is included in selling, general and administrative expenses on the
Company's condensed consolidated statements of operations and comprehensive
income.
9. 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.
The Industrial Chemicals and Distribution segments have been restated to
give effect to the discontinued operations.
14
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Segment data for the three months and nine months ended March 31, 2003 and
2002 is as follows:
Animal Corporate
Health & Industrial All Expenses &
Three Months Ended March 31, 2003 Nutrition Chemicals Distribution Other Adjustments Total
----------- -------- -------- -------- ------------ --------
Revenues -- external customers $ 62,675 $ 12,192 $ 7,612 $ 11,260 $ -- $ 93,739
-- intersegment 579 1,985 547 1 (3,112) --
----------- -------- -------- -------- ------------ --------
Total revenues $ 63,254 $ 14,177 $ 8,159 $ 11,261 $ (3,112) $ 93,739
=========== ======== ======== ======== ============ ========
Operating income/(loss) $ 8,122 $ (716) $ 900 $ (846) $ (3,192) $ 4,268
=========== ======== ======== ======== ============ ========
Depreciation and amortization $ 1,890 $ 738 $ 2 $ 533 $ 405 $ 3,568
=========== ======== ======== ======== ============ ========
Animal Corporate
Health & Industrial All Expenses &
Three Months Ended March 31, 2002 Nutrition Chemicals Distribution Other Adjustments Total
----------- -------- -------- -------- ------------ --------
Revenues -- external customers $ 59,378 $ 12,676 $ 6,753 $ 9,357 $ -- $ 88,164
-- intersegment 874 1,286 372 87 (2,619) --
-------- -------- -------- -------- -------- --------
Total revenues $ 60,252 $ 13,962 $ 7,125 $ 9,444 $ (2,619) $ 88,164
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 6,246 $ (117) $ 496 $ (750) $ (3,793) $ 2,082
======== ======== ======== ======== ======== ========
Depreciation and amortization $ 1,996 $ 851 $ 3 $ 440 $ 263 $ 3,553
======== ======== ======== ======== ======== ========
Animal Corporate
Health & Industrial All Expenses &
Nine Months Ended March 31, 2003 Nutrition Chemicals Distribution Other Adjustments Total
----------- -------- -------- -------- ------------ --------
Revenues -- external customers $189,301 $ 37,317 $ 22,905 $ 31,091 $ -- $280,614
-- intersegment 2,224 5,745 1,395 8 (9,372) --
-------- -------- -------- -------- -------- --------
Total revenues $191,525 $ 43,062 $ 24,300 $ 31,099 $ (9,372) $280,614
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 29,852 $ (1,538) $ 2,452 $ (1,464) $(11,387) $ 17,915
======== ======== ======== ======== ======== ========
Depreciation and amortization $ 5,702 $ 2,495 $ 8 $ 1,531 $ 1,155 $ 10,891
======== ======== ======== ======== ======== ========
Animal Corporate
Health & Industrial All Expenses &
Nine Months Ended March 31, 2002 Nutrition Chemicals Distribution Other Adjustments Total
----------- -------- --------- -------- ------------ --------
Revenues -- external customers $180,477 $ 35,800 $ 20,983 $ 28,347 $ -- $265,607
-- intersegment 3,141 5,077 1,203 117 (9,538) --
-------- -------- -------- -------- -------- --------
Total revenues $183,618 $ 40,877 $ 22,186 $ 28,464 $ (9,538) $265,607
======== ======== ======== ======== ======== ========
Operating income/(loss) $ 23,870 $ (3,627) $ 1,652 $ (860) $(10,131) $ 10,904
======== ======== ======== ======== ======== ========
Depreciation and amortization $ 5,395 $ 2,545 $ 9 $ 1,297 $ 795 $ 10,041
======== ======== ======== ======== ======== ========
15
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
Animal Corporate
Identifiable Assets of Health & Industrial All Expenses &
Continuing Operations Nutrition Chemicals Distribution Other Adjustments Total
----------- -------- -------- -------- ------------ --------
At June 30, 2002 $186,118 $ 38,985 $ 8,059 $ 30,688 $ 10,393 $274,243
======== ======== ======== ======== ======== ========
At March 31, 2003 $199,763 $ 33,747 $ 10,082 $ 28,967 $ 8,221 $280,780
======== ======== ======== ======== ======== ========
10. 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 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.
