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Table of Contents
As Filed with the Securities and Exchange Commission on August 13, 2002
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
 
For the quarterly period ended June 30, 2002
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to                 
 
Commission file number 333-81235
 
ROYSTER-CLARK, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
  
76-0329525
(State or other jurisdiction
of incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
600 FIFTH AVENUE — 25TH FLOOR
NEW YORK, NEW YORK 10020
(212) 332-2965
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
 
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  ¨
 
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the last practical date:    Not Applicable
 

Table of Contents
ROYSTER-CLARK, INC.
 
FORM 10-Q
 
TABLE OF CONTENTS
 
         
Page
PART 1.
        
Item 1.
        
       
2
       
3
       
4
       
5
Item 2.
      
13
Item 3.
      
21
PART 2.
        
Item 6.
      
22
  
24
 
FORWARD-LOOKING STATEMENTS
 
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. When used in this Report, the words “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “hope,” “may” and similar expressions, as well as “will,” “shall” and other indications of future tense, are intended to identify forward-looking statements. Similarly, statements that describe the Company’s future plans, objectives, targets or goals are also forward-looking statements. The forward-looking statements are based on our current expectations and speak only as of the date made. These forward-looking statements involve known and unknown risks, uncertainties and other factors that in some cases have affected our historical results and could cause actual results in the future to differ significantly from the results anticipated in forward-looking statements made in this Report. Important factors that could cause a material effect include, but are not limited to, (i) changes in matters which affect the global supply and demand of fertilizer products, (ii) the volatility of the natural gas markets, (iii) a variety of conditions in the agricultural industry such as grain prices, planted acreage, projected grain stocks, U.S. government policies, weather and changes in agricultural production methods, (iv) possible unscheduled plant outages and other operating difficulties, (v) price competition and capacity expansions and reductions from both domestic and international producers, (vi) the relative unpredictability of national and local economic conditions within the markets we serve, (vii) environmental regulations, (viii) other important factors affecting the fertilizer industry, (ix) fluctuations in interest rates and (x) other factors referenced in the Company’s Reports and registration statements filed with the Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements.
 
Few of the forward-looking statements in this Report deal with matters that are within our control. Acquisition, financing and other agreements and arrangements must be negotiated with independent third parties and, in some cases, must be approved by governmental agencies. These third parties generally have interests that do not coincide with ours and may conflict with our interests. Unless the third parties and we are able to compromise their various objectives in a mutually acceptable manner, agreements and arrangements will not be consummated.

1

Table of Contents
PART I.     FINANCIAL INFORMATION
 
ITEM 1.    Financial Statements
 
ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(Dollars in thousands)
 
    
June 30, 2002
   
December 31, 2001
  
Assets
              
Current assets:
              
Cash
   
$
317
   
997
 
Trade accounts receivable, net of allowance for doubtful accounts of $8,311 and $5,350 at June 30, 2002 and December 31, 2001, respectively
   
 
180,143
   
73,754
 
Other receivables
   
 
35,068
   
24,381
 
Inventories
   
 
139,206
   
211,218
 
Prepaid expenses and other current assets
   
 
2,079
   
2,246
 
Deferred income taxes
   
 
8,000
   
6,000
 
    
  
Total current assets
   
 
364,813
   
318,596
 
Property, plant and equipment, net
   
 
194,266
   
203,445
 
Goodwill
   
 
16,540
   
16,540
 
Deferred income taxes
   
 
—  
   
4,795
 
Deferred financing costs, net
   
 
9,461
   
10,512
 
Other assets, net
   
 
1,739
   
1,997
 
    
  
    
$
586,819
   
555,885
 
    
  
Liabilities and Stockholder’s Equity
              
Current liabilities:
              
Current installments of long-term debt
   
$
2,147
   
7,181
 
Customer deposits
   
 
30,250
   
60,900
 
Accounts payable
   
 
69,839
   
86,282
 
Accrued expenses
   
 
20,748
   
24,314
 
    
  
Total current liabilities
   
 
122,984
   
178,677
 
Senior secured credit facility
   
 
154,343
   
89,244
 
10 1/4% First Mortgage Notes due 2009
   
 
200,000
   
200,000
 
Long-term debt, excluding current installments
   
 
363
   
363
 
Other long-term liabilities
   
 
5,600
   
6,018
 
Deferred income taxes
   
 
6,574
   
—  
 
    
  
Total liabilities
   
 
489,864
   
474,302
 
    
  
Stockholder’s equity:
              
Common stock, no par value. Authorized 350,000 shares; 1 share issued and outstanding
   
 
—  
   
—  
 
Additional paid-in capital
   
 
88,599
   
88,599
 
Retained earnings (accumulated deficit)
   
 
8,356
   
(7,016
)
    
  
Total stockholder’s equity
   
 
96,955
   
81,583
 
    
  
    
$
586,819
   
555,885
 
    
  
 
See accompanying notes to condensed consolidated financial statements.

2

Table of Contents
ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands)
 
    
Three Months ended June 30,
     
Six Months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net sales
   
$
470,511
 
   
534,633
 
   
628,458
 
   
700,730
 
Cost of sales
   
 
371,916
 
   
422,412
 
   
507,037
 
   
560,661
 
    
  
  
  
Gross profit
   
 
98,595
 
   
112,221
 
   
121,421
 
   
140,069
 
Selling, general and administrative expenses
   
 
42,244
 
   
49,134
 
   
81,954
 
   
92,279
 
Loss on disposal of property, plant and equipment, net
   
 
103
 
   
293
 
   
163
 
   
842
 
    
  
  
  
Operating income
   
 
56,248
 
   
62,794
 
   
39,304
 
   
46,948
 
Interest expense
   
 
(7,301
)
   
(9,725
)
   
(14,419
)
   
(18,586
)
    
  
  
  
Income before income taxes
   
 
48,947
 
   
53,069
 
   
24,885
 
   
28,362
 
Income tax expense
   
 
18,628
 
   
20,261
 
   
9,513
 
   
11,099
 
    
  
  
  
Net income
   
$
30,319
 
   
32,808
 
   
15,372
 
   
17,263
 
    
  
  
  
 
 
See accompanying notes to condensed consolidated financial statements.

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Table of Contents
ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands)
 
    
Six Months ended June 30,
  
    
2002
     
2001
  
Cash flows from operating activities:
                
Net income
   
$
15,372
 
   
17,263
 
    
  
Adjustments to reconcile net income to net cash used in operating activities:
                
Provision for doubtful accounts
   
 
1,882
 
   
1,653
 
Depreciation and amortization
   
 
13,471
 
   
13,137
 
Loss on disposal of property, plant and equipment
   
 
163
 
   
842
 
Deferred income taxes
   
 
9,369
 
   
10,810
 
Changes in operating assets and liabilities increasing (decreasing) cash:
                
Trade accounts receivable
   
 
(108,271
)
   
(115,296
)
Other receivables
   
 
(10,687
)
   
4,871
 
Inventories
   
 
72,012
 
   
88,863
 
Prepaid expenses and other current assets
   
 
167
 
   
3,884
 
Other assets
   
 
16
 
   
(577
)
Accounts payable
   
 
(16,443
)
   
(34,037
)
Accrued expenses
   
 
(3,566
)
   
(1,999
)
Other long-term liabilities
   
 
(418
)
   
1,063
 
    
  
Total adjustments
   
 
(42,305
)
   
(26,786
)
    
  
Net cash used in operating activities
   
 
(26,933
)
   
(9,523
)
    
  
Cash flows from investing activities:
                
Proceeds from disposal of property, plant and equipment
   
 
739
 
   
497
 
Purchases of property, plant and equipment
   
 
(3,901
)
   