16
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of March 31, 2003
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 43 $ 1,884 $ 10,104 $ 12,031
Trade receivables 3,220 28,792 27,890 59,902
Other receivables 184 698 1,787 2,669
Inventory 2,874 54,115 36,323 93,312
Prepaid expenses and other 2,106 2,283 11,561 15,950
Current assets from discontinued operations -- -- 1,693 1,693
--------- --------- --------- --------- ---------
Total current assets 8,427 87,772 89,358 -- 185,557
--------- --------- --------- --------- ---------
Property, plant & equipment, net 206 27,086 46,076 73,368
Intangibles 210 1,303 9,656 11,169
Investment in subsidiaries 101,810 3,621 -- (105,431) --
Intercompany 40,033 (36,683) 4,127 (7,477) --
Other assets 10,490 1,369 520 12,379
Other assets from discontinued operations -- -- -- --
--------- --------- --------- --------- ---------
Total assets $ 161,176 $ 84,468 $ 149,737 $(112,908) $ 282,473
========= ========= ========= ========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Cash overdraft $ 578 $ 4,068 $ -- $ 4,646
Loan payable to banks 32,382 -- 2,833 35,215
Current portion of long term debt 23,283 458 6,000 29,741
Accounts payable 2,265 28,360 15,422 46,047
Accrued expenses and other 11,145 8,031 32,920 52,096
Current liabilities from discontinued
operations -- -- 1,148 1,148
--------- --------- --------- --------- ---------
Total current liabilities 69,653 40,917 58,323 -- 168,893
--------- --------- --------- --------- ---------
Long term debt 100,081 (69,891) 80,314 (7,477) 103,027
Other liabilities 3,027 14,594 4,517 22,138
Other liabilities from discontinued operations -- -- -- --
Redeemable securities:
Series B and C preferred stock 63,129 -- -- 63,129
Stockholders' Equity
Series A preferred stock 521 -- -- 521
Common stock 2 32 -- (32) 2
Paid in capital 740 110,885 5,179 (116,064) 740
(Accumulated deficit) retained earnings (66,442) (12,040) 10,909 1,131 (66,442)
Accumulated other comprehensive income (loss)-
gain (loss) on derivative instruments 51 51 -- (51) 51
currency translation adjustment (9,586) (80) (9,505) 9,585 (9,586)
--------- --------- --------- --------- ---------
Total stockholders' equity (74,714) 98,848 6,583 (105,431) (74,714)
--------- --------- --------- --------- ---------
Total liabilities and equity $ 161,176 $ 84,468 $ 149,737 $(112,908) $ 282,473
========= ========= ========= ========= =========
17
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended March 31, 2003
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 6,500 $ 57,536 $ 31,975 $ (2,272) $ 93,739
Cost of goods sold 5,065 45,289 22,936 (2,272) 71,018
-------- -------- -------- -------- --------
Gross profit 1,435 12,247 9,039 -- 22,721
Selling, general, and administrative
expenses 4,109 9,531 4,813 18,453
-------- -------- -------- -------- --------
Operating (loss) income (2,674) 2,716 4,226 -- 4,268
Interest expense 543 667 2,768 3,978
Interest income (1) -- (38) (39)
Other expense (income) 129 (308) 291 112
Intercompany allocation (3,754) 3,592 162 --
(Profit) loss relating to subsidiaries 791 -- -- (791) --
-------- -------- -------- -------- --------
(Loss) income before income taxes (382) (1,235) 1,043 791 217
Provision for income taxes -- 281 318 599
-------- -------- -------- -------- --------
(Loss) income from continuing operations (382) (1,516) 725 791 (382)
DISCONTINUED OPERATIONS:
Profit (loss) relating to discontinued operations 28,129 -- -- (28,129) --
(Loss) from discontinued operations (net of
income taxes) -- -- (548) (548)
(Loss) on disposal of discontinued operations
(net of income taxes) (30,019) -- 28,677 (1,342)
-------- -------- -------- -------- --------
Net (loss) income $ (2,272) $ (1,516) $ 28,854 $(27,338) $ (2,272)
======== ======== ======== ======== ========
18
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Nine Months Ended March 31, 2003
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 19,643 $172,552 $ 95,966 $ (7,547) $280,614
Cost of goods sold 15,605 134,776 68,306 (7,547) 211,140
-------- -------- -------- -------- --------
Gross profit 4,038 37,776 27,660 -- 69,474
Selling, general, and administrative
expenses 13,863 23,881 13,815 51,559
-------- -------- -------- -------- --------
Operating (loss) income (9,825) 13,895 13,845 -- 17,915
Interest expense 1,215 2,154 8,769 12,138
Interest income (2) -- (133) (135)
Other expense (income) 438 (308) 1,187 1,317
Intercompany allocation (12,395) 11,927 468 --
(Profit) loss relating to subsidiaries (1,392) -- -- 1,392 --
-------- -------- -------- -------- --------
Income (loss) before income taxes 2,311 122 3,554 (1,392) 4,595
Provision for income taxes 156 507 1,777 2,440
-------- -------- -------- -------- --------
Income (loss) from continuing operations 2,155 (385) 1,777 (1,392) 2,155
DISCONTINUED OPERATIONS:
Profit (loss) relating to discontinued operations 17,600 -- -- (17,600) --
(Loss) from discontinued operations (net of
income taxes) -- -- (11,077) (11,077)
(Loss) on disposal of discontinued operations
(net of income taxes) (30,019) -- 28,677 (1,342)
-------- -------- -------- -------- --------
Net (loss) income $(10,264) $ (385) $ 19,377 $(18,992) $(10,264)
======== ======== ======== ======== ========
19