(9,334
)
Costs associated with Agro Acquisition
   
 
—
 
   
(1,816
)
    
  
Net cash used in investing activities
   
 
(3,162
)
   
(10,653
)
    
  
Cash flows from financing activities:
                
Proceeds from senior secured credit facility
   
 
220,886
 
   
240,735
 
Payments on senior secured credit facility
   
 
(155,787
)
   
(175,970
)
Principal payments on long-term debt
   
 
(5,034
)
   
(60
)
Net decrease in customer deposits
   
 
(30,650
)
   
(44,512
)
    
  
Net cash provided by financing activities
   
 
29,415
 
   
20,193
 
    
  
Net increase (decrease) in cash
   
 
(680
)
   
17
 
Cash at beginning of period
   
 
997
 
   
413
 
    
  
Cash at end of period
   
$
317
 
   
430
 
    
  
Supplemental disclosure of cash flow information:
                
Cash paid during the period for interest
   
$
14,104
 
   
18,811
 
    
  
Cash paid during the period for income taxes
   
$
260
 
   
258
 
    
  
 
See accompanying notes to condensed consolidated financial statements.

4

Table of Contents
ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Dollars in thousands)
 
(1)    Description of Business and Basis of Presentation    
 
Royster-Clark, Inc. (herein referred to as Royster-Clark or the Company) is a retail and wholesale distributor of mixed fertilizer, fertilizer materials, seed, crop protection products and agronomic services to farmers, primarily in the East, South and Midwest. The Company’s operations consist of retail farm centers, granulation, blending and seed processing plants, and an integrated network of storage and distribution terminals and warehouses. In addition, the Company operates two nitrogen-manufacturing plants that supply the retail and wholesale distribution businesses with nitrogen fertilizer products.
 
The information presented as of June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 is unaudited, and reflects all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s financial position as of June 30, 2002 and the results of its operations and its cash flows for the three and six month periods ended June 30, 2002 and 2001. The December 31, 2001 balance sheet information was derived from the audited Consolidated Financial Statements for the year ended December 31, 2001.
 
The condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2001, which are included as part of the Company’s Annual Report on Form 10-K.
 
The Company’s business is highly seasonal with approximately 70% of sales generated between March and July. Results for the interim periods presented are not necessarily indicative of results that may be expected for the entire year.
 
Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2001 and for the three and six months ended June 30, 2001 in order to conform to the financial statement presentation as of and for the three and six months ended June 30, 2002.
 
(2)    Accounting Change
 
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which establishes accounting and reporting standards for goodwill and intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but rather tested for impairment at least annually. Upon the adoption of SFAS No. 142 effective January 1, 2002, the Company ceased amortizing amounts related to goodwill. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”
 
SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase, required to be completed by June 30, 2002, screens for impairment, while the second phase (if necessary), which is required to be completed by December 31, 2002, measures the impairment. The Company completed its first phase impairment analysis during the current quarter which indicated no impairment of its recorded goodwill; accordingly, the second testing phase, absent future indication of impairment, is not necessary during 2002.

5

Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

 
Intangible Assets
 
At January 1, 2002, the Company’s intangible assets consisted of non-compete agreements with former employees and owners of businesses acquired. These assets are being amortized over the legal term of the individual agreements, which is generally less than four years. At June 30, 2002 and December 31, 2001, the carrying value of these arrangements was $0.8 million and $1.0 million, respectively, which is net of $0.8 million and $0.6 million of accumulated amortization, respectively. Amortization of intangible assets amounted to $0.2 million and $0.3 million for the six months ended June 30, 2002 and 2001, respectively.
 
These intangible assets are included in “other assets” in the accompanying condensed consolidated balance sheets. Estimated annual amortization expense for the next five years follows: 2002—$0.5 million; 2003—$0.4 million; 2004—$0.2 million and no amortization in 2005 and 2006.
 
Goodwill
 
At June 30, 2002 and December 31, 2001, the carrying value of goodwill was $16.5 million. In accordance with SFAS No. 142, the Company compared the fair value of the Company with the carrying value of assets and determined that goodwill recorded was not impaired. The fair value was determined using a present value of future cash flows technique.
 
For the six months ended June 30, 2001, amortization of goodwill totaled $0.6 million. The following table reconciles reported net income for the three and six months ended June 30, 2002 and 2001 to net income that would have been recorded if SFAS No. 142 were effective for each of the periods presented:
 
    
Three Months Ended June 30,
   
Six Months Ended
June 30,
    
2002
   
2001
   
2002
   
2001
Reconciliation of net income:
               
Net income
   
$
30,319
   
32,808
   
15,372
   
17,263
Add back: Goodwill amortization (net of tax)
   
 
—  
   
159
   
—  
   
372
    
  
  
  
Adjusted net income
   
$
30,319
   
32,967
   
15,372
   
17,635
    
  
  
  
 
(3)    Inventories
 
Inventories at June 30, 2002 and December 31, 2001 consist of the following:
 
    
June 30,
   
December 31,
    
2002
   
2001
Crop protection products
   
$
68,986
   
93,428
Fertilizers
   
 
10,457
   
25,824
Raw materials
   
 
34,908
   
62,624
Seeds
   
 
10,894
   
12,752
Sundries and other
   
 
13,961
   
16,590
    
  
    
$
139,206
   
211,218
    
  

6

Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

 
(4)    Environmental Matters
 
The Company is subject to a wide variety of federal, state and local environmental laws and regulations. The Company has been identified as a potentially responsible party concerning the release of certain hazardous substances at five locations. While the current law potentially imposes joint and several liability upon each party named as a potentially responsible party, the Company’s contribution to clean up these sites is expected to be limited, given the number of other companies which have also been named as potentially responsible parties and the nature and amount of cleanup involved. A number of the Company’s facilities have been evaluated as having excess nitrates, phosphorous and pesticides in the surrounding soil or groundwater. In addition, several underground storage tanks have been removed or closed at some facilities and these sites have been evaluated for possible contamination. In total, cleanup of hazardous or potentially hazardous substances has been planned or is being performed at approximately 49 sites.
 
In connection with the acquisitions of AgriBusiness and Royster-Clark (predecessor company), the Company obtained indemnities for certain claims related to environmental matters that existed or arose prior to the acquisitions. The indemnities related to AgriBusiness are subject to a $4,500 deductible, an overall cap on all indemnities of approximately $27,000, and certain time limitations. The indemnities related to Royster-Clark, Inc. (predecessor company) are subject to a deductible of $2,000, certain time limitations and an overall cap of $5,000 on all indemnities. In addition, Royster-Clark, Inc. (predecessor company) had obtained indemnities from Lebanon Chemical Corporation (LCC) for certain claims related to environmental matters that existed at sites acquired from LCC in December 1998. The Company also obtained indemnities from the former stockholder of Alliance for environmental conditions identified as of the date of acquisition.
 
The Company has recorded environmental liabilities at June 30, 2002 and December 31, 2001 for the estimated cost of cleanup efforts of identified contamination or site characterization, which total $3,437 and $3,483, respectively, and are included in other long-term liabilities in the accompanying condensed consolidated balance sheets. Actual cash expenditures during the six months ended June 30, 2002 and 2001 were $46 and $82, respectively. These liabilities do not take into account any claims for recoveries from insurance or third parties and are not discounted. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainty in evaluating environmental exposures.
 
(5)    Senior Secured Credit Facility
 
The Company maintains a senior secured credit facility that is subject to certain borrowing base limitations and to certain covenants, including maintenance of certain required financial ratios. Although the Company believes it is in compliance with the covenants at June 30, 2002, we do not expect to be in compliance with one or more of the financial ratios at September 30, 2002. We are currently renegotiating loan covenants with our bank group for future measurement dates. We expect to have this completed by September 30, 2002. If we are unable to have the covenants reset, we may have to renegotiate the loan or enter into a new agreement. While we believe we will be able to renegotiate the agreement or enter into a new agreement, there can be no assurance that we will.
 
(6)    Condensed Financial Data of Guarantor Subsidiaries
 
The Company issued $200,000 of 10 1/4% First Mortgage Notes due April 2009 (herein referred to as the First Mortgage Notes) on April 22, 1999 to partially finance an acquisition. The First Mortgage Notes mature on April 22, 2009 and bear interest at 10 1/4% payable semi-annually in arrears. The First Mortgage Notes are secured by 17 principal properties, related fixtures and equipment and other related assets and a pledge of equity

7

Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

of certain subsidiaries. The First Mortgage Notes are guaranteed on a full, unconditional and joint and several basis, by each of the following subsidiaries of Royster-Clark:
 
 
Royster-Clark Realty LLC
  
Royster-Clark Nitrogen, Inc.
Royster-Clark Resources LLC
  
Alliance Fertilizer of Suffolk, Inc.
Royster-Clark AgriBusiness, Inc.
  
Seaboard Liquid Plant Food, Inc.
Royster-Clark AgriBusiness Realty LLC
    
 
There are currently no restrictions on the ability of Royster-Clark to obtain funds from its guarantor subsidiaries through dividends or loans.
 
The following tables present the condensed financial data of Royster-Clark and its guarantor subsidiaries as of June 30, 2002 and December 31, 2001 and for the three and six month periods ended June 30, 2002 and 2001.

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Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

 
Balance Sheet Data as of June 30, 2002:
 
      
Royster-Clark, Inc.
   
Guarantor Subsidiaries
   
Eliminations
     
Consolidated
Current assets:
                          
Cash
     
$
42
   
275
   
—  
 
   
317
Trade accounts receivable, net
     
 
—  
   
181,881
   
(1,738
)
   
180,143
Other receivables
     
 
2,259
   
42,239
   
(9,430
)
   
35,068
Inventories
     
 
—  
   
139,206
   
—  
 
   
139,206
Prepaid expenses and other current assets
     
 
208
   
1,871
   
—  
 
   
2,079
Deferred income taxes
     
 
8,000
   
—  
   
—  
 
   
8,000
      
  
  
  
Total current assets
     
 
10,509
   
365,472
   
(11,168
)
   
364,813
Property, plant and equipment, net
     
 
12,502
   
181,764
   
—  
 
   
194,266
Goodwill
     
 
12,012
   
4,528
   
—  
 
   
16,540
Deferred financing costs, net
     
 
9,461
   
—  
   
—  
 
   
9,461
Other assets, net
     
 
50
   
1,689
   
—  
 
   
1,739
Investment in subsidiaries
     
 
402,019
   
—  
   
(402,019
)
   
—  
      
  
  
  
Total assets
     
$
446,553
   
553,453
   
(413,187
)
   
586,819
      
  
  
  
Current liabilities:
                          
Current installments of long-term debt
     
$
—  
   
2,147
   
—  
 
   
2,147
Customer deposits
     
 
—  
   
30,250
   
—  
 
   
30,250
Accounts payable
     
 
90
   
80,917
   
(11,168
)
   
69,839
Accrued expenses
     
 
6,347
   
14,401
   
—  
 
   
20,748
      
  
  
  
Total current liabilities
     
 
6,437
   
127,715
   
(11,168
)
   
122,984
Senior secured credit facility
     
 
154,343
   
—  
   
—  
 
   
154,343
10 1/4% First Mortgage Notes
     
 
200,000
   
—  
   
—  
 
   
200,000
Long-term debt, excluding current installments
     
 
—  
   
363
   
—  
 
   
363
Other long-term liabilities
     
 
489
   
5,111
   
—  
 
   
5,600
Deferred income taxes
     
 
6,574
   
—  
   
—  
 
   
6,574
      
  
  
  
Total liabilities
     
 
367,843
   
133,189
   
(11,168
)
   
489,864
      
  
  
  
Stockholder’s equity:
                          
Common stock
     
 
—  
   
—  
   
—  
 
   
—  
Additional paid-in capital
     
 
78,599
   
412,019
   
(402,019
)
   
88,599
Retained earnings
     
 
111
   
8,245
   
—  
 
   
8,356
      
  
  
  
Total stockholder’s equity
     
 
78,710
   
420,264
   
(402,019
)
   
96,955
      
  
  
  
Total liabilities and stockholder’s equity
     
$
446,553
   
553,453
   
(413,187
)
   
586,819
      
  
  
  

9

Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

 
Balance Sheet Data as of December 31, 2001:
 
 
      
Royster-Clark, Inc.
   
Guarantor Subsidiaries
     
Eliminations
     
Consolidated
  
Current assets:
                              
Cash
     
$
42
   
955
 
   
—  
 
   
997
 
Trade accounts receivable, net
     
 
—  
   
73,754
 
   
—  
 
   
73,754
 
Other receivables
     
 
4,204
   
42,306
 
   
(22,129
)
   
24,381
 
Inventories
     
 
—  
   
211,257
 
   
(39
)
   
211,218
 
Prepaid expenses and other current assets
     
 
356
   
1,890
 
   
—  
 
   
2,246
 
Deferred income taxes
     
 
6,000
   
—  
 
   
—  
 
   
6,000
 
      
  
  
  
Total current assets
     
 
10,602
   
330,162
 
   
(22,168
)
   
318,596
 
Property, plant and equipment, net
     
 
13,354
   
190,091
 
   
—  
 
   
203,445
 
Goodwill
     
 
12,012
   
4,528
 
   
—  
 
   
16,540
 
Deferred income taxes
     
 
4,795
   
—  
 
   
—  
 
   
4,795
 
Deferred financing costs, net
     
 
10,512
   
—  
 
   
—  
 
   
10,512
 
Other assets, net
     
 
75
   
1,922
 
   
—  
 
   
1,997
 
Investment in subsidiaries
     
 
322,845
   
—  
 
   
(322,845
)
   
—  
 
      
  
  
  
Total assets
     
$
374,195
   
526,703
 
   
(345,013
)
   
555,885
 
      
  
  
  
Current liabilities:
                              
Current installments of long-term debt
     
$
4
   
7,177
 
   
—  
 
   
7,181
 
Customer deposits
     
 
—  
   
60,900
 
   
—  
 
   
60,900
 
Accounts payable
     
 
—  
   
108,411
 
   
(22,129
)
   
86,282
 
Accrued expenses
     
 
5,750
   
18,564
 
   
—  
 
   
24,314
 
      
  
  
  
Total current liabilities
     
 
5,754
   
195,052
 
   
(22,129
)
   
178,677
 
Senior secured credit facility
     
 
89,244
   
—  
 
   
—  
 
   
89,244
 
10 1/4% First Mortgage Notes
     
 
200,000
   
—  
 
   
—  
 
   
200,000
 
Long-term debt, excluding current installments
     
 
—  
   
363
 
   
—  
 
   
363
 
Other long-term liabilities
     
 
490
   
5,528
 
   
—  
 
   
6,018
 
      
  
  
  
Total liabilities
     
 
295,488
   
200,943
 
   
(22,129
)
   
474,302
 
      
  
  
  
Stockholder’s equity:
                              
Common stock
     
 
—  
   
—  
 
   
—  
 
   
—  
 
Additional paid-in capital
     
 
78,599
   
332,845
 
   
(322,845
)
   
88,599
 
Retained earnings (accumulated deficit)
     
 
108
   
(7,085
)
   
(39
)
   
(7,016
)
      
  
  
  
Total stockholder’s equity
     
 
78,707
   
325,760
 
   
(322,884
)
   
81,583
 
      
  
  
  
Total liabilities and stockholder’s equity
     
$
374,195
   
526,703
 
   
(345,013
)
   
555,885
 
      
  
  
  

10

Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

 
Statement of Operations Data for the three and six months ended June 30, 2002 and 2001:
 
      
Royster-Clark, Inc.
     