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2003
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $(10,264) $ (385) $ 19,377 $(18,992) $(10,264)
Adjustment for discontinued operations 12,419 -- (17,600) 17,600 12,419
-------- -------- -------- -------- --------
Income (loss) from continuing operations 2,155 (385) 1,777 (1,392) 2,155
Adjustments to reconcile income
(loss) from continuing operations to cash
provided by operating activities:
Depreciation and amortization 1,155 4,170 5,566 10,891
Other 319 (557) (250) (488)
Changes in operating assets and liabilities:
Accounts receivable (137) 797 391 1,051
Inventory (167) (10,024) 4,122 (6,069)
Prepaid expenses and other 1,112 (139) (1,530) (557)
Other assets (2,135) 894 (949) (2,190)
Intercompany 2,505 (3,114) (783) 1,392 --
Accounts payable 1,241 13,147 690 15,078
Accrued expenses and other 4,274 (1,119) 2,651 5,806
Operating cash flows from discontinued
operations -- -- 2,970 2,970
-------- -------- -------- -------- --------
Net cash provided by operating activities 10,322 3,670 14,655 -- 28,647
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures -- (3,126) (4,652) (7,778)
Proceeds from asset sales and other investing -- 2,530 791 3,321
Discontinued operations -- -- 1,877 1,877
-------- -------- -------- -------- --------
Net cash used in investing activities -- (596) (1,984) -- (2,580)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft 2 (1,434) (1,689) (3,121)
Net increase (decrease) in short term debt (5,609) -- (403) (6,012)
Proceeds from long term debt -- -- 2,125 2,125
Payments of long term debt (5,129) (410) (8,181) (13,720)
-------- -------- -------- -------- --------
Net cash used in financing activities (10,736) (1,844) (8,148) -- (20,728)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash -- 2 271 273
-------- -------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (414) 1,232 4,794 -- 5,612
Cash and cash equivalents at
beginning of period 457 652 5,310 6,419
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 43 $ 1,884 $ 10,104 $ -- $ 12,031
======== ======== ======== ======== ========
20
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 29,336 61,157
Other receivables 392 855 1,937 3,184
Inventory 2,707 44,929 39,289 86,925
Prepaid expenses and other 3,010 2,460 10,050 15,520
Current assets from discontinued operations -- -- 11,769 11,769
-------- -------- -------- --------- --------
Total current assets 9,716 77,045 98,213 -- 184,974
-------- -------- -------- --------- --------
Property, plant & equipment, net 409 29,781 46,306 76,496
Intangibles 32 1,495 10,262 11,789
Investment in subsidiaries 82,540 3,621 -- (86,161) --
Intercompany 73,359 (36,074) (5,240) (32,045) --
Other assets 9,738 1,918 1,097 12,753
Other assets from discontinued operations -- -- 10,432 10,432
-------- -------- -------- --------- --------
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 13,975 39,715
Accrued expenses and other 7,579 8,092 14,314 29,985
Current liabilities from discontinued
operations -- -- 6,660 6,660
-------- -------- -------- --------- --------
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 20,089 28,597
Other liabilities from discontinued operations -- -- 1,280 1,280
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
(Accumulated deficit) 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
======== ======== ======== ========= ========
21
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Three Months Ended March 31, 2002
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 6,337 $ 53,002 $ 36,162 $ (7,337) $ 88,164
Cost of goods sold 5,189 41,629 28,132 (7,337) 67,613
-------- -------- -------- -------- --------
Gross profit 1,148 11,373 8,030 -- 20,551
Selling, general, and administrative
expenses 4,247 9,070 5,152 -- 18,469
-------- -------- -------- -------- --------
Operating (loss) income (3,099) 2,303 2,878 -- 2,082
Interest expense 574 427 3,608 4,609
Interest income (5) -- (3) (8)
Other expense (income) 6 (79) 584 511
Intercompany allocation (4,843) 4,843 -- --
Loss (profit) relating to subsidiaries 3,342 -- -- (3,342) --
-------- -------- -------- -------- --------
(Loss) income before income taxes (2,173) (2,888) (1,311) 3,342 (3,030)
Provision (benefit) for income taxes 1,663 (1,049) 192 806
-------- -------- -------- -------- --------
(Loss) income from continuing operations (3,836) (1,839) (1,503) 3,342 (3,836)
DISCONTINUED OPERATIONS:
(Loss) profit relating to discontinued operations (5,236) -- -- 5,236 --
(Loss) from discontinued operations (net of
income taxes) -- -- (5,236) (5,236)
-------- -------- -------- -------- --------
Net (loss) income $ (9,072) $ (1,839) $ (6,739) $ 8,578 $ (9,072)
======== ======== ======== ======== ========
22
PHILIPP BROTHERS CHEMICALS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Nine Months Ended March 31, 2002
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $ 19,516 $160,863 $106,357 $(21,129) $265,607
Cost of goods sold 15,849 125,650 80,068 (21,129) 200,438
-------- -------- -------- -------- --------
Gross profit 3,667 35,213 26,289 -- 65,169
Selling, general, and administrative
expenses 11,841 26,183 16,241 54,265
-------- -------- -------- -------- --------
Operating (loss) income (8,174) 9,030 10,048 -- 10,904
Interest expense 1,769 1,995 10,162 13,926
Interest income (15) -- (296) (311)
Other (income) expense (298) (72) 2,784 2,414
Intercompany allocation (9,778) 9,778 -- --
Loss (income) relating to subsidiaries 5,730 -- -- (5,730) --
-------- -------- -------- -------- --------
(Loss) income before income taxes (5,582) (2,671) (2,602) 5,730 (5,125)
Provision (benefit) for income taxes 1,383 (185) 642 1,840
-------- -------- -------- -------- --------
(Loss) income from continuing operations (6,965) (2,486) (3,244) 5,730 (6,965)
DISCONTINUED OPERATIONS:
(Loss) profit relating to discontinued operations (6,171) -- -- 6,171 --
(Loss) from discontinued operations (net of
income taxes) -- -- (6,171) (6,171)
-------- -------- -------- -------- --------
Net (loss) income $(13,136) $ (2,486) $ (9,415) $ 11,901 $(13,136)
======== ======== ======== ======== ========
23
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2002
(In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign
U.S. Guarantor Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $(13,136) $ (2,486) $ (9,415) $ 11,901 $(13,136)
Adjustment for discontinued operations 6,171 -- 6,171 (6,171) 6,171
-------- -------- -------- -------- --------
(Loss) income from continuing operations $ (6,965) $ (2,486) $ (3,244) $ 5,730 $ (6,965)
Adjustments to reconcile (loss) income
from continuing operations to cash
(used in) provided by operating activities:
Depreciation and amortization 795 3,986 5,260 10,041
Other (594) 136 4,271 3,813
Changes in operating assets and liabilities:
Accounts receivable 1,278 6,163 4,867 12,308
Inventory 318 (3,521) (13,507) (16,710)
Prepaid expenses and other 892 (909) (2,527) (2,544)
Other assets 260 (838) (264) (842)
Intercompany (10,614) 3,675 12,669 (5,730) --
Accounts payable (1,095) 343 53 (699)
Accrued expenses and other 902 (5,130) 6,678 2,450
Operating cash flows from discontinued
operations -- -- (438) (438)
-------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities (14,823) 1,419 13,818 -- 414
-------- -------- -------- -------- --------
Investing activities:
Capital expenditures (74) (3,918) (3,889) (7,881)
Acquisition of a business -- -- (7,182) (7,182)
Other investing -- 412 57 469
Discontinued operations -- -- (692) (692)
-------- -------- -------- -------- --------
Net cash used in investing activities (74) (3,506) (11,706) -- (15,286)
-------- -------- -------- -------- --------
Financing activities:
Cash overdraft (13) 1,494 -- 1,481
Net increase (decrease) in short term debt 16,093 -- (845) 15,248
Proceeds from long term debt 2,000 316 -- 2,316
Payments of long term debt (2,533) (395) (1,396) (4,324)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 15,547 1,415 (2,241) -- 14,721
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash -- -- (110) (110)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents 650 (672) (239) -- (261)
Cash and cash equivalents at
beginning of period 1,292 1,210 12,343 14,845
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 1,942 $ 538 $ 12,104 $ -- $ 14,584
======== ======== ======== ======== ========
24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a 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.
In February 2003 the Company determined that it would permanently shutdown
and no longer fund the operations of its Norwegian subsidiary, Odda Smelteverk
("Odda"). On February 28, 2003, the management of Odda filed for bankruptcy in
Norway and the bankruptcy is proceeding in accordance with Norwegian law. As a
result of the bankruptcy, the creditors of Odda have recourse only to the assets
of Odda, except in the case of certain debt guaranteed by the Company. The
Company has removed all assets, liabilities (except as noted below) and
cumulative translation adjustments related to Odda from the Company's
consolidated balance sheet as of March 31, 2003, and has recorded the net result
as a Loss on disposal of discontinued operations. Philipp Brothers Chemicals,
Inc is the guarantor of certain debt of Odda under two separate multi- currency
revolving credit facilities of Odda. As of March 31, 2003, NOK 41,100 ($5,731)
was outstanding under these facilities and continues to be included in Loans
payable to banks and Current portion of long-term debt captions on the Company's
Consolidated Balance Sheet at March 31, 2003. The Company has entered into
forebearance agreements with the two banks holding guarantees from the Company
for the debt of Odda under which the banks have agreed not to demand immediate
payment on those guarantees, and the Company has agreed to pay the principal
amount plus interest in installments. The Company has been advised by Norwegian
counsel that it will obtain the benefit of the banks' position as a secured
creditor upon payment pursuant to the guarantees. The Company has obtained the
consent of a majority of the holders of its outstanding Senior Subordinated
Notes to amend the Indenture governing these notes in such a manner that the
bankruptcy of Odda does not create an event of default thereunder. The results
of Odda's operations are reflected as a discontinued operation and the operating
results have been excluded from the Industrial Chemical segment. All prior
periods have been restated for consistency of presentation.