Guarantor Subsidiaries
     
Eliminations
     
Consolidated
  
Three Months Ended June 30, 2002
                                
Net sales
     
$
903
 
   
493,038
 
   
(23,430
)
   
470,511
 
Cost of sales
     
 
105
 
   
390,763
 
   
(18,952
)
   
371,916
 
      
  
  
  
Gross profit
     
 
798
 
   
102,275
 
   
(4,478
)
   
98,595
 
Selling, general and administrative expenses
     
 
299
 
   
46,423
 
   
(4,478
)
   
42,244
 
(Gain)/Loss on disposal of property, plant and equipment, net
     
 
(4
)
   
107
 
   
—  
 
   
103
 
      
  
  
  
Operating income
     
 
503
 
   
55,745
 
   
—  
 
   
56,248
 
Interest expense
     
 
(501
)
   
(6,800
)
   
—  
 
   
(7,301
)
      
  
  
  
Income before income taxes
     
 
2
 
   
48,945
 
   
—  
 
   
48,947
 
Income tax expense
     
 
1
 
   
18,627
 
   
—  
 
   
18,628
 
      
  
  
  
Net income
     
$
1
 
   
30,318
 
   
—  
 
   
30,319
 
      
  
  
  
Three Months Ended June 30, 2001
                                
Net sales
     
$
1,207
 
   
556,815
 
   
(23,389
)
   
534,633
 
Cost of sales
     
 
105
 
   
440,022
 
   
(17,715
)
   
422,412
 
      
  
  
  
Gross profit
     
 
1,102
 
   
116,793
 
   
(5,674
)
   
112,221
 
Selling, general and administrative expenses
     
 
70
 
   
54,681
 
   
(5,617
)
   
49,134
 
Loss on disposal of property, plant and equipment, net
     
 
289
 
   
4
 
   
—  
 
   
293
 
      
  
  
  
Operating income
     
 
743
 
   
62,108
 
   
(57
)
   
62,794
 
Interest expense
     
 
(740
)
   
(8,985
)
   
—  
 
   
(9,725
)
      
  
  
  
Income before income taxes
     
 
3
 
   
53,123
 
   
(57
)
   
53,069
 
Income tax expense
     
 
1
 
   
20,260
 
   
—  
 
   
20,261
 
      
  
  
  
Net income
     
$
2
 
   
32,863
 
   
(57
)
   
32,808
 
      
  
  
  
Six Months Ended June 30, 2002
                                
Net sales
     
$
1,801
 
   
663,415
 
   
(36,758
)
   
628,458
 
Cost of sales
     
 
211
 
   
534,193
 
   
(27,367
)
   
507,037
 
      
  
  
  
Gross profit
     
 
1,590
 
   
129,222
 
   
(9,391
)
   
121,421
 
Selling, general and administrative expenses
     
 
591
 
   
90,793
 
   
(9,430
)
   
81,954
 
Loss on disposal of property, plant and equipment, net
     
 
12
 
   
151
 
   
—  
 
   
163
 
      
  
  
  
Operating income
     
 
987
 
   
38,278
 
   
39
 
   
39,304
 
Interest expense
     
 
(983
)
   
(13,436
)
   
—  
 
   
(14,419
)
      
  
  
  
Income before income taxes
     
 
4
 
   
24,842
 
   
39
 
   
24,885
 
Income tax expense
     
 
2
 
   
9,511
 
   
—  
 
   
9,513
 
      
  
  
  
Net income
     
$
2
 
   
15,331
 
   
39
 
   
15,372
 
      
  
  
  
Six Months Ended June 30, 2001
                                
Net sales
     
$
2,269
 
   
729,945
 
   
(31,484
)
   
700,730
 
Cost of sales
     
 
210
 
   
580,991
 
   
(20,540
)
   
560,661
 
      
  
  
  
Gross profit
     
 
2,059
 
   
148,954
 
   
(10,944
)
   
140,069
 
Selling, general and administrative expenses
     
 
368
 
   
103,030
 
   
(11,119
)
   
92,279
 
Loss on disposal of property, plant and equipment, net
     
 
392
 
   
450
 
   
—  
 
   
842
 
      
  
  
  
Operating income
     
 
1,299
 
   
45,474
 
   
175
 
   
46,948
 
Interest expense
     
 
(1,294
)
   
(17,292
)
   
—
 
   
(18,586
)
      
  
  
  
Income before income taxes
     
 
5
 
   
28,182
 
   
175
 
   
28,362
 
Income tax expense
     
 
2
 
   
11,097
 
   
—  
 
   
11,099
 
      
  
  
  
Net income
     
$
3
 
   
17,085
 
   
175
 
   
17,263
 
      
  
  
  

11

Table of Contents

ROYSTER-CLARK, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
JUNE 30, 2002
(Dollars in thousands)

 
Statement of Cash Flow Data for the six months ended June 30, 2002 and 2001:
 
      
Royster-Clark, Inc.
     
Guarantor Subsidiaries
       
Eliminations
   
Consolidated
  
Six Months Ended June 30, 2002
                                
Net cash provided by (used in) operating activities
     
$
(65,149
)
   
38,216
 
     
—  
   
(26,933
)
      
  
    
  
Cash flows from investing activities:
                                
Proceeds from disposal of property, plant and equipment
     
 
54
 
   
685
 
     
—  
   
739
 
Purchases of property, plant and equipment
     
 
—  
 
   
(3,901
)
     
—  
   
(3,901
)
      
  
    
  
Net cash provided by (used in) investing activities
     
 
54
 
   
(3,216
)
     
—  
   
(3,162
)
      
  
    
  
Cash flows from financing activities:
                                
Proceeds from senior secured credit facility
     
 
220,886
 
   
—
 
     
—  
   
220,886
 
Payments on senior secured credit facility
     
 
(155,787
)
   
—
 
     
—  
   
(155,787
)
Principal payments on long-term debt
     
 
(4
)
   
(5,030
)
     
—  
   
(5,034
)
Net decrease in customer deposits
     
 
—  
 
   
(30,650
)
     
—  
   
(30,650
)
      
  
    
  
Net cash provided by (used in) financing activities
     
 
65,095
 
   
(35,680
)
     
—  
   
29,415
 
      
  
    
  
Net decrease in cash
     
 
—  
 
   
(680
)
     
—  
   
(680
)
Cash at beginning of period
     
 
42
 
   
955
 
     
—  
   
997
 
      
  
    
  
Cash at end of period
     
$
42
 
   
275
 
     
—  
   
317
 
      
  
    
  
Six Months Ended June 30, 2001
                                
Net cash provided by (used in) operating activities
     
$
(64,901
)
   
55,378
 
     
—  
   
(9,523
)
      
  
    
  
Cash flows from investing activities:
                                
Proceeds from disposal of property, plant and equipment
     
 
159
 
   
338
 
     
—  
   
497
 
Purchases of property, plant and equipment
     
 
—  
 
   
(9,334
)
     
—  
   
(9,334
)
Costs associated with Agro acquisition
     
 
—  
 
   
(1,816
)
     