In November 2002, the Company had announced a temporary shutdown of Odda
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. 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 to their estimated salvage values.
In April 2003, the Company completed the sale of its Carbide business
which distributed calcium carbide previously produced by Odda. The Company
recorded a loss on sale of approximately $1.0 million. Proceeds were not
material. The results of Carbide's operations are reflected as a discontinued
operation and the operating results have been excluded from the Distribution
segment. All prior periods have been restated for consistency of presentation.
The Company recorded operating income, after the classification of its
Odda and Carbide businesses as discontinued operations, of $17.9 million for the
nine months ended March 31, 2003 compared to operating income of $10.9 million
in the prior year nine-month period. The period-to-period comparison was also
affected by purchase accounting adjustments relating to inventory acquired in
the acquisition of the Phibro Animal Health ("PAH") business, that resulted in a
$3.3 million increase to cost of goods sold for the nine months ended March 31,
2002.
At March 31, 2003, 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. The Company is
presently seeking to refinance its credit facility and the Pfizer note payable.
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.
25
Certain prior year amounts have been reclassified to conform to the fiscal
2003 presentation. Freight and warehousing expenses of $6.4 million and $20.0
million for the three and nine months ended March 31, 2002, respectively, were
reclassified from general and administrative expenses to cost of goods sold.
Results of Operations
Sales
($000's)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -----------------------
Operating Segments 2003 2002 2003 2002
------- ------- -------- --------
Animal Health and Nutrition...................... $63,254 $60,252 $191,525 $183,618
Industrial Chemicals............................. 14,177 13,962 43,062 40,877
Distribution..................................... 8,159 7,125 24,300 22,186
All Other........................................ 11,261 9,444 31,099 28,464
Elimination of inter-segment sales............... (3,112) (2,619) (9,372) (9,538)
------- ------- -------- --------
$93,739 $88,164 $280,614 $265,607
======= ======= ======== ========
Operating Income (Loss)
($000's)
Three Months Ended Nine Months Ended
March 31, March 31,
Operating Segments 2003 2002 2003 2002
------- ------- -------- --------
Animal Health and Nutrition ...................... $ 8,122 $ 6,246 $ 29,852 $ 23,870
Industrial Chemicals.............................. (716) (117) (1,538) (3,627)
Distribution...................................... 900 496 2,452 1,652
All Other......................................... (846) (750) (1,464) (860)
Corporate expenses and eliminations............... (3,192) (3,793) (11,387) (10,131)
------- ------- -------- --------
$ 4,268 $ 2,082 $ 17,915 $ 10,904
======= ======= ======== ========
Comparison of Three Months Ended March 31, 2003 and 2002
Net Sales. Net sales increased by $5.6 million, or 6%, to $93.7 million in
the three months ended March 31, 2003, as compared to the same period of the
prior year. Each of the Company's segments reported higher sales over the prior
period.
Animal Health and Nutrition net sales increased by $3.0 million, or 5%, to
$63.3 million for the three months ended March 31, 2003. 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 declined
due to lower unit volume sales of its core organic materials.
Industrial Chemicals net sales increased by $.2 million, or 2%, to $14.2
million in the three months ended March 31, 2003 as compared to the prior
period. The Company's Prince operations improved due to higher unit volumes over
the prior year comparable period. Sales by the Company's Phibro-Tech subsidiary
decreased from the prior year due to lower recycling fees and sales volumes.
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 continues its existing etchant business at its other
facilities.
Net sales for the Distribution segment increased by $1.0 million, or 15%,
to $8.2 million in 2003, as compared to the prior period. Higher unit sales
volumes at the Company's Ferro operations and improved product mix changes in
the Company's PhibroChem operations accounted for the increase.
Net sales for the All Other segment increased by $1.8 million, or 19%, to
$11.2 million in 2003, as compared to the prior period. Higher sales of crop
protection chemicals increased revenues by approximately $1.2 million. The
Company's fly ash
26
business increased revenues by approximately $.5 million due to higher unit
volumes offset in part by declines in average selling prices. An increase in
specialized lab projects and formulations at the segment's U.K. operations
accounted for the balance of the increase.