—  
   
(1,816
)
      
  
    
  
Net cash provided by (used in) investing activities
     
 
159
 
   
(10,812
)
     
—  
   
(10,653
)
      
  
    
  
Cash flows from financing activities:
                                
Proceeds from senior secured credit facility
     
 
240,735
 
   
—
 
     
—  
   
240,735
 
Payments on senior secured credit facility
     
 
(175,970
)
   
—
 
     
—  
   
(175,970
)
Principal payments on long-term debt
     
 
(23
)
   
(37
)
     
—  
   
(60
)
Net increase in customer deposits
     
 
—  
 
   
(44,512
)
     
—  
   
(44,512
)
      
  
    
  
Net cash provided by (used in) financing activities
     
 
64,742
 
   
(44,549
)
     
—  
   
20,193
 
      
  
    
  
Net increase in cash
     
 
—  
 
   
17
 
     
—  
   
17
 
Cash at beginning of period
     
 
42
 
   
371
 
     
—  
   
413
 
      
  
    
  
Cash at end of period
     
$
42
 
   
388
 
     
—  
   
430
 
      
  
    
  
 

12

Table of Contents
 
ITEM 2.     Management’s Discussion and Analysis of Financial Condition, Results of Operations and Cash
                  Flows
 
THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS. SEE “FORWARD-LOOKING STATEMENTS” ABOVE.
 
General
 
Royster-Clark, Inc. together with its subsidiaries, (the “Company” or “Royster-Clark”) is a retail and wholesale distributor of mixed fertilizer, fertilizer materials, seed, crop protection products and agronomic services to farmers, primarily in the East, South and Midwest. The Company’s operations include retail farm centers (“Farmarkets”), granulation, blending and seed processing plants, and an integrated network of storage and distribution terminals and warehouses. In addition, the Company operates two nitrogen-manufacturing plants that supply the retail and wholesale distribution businesses with nitrogen fertilizer products. Our business is affected by a number of factors, including weather conditions and the availability and prevailing prices for fertilizer, natural gas used in the production of various fertilizers and other crop production inputs.
 
Weather conditions can significantly affect our results of operations, both for quarterly reporting and on an annual basis. Adverse weather conditions during the planting season may force farmers to either delay or abandon their planting, or change to another crop, which may lead to lower use of fertilizer, seed and crop protection products. Weather conditions affected this quarter’s results of operations due to wet field conditions, especially in our Midwestern markets where some areas had water standing in the fields into the second week of June. This time is critical because farmers who have taken out crop insurance must decide whether to plant a crop or not. Farmers without crop insurance will decide whether to plant corn or switch to soybeans which has a lower dollar cost investment to the farmer.
 
The crop production inputs distribution business is seasonal, with approximately 70% of our sales occurring between March and July based upon planting, growing and harvesting cycles. This seasonality results from the planting, growing and harvesting cycles of our customers. Inventories are accumulated to be available for seasonal sales, requiring significant storage capacity. The accumulation of inventory is financed by suppliers or by the Company through its credit facility. Depending on weather and field conditions in the Company’s widely diverse geographic marketing areas, the period of heavy product shipments to customers can vary by several weeks, which may have a material impact on whether sales are recorded in the first or second quarter.
 
Another factor affecting our business is the price for fertilizers. We purchase nitrogen materials, phosphates, and potash and resell these nutrients in either their original form or in the form of multi-nutrient fertilizers. Prices for phosphates have recently experienced some volatility while potash has been relatively stable over the past several years. During the second quarter of 2002, nitrogen pricing has remained relatively stable compared to 2001 when pricing dropped significantly. The level of nitrogen prices directly affects the profitability of our two nitrogen-manufacturing plants.
 
The major raw material in the manufacture of nitrogen-based products is natural gas. We purchase natural gas through a combination of firm supply, fixed-price and market-priced contracts for use in our nitrogen-production plant in East Dubuque, IL. Natural gas pricing quoted at the Henry Hub was $2.55 per MMBTU at December 31, 2001. Natural gas prices have ranged from approximately $3.04 to $3.75 per MMBTU during the quarter and were $3.20 per MMBTU as of June 30, 2002. The level of natural gas prices directly affects profitability of our nitrogen-based products.

13

Table of Contents
 
Results of Operations
 
Three months ended June 30, 2002 compared to three months ended June 30, 2001
 
The following table and discussion provides information regarding Royster-Clark’s statement of operations as a percentage of net sales.
 
    
Three Months ended June 30,
  
    
2002
       
2001
  
Net sales
   
100.0
%
     
100.0
 
Cost of sales
   
79.0
 
     
79.0
 
    
    
Gross profit
   
21.0
 
     
21.0
 
Selling, general and administrative expenses
   
9.0
 
     
9.2
 
Loss on disposal of property, plant and equipment, net
   
—  
 
     
0.1
 
    
    
Operating income
   
12.0
 
     
11.7
 
Interest expense
   
(1.6
)
     
(1.8
)
    
    
Income before taxes
   
10.4
 
     
9.9
 
Income tax expense
   
4.0
 
     
3.8
 
    
    
Net income
   
6.4
%
     
6.1
 
    
    
 
Net sales.    Royster-Clark’s net sales were $470.5 million for the second quarter of 2002 compared to $534.6 million for the same period in 2001, a decrease of $64.1 million, or 12.0%. The decrease in sales resulted predominantly from approximately
$58.1 million in price depreciation of fertilizer materials, crop protection and seed products, predominantly nitrogen products. Declining natural gas prices from the high levels encountered in 2001 was the prime driver in this price depreciation. Inclement weather in several of the Company’s market areas in Indiana, Ohio, Illinois, Kentucky and Tennessee continued during the second quarter affecting product shipments. Some farmers switched from planting corn to soybeans, which require less fertilizer and crop protection inputs while other farmers elected not to plant and file for crop insurance compensation. The change in sales resulted from the following factors:
 
 
•
 
Market related sales price depreciation of various nitrogen fertilizer products (“nitrogen products”) accounted for approximately $48.0 million of the $58.1 million price depreciation. Price depreciation affected liquid and dry blend fertilizers and, to lesser extent, phosphate and potash products. Nitrogen products are used in both liquid and dry blended fertilizers and were affected by nitrogen price depreciation resulting in approximately $6.4 million in price depreciation. Crop protection product price depreciation of approximately $2.2 million resulted predominantly from generic product competition during the second quarter.
 
 
•
 
Sales volume declines were a net of $6.0 million resulting from declines in blend and granulated fertilizer products of approximately $9.5 million and crop protection products of approximately $11.0 million that were partially offset by volume increases in nitrogen products of approximately $13.8 million and smaller volume increases in industrial, potash and seed products. The decrease in blend and granulated sales volumes was the result of several factors that affected our markets to varying degrees. The volume declines in granulated products sales in the Southeast resulted from reduced fertilizer application due to continued dry conditions, limited supply of certain fertilizer grades and mixes and unprofitable customers we elected not to service. Limited supply of certain grades and mixes resulted from Company efforts that modified some of its manufacturing processes. We did not attain previous manufacturing rates resulting in lower available tons. Other decreases were the result of the compressed period many farmers had for planting in the Midwest due to rains during the planting season. Farmers shifted to nitrogen products for the maximum payback on their input dollars at the expense of the nutrient mix offered in blend and granulated products. Lower crop protection product sales volumes resulted from reduced corn acres planted.

14

Table of Contents
 
Gross profit.    Gross profit was $98.6 million for the second quarter of 2002 compared to $112.2 million for the same period in 2001, a decrease of $13.6 million, or 12.1%. The decrease in gross profit resulted from the various volume and pricing factors discussed above. Higher rebates, compared to the comparable period last year, covering various product groups resulted from improved rebate program income but was offset by unfavorable leverage of East Dubuque sales due to price depreciation of nitrogen products.
 