Gross Profit. Gross profit increased by $2.2 million, or 11%, to $22.7
million in the three months ended March 31, 2003, 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 $.3
million for the three months ended March 31, 2003 and 2002, respectively.
Excluding the purchase accounting adjustments, gross profit increased by
approximately $1.7 million in the Animal Health segment primarily due to higher
unit volume sales. The Industrial Chemicals segment decreased by approximately
$.9 million primarily due to lower revenues and production levels at Phibro-Tech
facilities and also higher manufacturing costs at the Company's Prince
Manufacturing operations. The Distribution segment increased $.4 million
primarily as a result of higher unit volume sales and product mix. The All Other
segment approximated the prior year due to higher sales of crop protection
chemicals offset by the Company's fly ash operations. Elimination of
inter-company profit in inventory accounted for the remainder.
Selling, General and Administrative Expenses. Costs for the current
quarter were $18.5 million, approximately the same as the comparable prior year
period. During the current quarter, the Company recognized a gain of $2.2
million resulting from a settlement of a class action suit against European
vitamin manufacturers. Costs declined primarily at the Company's Phibro-Tech and
Koffolk operations due to cost reduction programs and lower levels of production
activity. Costs increased due to environmental accruals of $.7 million primarily
related to the Company's Sumter, S.C. facility, severance costs of $.4 million,
resolution of a disputed claim related to a divested business of $.2 million,
actuarial revisions in pension expense of $.3 million and higher insurance costs
of $.4 million. Further, Corporate expenses increased due to costs related to
debt restructuring activities and higher staff levels.
Operating (Loss) Income. Operating income increased by $2.2 million to
$4.3 million in 2003, 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 higher environmental expense
accruals at Phibro-Tech and higher manufacturing costs at Prince Manufacturing,
offset in part by lower general and administrative expenses at Phibro-Tech. The
Company's Distribution segment increased as a result of higher unit volume sales
and product mix. The All Other segment declined slightly from the prior period.
In addition, the Company recognized a gain of $2.2 million during the current
quarter resulting from a settlement of a class action suit against European
vitamin manufacturers.
Interest Expense, Net. Costs decreased by $.7 million or 14% to $3.9
million for the three months ended March 31, 2003 as compared to the prior
period primarily due to lower weighted-average interest rates and lower average
borrowing levels.
Other Expense, Net. Other (income) expense, net principally reflects
foreign currency transaction/translation gains and losses of the Company's
foreign subsidiaries.
Income Taxes. An income tax provision of $.6 million was reported on a
consolidated pre-tax income of $.2 million in fiscal 2003 primarily due to
income tax provisions in profitable foreign jurisdictions and also for state
income taxes. The Company continues to carry a full valuation allowance related
to its domestic and Brazilian operating losses. These deferred tax assets will
continue to be evaluated each reporting period based on actual and expected
operating performance.
Loss from Discontinued Operations. Net sales, loss and depreciation and
amortization from the discontinued operations for the three months ended March
31 were as follows, amounts in $000s:
Odda Carbide
---- -------
2003 2002 2003 2002
--------- --------- ----------- ----------
Gross sales, including intercompany................... $ -- $ 8,877 $ 1,933 $ 1,859
========= ========= =========== ==========
Pre-tax income (loss) from discontinued operations.... $ (500) $ (5,502) $ (132) 109
Provision (benefit) for income tax ................... -- 166 (84) 9
--------- --------- ----------- ----------
Net income (loss) from discontinued operations........ $ (500) $ (5,336) $ (48) $ 100
========= ========= =========== ==========
Depreciation and amortization......................... $ -- $ 5,513 $ 192 $ 49
========= ========= =========== ==========
Loss on Disposal of Discontinued Operations. The Company recorded charges
of $.3 million and $1.0 million related to the disposal of Odda and Carbide,
respectively. Such costs were related to the write-off of foreign currency
cumulative
27
translation adjustments, fixed assets, intangibles and other net assets of the
divested operations and also costs associated with their disposition.
Comparison of Nine Months Ended March 31, 2003 and 2002
Net Sales. Net sales increased by $15.0 million, or 6%, to $280.6 million
in the nine months ended March 31, 2003, as compared to the same period of the
prior year. Each of the Company's segments reported higher sales over the prior
period.
Animal Health and Nutrition net sales increased by $7.9 million, or 4%, to
$191.5 million for the nine months ended March 31, 2003. 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.
Industrial Chemicals net sales increased by $2.2 million, or 5%, to $43.1
million in the nine months ended March 31, 2003 as compared to the prior period.
Sales by the Company's Phibro-Tech subsidiary decreased due to lower 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 continued its
existing etchant business at its other facilities. The Company's Prince
operations also reported higher sales due to higher unit volumes over the prior
year comparable period.