Gross margin was 21.0% for the second quarter of 2002 compared to 21.0% for the same period in 2001.
 
Selling, general and administrative expenses.    Selling, general and administrative expenses were $42.2 million for the second quarter of 2002 compared to $49.1 million for the same period in 2001, a decrease of $6.9 million, or 14.1%. The decrease in selling, general and administrative expenses resulted from the following factors:
 
 
•
 
Expenses were approximately $3.9 million lower compared to 2001 due to less expense supporting sales decreases including incentives, seasonal labor and overtime, fuel, power, doubtful accounts, travel, entertainment, repairs and supplies. Cost savings initiated in response to sales volume decreases were included in the lower expense.
 
 
•
 
Expenses at distribution centers handling crop protection and seed products and various terminals handling nitrogen solution and other fertilizer materials were $1.2 million lower due to the leverage effect of increased shipments through the facilities.
 
 
•
 
Medical health insurance and workers compensation expenses were $1.0 million lower than last year due to favorable cost experience and an increase in employee sharing of healthcare costs.
 
 
•
 
Rent expense was approximately $0.6 million lower than the comparable period last year due to improved utilization of equipment and lengthened use of equipment.
 
 
•
 
Full time salary costs were approximately $0.4 million lower due to personnel reductions.
 
 
•
 
Amortization of goodwill and other assets was approximately $0.2 million lower compared to 2001, predominantly due to adoption of provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. During 2001 selling, general and administrative expenses reflect charges for the amortization of goodwill, which is no longer amortized in the current year with the adoption of SFAS No. 142. For the three months ended June 30, 2001, amortization of goodwill totaled $0.3 million.
 
 
•
 
Other expenses were approximately $0.4 million lower compared to 2001 due to the results of other cost savings measures.
 
The decrease in selling, general and administrative expenses was partially offset by increases in property and general liability insurance of approximately $0.4 million and depreciation of approximately $0.4 million. Selling, general and administrative expense as a percentage of net sales was 9.0% for the second quarter of 2002 compared to 9.2% for the same period in 2001. Lower selling, general and administrative expenses as a percent of net sales resulted from personnel reduction, lower amortization and other expense reductions not driven by volume changes. Quarterly selling, general and administrative expense as a percent of net sales fluctuates widely within the fiscal year due to the seasonal nature of sales volumes with selling, general and administrative expense exhibiting less seasonal fluctuations.
 
Loss on disposal of property, plant and equipment, net.    Loss on sales of fixed assets was $0.1 million in 2002 compared to $0.3 million in 2001. This decrease was the result of the fewer asset sales during the quarter compared to the comparable period last year.
 
Operating income.    Operating income was $56.2 million for the second quarter of 2002 compared to $62.8 million for the same period in 2001, a decrease of $6.6 million, or 10.5%. This decrease was the result of

15

Table of Contents
factors discussed above. Operating income as a percentage of net sales was 12.0% for the second quarter in 2002 compared to 11.7% for the same period in 2001 due to the decreased selling, general and administrative expenses as a percentage of sales as described above.
 
Interest expense.    Interest expense was $7.3 million for the second quarter in 2002 compared to $9.7 million for the same period in 2001, a decrease of $2.4 million, or 24.7%. The decrease in interest expense was due to both lower average daily borrowings for the quarter against our senior secured credit facility and lower interest rates. Average daily borrowings against our senior secured credit facility used to fund working capital needs were $86.4 million lower in 2002 compared to 2001 resulting in approximately $1.7 million less interest expense. Lower interest rates on the senior secured credit facility of approximately 2.0% resulted in approximately $0.7 million less expense in 2002 as compared to 2001.
 
Income tax expense.    Income tax expense was $18.6 million for the second quarter of 2002 compared to $20.3 million for the same period in 2001, a decrease of $1.7 million. The lower income tax expense is attributable to lower taxable income. The effective tax rate was 38.1% for the second quarter of 2002 compared to 38.2% for the same period in 2001.
 
Net income.      Net income was $30.3 million for the second quarter of 2002 compared to $32.8 million for the same period in 2001, a decrease of $2.5 million, resulting from the fluctuations noted above.
 
Six months ended June 30, 2002 compared to six months ended June 30, 2001
 
The following table and discussion provides information regarding Royster-Clark’s statement of operations as a percentage of net sales.
 
    
Six Months ended June 30,
  
    
2002
       
2001
  
Net sales
   
100.0
%
     
100.0
 
Cost of sales
   
80.7
 
     
80.0
 
    
    
Gross profit
   
19.3
 
     
20.0
 
Selling, general and administrative expenses
   
13.0
 
     
13.2
 
Loss on disposal of property, plant and equipment, net
   
—  
 
     
0.1
 
    
    
Operating income
   
6.3
 
     
6.7
 
Interest expense
   
(2.3
)
     
(2.6
)
    
    
Income before taxes
   
.4.0
 
     
4.1
 
Income tax expense
   
1.6
 
     
1.6
 
    
    
Net income
   
2.4
%
     
2.5
 
    
    
 
Net sales.    Royster-Clark’s net sales were $628.5 million for the first six months of 2002 compared to $700.7 million for the same period in 2001, a decrease of $72.2 million, or 10.3%. The decrease in sales resulted predominantly from approximately $79.0 million in price depreciation of fertilizer materials, crop protection and seed products, predominantly nitrogen products during the second quarter. Declining natural gas prices from the high levels encountered in 2001 was the prime driver in this price depreciation. Inclement weather in several of the Company’s market areas in Indiana, Ohio, Illinois, Kentucky and Tennessee during the later portion of the first quarter and during the second quarter affected product shipments. Some farmers switched from planting

16

Table of Contents
corn to soybeans, which require less fertilizer and crop protection inputs while other farmers elected not to plant and file for crop insurance compensation. The change in sales resulted from the following factors:
 
 
•
 
Market related sales price depreciation of various nitrogen fertilizer products accounted for approximately $62.6 million of the $79.0 million price depreciation. Price depreciation affected liquid and dry blend fertilizers and, to lesser extent, phosphate and potash products. Nitrogen products are used in both liquid and dry blended fertilizers and were affected by nitrogen price depreciation resulting in approximately $9.1 million in price depreciation. Crop protection product price depreciation of approximately $2.5 million resulted predominantly from generic product competition during the second quarter.
 
 
•
 
Sales volume increases were a net of $6.8 million resulting from volume increases in nitrogen products of approximately $20.8 million that were partially offset by declines in blend and granulated fertilizer products of approximately $9.5 million and crop protection products of approximately $7.9 million. The increase in nitrogen products resulted primarily from regaining market share from 2001 when we passed on business anticipating higher returns during heavy second quarter movement. In addition, farmers applied nitrogen products for the maximum payback on their input dollars at the expense of blend and granulated fertilizer that offer a nutrient mix. Other decreases in blend and granulated sales volumes were the result of several factors that affected our markets to varying degrees. The volume declines in granulated products sales in the Southeast resulted from reduced fertilizer application due to continued dry conditions, limited supply of certain fertilizer grades and mixes and unprofitable customers we elected not to service. Limited supply of certain grades and mixes resulted from Company efforts that modified some of its manufacturing processes. We did not attain previous manufacturing rates resulting in lower available tons. Lower crop protection product sales volumes resulted from reduced corn acres planted.
 