Net sales for the Distribution segment increased by $2.1 million, or 10%,
to $24.3 million in 2003, as compared to the prior period. Higher unit sales
volumes at the Company's Ferro operations and improved product mix changes in
the Company's PhibroChem operations accounted for the increase.
Net sales for the All Other segment increased by $2.6 million, or 9%, to
$31.1 million in 2003, as compared to the prior period. The Company's fly ash
business increased revenues by approximately $2.1 million due to higher unit
volumes offset in part by declines in average selling prices. Higher sales of
crop protection chemicals increased revenues by approximately $1.1 million over
the prior year comparable period. A decrease in specialized lab projects and
formulations at the segment's U.K. operations lowered revenues by $.6 million.
Gross Profit. Gross profit increased by $4.3 million, or 7%, to $69.5
million in the nine months ended March 31, 2003, 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 $3.3
million for the nine months ended March 31, 2003 and 2002, respectively.
Excluding the purchase accounting adjustments, gross profit increased by
approximately $1.4 million in the Animal Health segment primarily due to higher
unit volume sales, lower manufacturing costs offset in part by lower average
selling prices. The Industrial Chemicals segment decreased by approximately $1.7
million primarily due to 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 $.7 million
primarily as a result of higher unit volume sales and product mix. The All Other
segment declined by approximately $.6 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 offset in part by higher margins on the sale of crop protection
chemicals. Elimination of inter-company profit in inventory accounted for the
remainder.
Selling, General and Administrative Expenses. Costs decreased by $2.7
million, or 5% to $51.6 million in 2003, as compared to the prior period. During
the current period, the Company recognized a gain of $2.8 million resulting from
a settlement of a class action suit against European vitamin manufacturers.
Costs declined primarily at the Company's Phibro-Tech and Koffolk 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. Costs increased due to environmental
accruals of $.7 million primarily related to the Company's Sumter, S.C.
facility, severance costs of $.4 million, resolution of a disputed claim related
to a divested business of $.2 million, actuarial revisions in pension expense of
$.3 million and higher insurance costs of $.4 million. Further, Corporate
expenses increased due to costs related to debt restructuring activities and
higher staff levels.
Operating (Loss) Income. Operating income increased by $7.0 million to
$17.9 million in 2003, 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 volume sales and lower manufacturing
costs, offset in part by lower average selling prices. The
28
Industrial Chemicals segment improved primarily due to lower general and
administrative costs at the Company's Phibro-Tech facilities. The Company's
Distribution segment increased as a result of higher unit volume sales and
product mix. 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 offset in part
by higher margins on the sale of crop protection chemicals. In addition, the
Company recognized a gain of $2.8 million during the current period resulting
from a settlement of a class action suit against European vitamin manufacturers.
Interest Expense, Net. Costs decreased by $1.6 million or 12% to $12.0
million for the nine months ended March 31, 2003 as compared to the prior period
primarily due to lower weighted-average interest rates and slightly lower
average borrowing levels.
Other Expense, Net. Other (income) expense, net principally reflects
foreign currency transaction/translation gains and losses of the Company's
foreign subsidiaries.
Income Taxes. An income tax provision of $2.4 million was reported on a
consolidated pre-tax income of $4.6 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 related to
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.
Loss from Discontinued Operations. Net sales, loss and depreciation and
amortization from the discontinued operations for the nine months ended March 31
were as follows, amounts in $000s:
Odda Carbide
---- -------
2003 2002 2003 2002
--------- --------- --------- --------
Gross Sales, including intercompany................... $ 7,781 $ 24,841 $ 1,933 $ 5,612
========= ========= ========= ========
Pre-tax income (loss) from discontinued operations.... $ (11,193) $ (7,932) $ 58 618
Provision (benefit) for income tax ................... -- (1,254) (58) 111
--------- --------- --------- --------
Net income (loss) from discontinued operations........ $ (11,193) $ (6,678) $ 116 $ 507
========= ========= ========= ========
Depreciation and amortization......................... $ 643 $ 6,967 $ 251 $ 151
========= ========= ========= ========
Loss on Disposal of Discontinued Operations. The Company recorded charges
of $.3 million and $1.0 million related to the operations of Odda and Carbide,
respectively. Such costs were related to the write-off of foreign currency
cumulative translation adjustments, fixed assets, intangibles and other net
assets of the divested operations and also costs associated with their
disposition.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Cash provided by operations for
the nine months ended March 31, 2003 and 2002 was $28.6 million and $.4 million,
respectively. Cash provided by operating activities increased in the nine months
ended March 31, 2003, compared with the nine months ended March 31, 2002,
primarily due to improvements in working capital management and higher operating
income.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the nine months ended March 31, 2003 and 2002 was $2.6 million
and $15.3 million, respectively. The prior year included contingent purchase
price payments of $7.2 million. Capital expenditures of $7.8 million and $7.9
million in the respective 2003 and 2002 periods, were for new product capacity,
maintaining the Company's existing asset base and for environmental, health and
safety projects. Proceeds from sales of fixed assets and discontinued operations
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 nine months ended March 31, 2003 and
2002 was ($20.7) million and $14.7 million, respectively. Borrowings under the
domestic credit facility and other long-term debt were reduced in fiscal 2003
from cash generated by operating activities.