Gross profit.    Gross profit was $121.4 million for the first six months of 2002 compared to $140.1 million for the same period in 2001, a decrease of $18.7 million, or 13.3%. The decrease in gross profit resulted from the various volume and pricing factors discussed above. Higher rebates covering various product groups earned during the second quarter compared to last year was partially offset by unfavorable leverage of East Dubuque sales due to price depreciation. Gross margin was 19.3% for the second quarter of 2002 compared to 20.0% for the same period in 2001. Lower gross margin percentage resulted primarily from sales price declines in nitrogen products.
 
Selling, general and administrative expenses.    Selling, general and administrative expenses were $82.0 million for the first six months of 2002 compared to $92.3 million for the same period in 2001, a decrease of $10.3 million, or 11.2%. The decrease in selling, general and administrative expenses resulted from the following factors:
 
 
•
 
Expenses were approximately $6.2 million lower compared to 2001 due to less expense supporting sales decreases including incentives, seasonal labor and overtime, fuel, power, doubtful accounts, travel, entertainment, repairs and supplies. Cost savings initiated in response to sales volume decreases were included in the lower expense.
 
 
•
 
Expenses at distribution centers handling crop protection and seed products and various terminals handling nitrogen solution and other fertilizer materials were $1.8 million lower due to the leverage effect of increased shipments through the facilities.
 
 
•
 
Medical health insurance and workers compensation expenses were $1.2 million lower than last year due to favorable cost experience and an increase in employee sharing of healthcare costs.
 
 
•
 
Rent expense was approximately $0.6 million lower than the comparable period last year due to improved utilization of equipment and lengthened use of equipment.
 

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•
 
Full time salary costs were approximately $1.1 million lower due to personnel reductions.
 
 
•
 
Amortization of goodwill and other assets was approximately $0.6 million lower compared to 2001, predominantly due to adoption of provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. During 2001 selling, general and administrative expenses, reflect charges for the amortization of goodwill, which is no longer amortized in the current year with the adoption of SFAS No. 142. For the six months ended June 30, 2001, amortization of goodwill totaled $0.6 million.
 
 
•
 
Other expenses were approximately $0.6 million lower compared to 2001 due to the results of other cost savings measures.
 
The decrease in selling, general and administrative expenses was partially offset by increases in property and general liability insurance of approximately $1.0 million and depreciation of approximately $0.8 million. Selling, general and administrative expense as a percentage of net sales was 13.0% for the first six months of 2002 compared to 13.2% for the same period in 2001. Lower selling, general and administrative expenses as a percent of net sales resulted from personnel reduction, lower amortization and other expense reductions not driven by volume changes. Quarterly selling, general and administrative expense as a percent of net sales fluctuates widely within the fiscal year due to the seasonal nature of sales volumes with selling, general and administrative expense exhibiting less seasonal fluctuations.
 
Loss on disposal of property, plant and equipment, net.    Loss on sales of fixed assets was $0.2 million for the first six months of 2002 compared to $0.8 million in 2001. This decrease was the result of the disposal last year of a former administrative office in 2001.
 
Operating income.    Operating income was $39.3 million for the first six months of 2002 compared to $46.9 million for the same period in 2001, a decrease of $7.6 million, or 16.2%. This decrease was the result of factors discussed above. Operating income as a percentage of net sales was 6.3% for the first six months in 2002 compared to 6.7% for the same period in 2001.
 
Interest expense.    Interest expense was $14.4 million for the first six months in 2002 compared to $18.6 million for the same period in 2001, a decrease of $4.2 million, or 22.6%. The decrease in interest expense was due to both lower average daily borrowings for the first six months against our senior secured credit facility and lower interest rates. Average daily borrowings against our senior secured credit facility used to fund working capital needs were $54.8 million lower in 2002 compared to 2001 resulting in approximately $2.5 million less interest expense. Lower interest rates on the senior secured credit facility of approximately 3.0% resulted in approximately $1.7 million less expense in 2002 as compared to 2001.
 
Income tax expense.    Income tax expense was $9.5 million for the first six months of 2002 compared to $11.1 million for the same period in 2001, a decrease of $1.6 million. The lower income tax expense is primarily attributable to a lower taxable income. The effective tax rate was 38.2% for the first six months of 2002 compared to 39.1% for the same period in 2001. The lower effective tax rate in 2002 compared to 2001 resulted from the elimination of goodwill amortization effective January 1, 2002 because of the adoption of SFAS No. 142.
 
Net income.    Net income was $15.4 million for the first six months of 2002 compared to $17.3 million for the same period in 2001, a decrease of $1.9 million, resulting from the fluctuations noted above.
 
Liquidity and Capital Resources
 
Our primary capital requirements are for working capital, debt service, capital expenditures and possible acquisitions. For day-to-day liquidity requirements, we operate with a $245 million senior secured credit facility (“credit facility”) with a consortium of banks. The credit facility expires in April 2004. At June 30, 2002, the borrowing base provisions under the facility supported a borrowing availability of $189.6 million, from which we had drawn $154.3 million. This facility includes up to $10.0 million for letters of credit. This facility contains financial and operational covenants and other restrictions with which we must comply, including a requirement to maintain certain financial ratios and limitations on our ability to incur additional indebtedness.

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Although the Company believes it is in compliance with the covenants at June 30, 2002, we do not expect to be in compliance with one or more of the financial ratios at September 30, 2002. We are currently renegotiating loan covenants with our bank group for future measurement dates. We expect to have this completed by September 30, 2002. If we are unable to have the covenants reset, we may have to renegotiate the loan or enter into a new agreement. While we believe we will be able to renegotiate the agreement or enter into a new agreement, there can be no assurance that we will.
 
Capital expenditures were $3.9 million for the six months ended June 30, 2002 compared with $9.3 million for the six months ended June 30, 2001. These capital expenditures were primarily for facilities improvements and machinery and equipment replacement projects. We estimate total capital expenditures, excluding acquisitions, for 2002 will range from $5.0 to $6.5 million.
 
Net cash used in operating activities for the six months ended June 30, 2002 was $26.9 million compared to $9.5 million for comparable period in 2001, an increase of $17.4 million. The most significant component of cash flows used in operating activities was movement in operating assets and liabilities of $14.0 million due to the seasonal nature of our business. The increases of $14.0 million resulted primarily from lower collections of other receivables of $15.6 million. Lower collections of other receivable resulted primarily from the collection last year of $10.2 million of the receivable recorded December 2000 for the sale of natural gas purchase contracts. Lower collections also resulted from higher rebate receivables of $3.7 million in 2002 and higher cash used from exchange receivables of $2.4 million due to the movement in balances 2002 versus 2001. Increased cash used also resulted from higher prepaid expenses of $3.8 million, lower accrued expenses of $1.6 million and lower long-term liabilities of $1.5 million. Cash used was partially offset from lower accounts receivable of $7.0 million due to lower sales and higher accounts payable net of inventory, of $0.7 million for the six months ended June 2002 compared to 2001.
 
Net cash used in investing activities amounted to $3.2 million in 2002 compared to $10.7 million in 2001, a decrease of $7.5 million. The decrease in net cash used in investing activities resulted from less capital expenditures in 2002 and $1.8 million in acquisition costs associated with the attempted acquisition of Agro Distribution expended in 2001.
 
Net cash provided by financing activities totaled $29.4 million compared to $20.2 million in 2001, an increase of $9.2 million. Increased cash provided by financing activities in 2002 compared to 2001 resulted from, an increase in customer deposits of $13.9 million and net proceeds from the credit facility of $0.3 million compared to 2001. The increase in cash provided by customer deposits resulted from lower cash used due to lower customer deposits at December 2001 compared to 2000, due primarily to price depreciation of nitrogen products. Lower working capital needs required lower borrowings under the credit facility. The payment of $5.0 million on a five-year note payable entered in 1997 reduced cash provided by financing activities.
 