29
Liquidity. At March 31, 2003, the Company was in compliance with the
financial covenants included in its amended 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 credit
facility, there can be no assurance that the Company 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 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, if at all, and
there are no disposal transactions which the Company considers probable at March
31, 2003. 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, if at all. 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 February 2003 the Company determined that it would permanently shutdown
and no longer fund the operations of its Norwegian subsidiary, Odda Smelteverk
("Odda"). On February 28, 2003, Odda filed for bankruptcy in Norway and the
bankruptcy is proceeding in accordance with Norwegian law. The Company has been
advised that, as a result of the bankruptcy, the creditors of Odda have recourse
only to the assets of Odda, except in the case of certain debt guaranteed by the
Company. The Company has removed all assets, liabilities, and cumulative
translation adjustments related to Odda from the Company's consolidated balance
sheets as of March 31, 2003, and has recorded the net result as a Loss on
disposal of discontinued operations. The Company is the guarantor of certain
debt of Odda under two separate multi-currency revolving credit facilities. As
of March 31, 2003, NOK 41,100 ($5,731) was outstanding under these facilities
and continues to be included in the Loans payable to banks and Current portion
of long-term debt captions on the Company's consolidated balance sheets at March
31, 2003. The Company has entered into forebearance agreements with the two
banks holding guarantees from the Company for the debt of Odda under which the
banks have agreed not to demand immediate payment on those guarantees, and the
Company has agreed to pay the principal amount plus interest in installments.
The Company has been advised by Norwegian counsel that it will obtain the
benefit of the banks' position as a secured creditor upon payment pursuant to
the guarantees. The Company has obtained the consent of a majority of the
holders of its outstanding Senior Subordinated Notes due 2008 to amend the
Indenture governing these notes in such a manner that the bankruptcy of Odda
does not create an event of default thereunder.
Working capital as of March 31, 2003 was $16.7 million compared to $50.5
million at fiscal year end June 30, 2002. The decrease in working capital was
primarily due to the reclassification to Current Liabilities of certain
obligations, now due within one year, previously classified as non-current Other
Liabilities. These reclassified items include: the Note Payable to Pfizer of
approximately $20.1 million, due March 2004, included in Current portion of
long-term debt; accrued royalties payable of $9.0 million, due March 2004,
included in Other current liabilities; and, other payables and accruals of $6.5
million included in Accounts payable and other current liabilities.
30
At March 31, 2003, the amount of credit extended under the Company's
credit facility totaled $32.4 million and the Company had $12.0 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 $8.7 million under their respective loan agreements.
The Company anticipates spending approximately $9.0 million for capital
expenditures related to continuing operations 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 adoption of
SFAS No. 146 did not result in an impact on the Company's 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 adoption of FIN No. 45 did not result in a material
impact on the Company's 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 (including 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
adoption of FIN No. 46 did not result in an impact on the Company's financial
statements.
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or
31
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The Company is currently assessing the impact of this statement.
Seasonality of Business
There is some seasonality in the Company's results as sales of certain
industrial chemicals to the wood treatment industry as well as sales of coal fly
ash are typically highest during the peak construction periods of the first and
fourth fiscal quarters.
Quantitative and Qualitative Disclosure About Market Risk
For financial market risks related to changes in interest rates, foreign
currency exchange rates and commodity prices, reference is made to Part II, Item
7, Quantitative and Qualitative Disclosure About Market Risk, in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002 and to Note
14 to the Consolidated Financial Statements of the Company included therein.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among other factors
noted herein, the following: the Company's substantial leverage and potential
inability to service its debt; the Company's dependence on distributions from
its subsidiaries; risks associated with the Company's international 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, at its meeting held February
6-12, 2003, had determined to withdraw the maximum residue limits for Carbadox.
A final report has not yet been issued. 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 continues
to assess 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
32
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.
33
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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.
34
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: May 14, 2003 By: /s/ JACK C. BENDHEIM
--------------------------------
Jack C. Bendheim
Chairman of the Board
Date: May 14, 2003 By: /S/ GERALD K. CARLSON
--------------------------------
Gerald K. Carlson
Chief Executive Officer
Date: May 14, 2003 By: /s/ RICHARD G. JOHNSON
--------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
35
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: May 14, 2003
/s/Gerald K. Carlson
- -----------------------
Gerald K. Carlson,
Chief Executive Officer
36
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: May 14, 2003
/s/Jack C. Bendheim
- ------------------------------------
Jack C. Bendheim,
Chairman of the Board
37
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: May 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.
38