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Net working capital, excluding senior secured credit facility and current installments of long-term debt at June 30, 2002 totaled $244.0 million versus $147.1 million at December 31, 2001, an increase of $96.9 million, or 65.9%. This increase resulted primarily from the typical seasonal activity of increases in trade accounts receivable and decreases in inventory, customer deposits and accounts payable from normal seasonal movement of operating assets and liabilities. Working capital changes are summarized in the table below.
 
Working capital increases:
       
Trade account receivable
   
$
106.4
Customer deposits
   
 
30.7
Accounts payable
   
 
16.4
Other receivables
   
 
10.7
Accrued expenses
   
 
3.6
Deferred taxes
   
 
2.0
    
Total increases
   
 
169.8
    
Working capital decreases:
       
Inventory
   
 
72.0
Other current assets
   
 
0.9
    
Total decreases
   
 
72.9
    
Net increase
   
$
96.9
    
 
Recently Issued Accounting Standards
 
Statement of Financial Accounting Standards No. 143
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.We do not believe the implementation of this standard will have a material effect on the financial condition or results of operations.
 
Statement of Financial Accounting Standards No. 145
 
In April 2002, the FASB issued SFAS No. 145, “Recission of FAS No. 4, 44 and 64, Amendment of FAS No. 13, and Technical corrections.” This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that Statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. This Statement also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement has a variety of effective dates due to the various standards affected, but generally is effective for years beginning or transactions after May 15, 2002, with early application encouraged. While we are still assessing the impact of this new standard, we do not believe the implementation of this standard will have a material effect on the financial condition or results of operations.
 

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Statement of Financial Accounting Standards No. 146
 
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. A fundamental conclusion reached by the Board in this Statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. SFAS No. 146 is effective prospectively after December 31, 2002. SFAS No. 146 was issued late in June and management has not reviewed its provisions to assess the impact of this new standard.
 
ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk
 
The Company is exposed to market risk due to changes in natural gas prices. Natural gas is a raw material used in the production of various nitrogen-based products that the Company either manufactures at its East Dubuque plant or purchases from vendors. Market prices of nitrogen-based products are affected by changes in natural gas prices as well as supply and demand and other factors. As a normal course of business, nitrogen-based products are purchased by the Company during the winter and early spring to supply its needs during the high sales volume spring season. Nitrogen-based inventory remaining at the end of the spring season will be subject to market risk due to changes in natural gas prices and supply and demand. Currently, the Company enters into limited indexed price commitments to purchase natural gas for use in its East Dubuque facility and therefore is exposed to significant market risk. Changes in levels of natural gas prices and market prices of nitrogen-based products can materially affect the Company’s financial position and results of operations.
 
The Company is also exposed to changes in interest rates. The interest rates that we pay for borrowings under our credit facility are based on the LIBOR rate of interest charged by the agent bank under our credit facility. Our operating results will be impacted by changes in interest rates. We estimate that based on an estimated annual average balance on our credit facility that each 1% change in market interest rate will impact before tax earnings by approximately $1.0 million. Our First Mortgage Notes bear interest at a fixed rate of 10 1/4%. Some of our customer deposits also bear interest at a fixed rate, which is established on an annual basis at the beginning of each farming season based on prevailing market rates for similar programs in each of the regions in which we operate.
 
The Company engages in limited commodity hedging activities with respect to its grain and seed purchases. Given the current economic climate, we believe that the rates in force approximate market rates. We do not hold or issue derivative financial instruments for trading purposes.
 
At June 30, 2002, the Company’s exposure to market risk factors had not materially changed from December 31, 2001.

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PART 2.     OTHER INFORMATION
 
ITEM 6.    Exhibits and Reports on Form 8-K
 
(a)
 
(1)    Financial Statements:
 
The following condensed consolidated financial statements are included in Part 1, Item 1, of this Form 10-Q:
 
Condensed Consolidated Balance Sheet as of June 30, 2002 and December 31, 2001
 
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2002 and 2001
 
Condensed Consolidated Statements of Cash Flow for the Six Months ended June 30, 2002 and 2001
 
(2)    Financial Statement Schedules: None.
 
(3)    Exhibits:
 
3.01
   
Restated Certificate of Incorporation of the Company.†
3.02
   
Certificate of Amendment of Restated Certificate of Incorporation of the Company.†
3.03
   
Amended and Restated Bylaws of the Company.†
4.01
   
Indenture dated as of April 22, 1999 by and among the Company, the Guarantors, and the United   States Trust Company of New York, as Trustee.†
4.02
   
Form of 10 1/4% First Mortgage Note Due 2009 (Included in Exhibit 4.01)†
10.01
   
Credit Agreement dated as of April 22, 1999 by and among the Company, the Guarantors, various lenders, DLJ Capital Funding, as arranger and syndication agent, J.P. Morgan Securities Inc., as documentation agent and U.S. Bancorp Ag Credit, Inc., as administrative agent.†
10.03
   
SupplyAgreement dated as of April 22, 1999 among IMC Kalium Ltd., IMC-Agrico Company and the Company. Portions of this exhibit have been omitted pursuant to a request for confidential treatment.†
10.04
   
Company Employee Savings and Investment Plan.†
10.05
   
Royster-Clark Group, Inc. 1999 Restricted Stock Purchase and Option Plan.†
10.06
   
Employment Agreement dated as of April 22, 1999 by and among Francis P. Jenkins, Jr., Royster-Clark Group, Inc. and Royster-Clark, Inc.†
10.14
   
Amendment Agreement dated August 18, 2000 amending Credit Agreement.††
10.15
   
Second Amendment to Revolving Credit Agreement among Royster-Clark, Inc., various financial institutions, DLJ Capital Funding, J.P. Morgan Securities, Inc., and U.S. Bancorp, Ag Credit, Inc.†††
10.16
   
Employment Agreement dated as of December 1, 1999 between Royster-Clark, Inc. and G. Kenneth Moshenek.††††
10.17
   
EmploymentAgreement dated as of December 1, 1999 between Royster-Clark, Inc. and Walter Vance.††††
10.18
   
Form of Waiver and Consent dated May 6, 2002 under the Revolving Credit Agreement by and among Royster-Clark, Inc. and various financial institutions*
99.01
   
Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350 ‡
99.02
   
Certification of Periodic Financial Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, U.S.C. Section 1350 ‡

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†
 
Incorporated by reference to Registration Statement on Form S-4 (Reg. No.: 333-81235) where it has been filed as an Exhibit.
††
 
Incorporated by reference to Exhibit No. 10.14 to Form 10Q for the quarterly period ended June 30, 2000 (Reg. No.: 333-81235) filed on August 21, 2000.
†††
 
Incorporated by reference to Exhibit No 10.15 to Form 10Q for the quarterly period ended September 30, 2000 (Reg. No.: 333-81235) filed on November 14, 2000.
††††
 
Incorporated by reference to Exhibit No 10.15 to Form 10K for the annual period ended December 31, 2000 (Reg. No.: 333-81235) filed on April 2, 2001.
*
 
Incorporated by reference to Exhibit No 10.18 to Form 10Q for the quarterly period ended March 31, 2002 (Reg. No.: 333-81235) filed on May 14, 2002.
‡
 
Filed herein.
 
 
(b)
 
Reports on Form 8-K – None

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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.
 
 
   
ROYSTER-CLARK, INC.
 
/s/    WALTER R. VANCE
   
Walter R. Vance
Chief Accounting Officer
 
 
DATE: August 12, 2002

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