ITEM 1. Business
Trans-Resources, Inc., a privately-owned Delaware corporation ("TRI"), operates through its independently managed and financed subsidiaries and is a leading global developer, producer and marketer of specialty plant nutrients and specialty industrial and agricultural chemicals. As used herein, the term "the Company" means TRI, together with direct and indirect subsidiaries. The Company is the world's largest producer and distributor of agricultural grade potassium nitrate, which is a leading specialty plant nutrient. Potassium nitrate is utilized in specialized agricultural applications for the growth of high-value crops such as fruits, vegetables, flowers and tobacco. The Company is also: (i) the largest global and sole U.S. producer of propanil, which is a leading rice herbicide; (ii) the world's largest producer of technical grade potassium nitrate, used in a variety of industrial applications; (iii) the sole supplier to the U.S. Air Force of nitrogen tetroxide, an aerospace fuel additive; and (iv) the only North American producer of 3,4 dichloroanaline ("DCA"), the principal raw material in the production of propanil. The Company also produces a variety of other chemical products used in agricultural, industrial and pharmaceutical markets. In addition, the Company utilizes its production capacity and manufacturing expertise to provide contract manufacturing services for other chemical companies. The Company sells its products through an established global sales, marketing and distribution network to customers in 95 countries and conducts its operations through three product groups: Specialty Plant Nutrients, Industrial Chemicals and Organic Chemicals, which during 1997 contributed approximately 58.6%, 28.9% and 12.5%, respectively, of the Company's total revenues. Of the Company's total revenues for the year ended December 31, 1997, approximately 34% and 39% were derived from sales in the United States and Europe, respectively, with the remainder derived from sales in many other countries.
TRI's direct and indirect wholly-owned subsidiaries include Haifa Chemicals Limited ("HCL"), an Israeli corporation, and HCL's wholly-owned subsidiary, Haifa Chemicals South, Ltd., an Israeli corporation ("HCSL"); Cedar Chemical Corporation, a Delaware corporation ("Cedar"), and Cedar's wholly-owned subsidiary, Vicksburg Chemical Company, a Delaware corporation ("Vicksburg"); and Na-Churs Plant Food Company ("Na-Churs"), a Delaware corporation (Na-Churs was acquired in March 1995). TRI was incorporated in Delaware in 1971 under the name Trans-Pacific Resources, Inc.
SIGNIFICANT DEVELOPMENTS
On August 16, 1996, Cedar's wholly-owned subsidiary, NMPC, Inc., (formerly New Mexico Potash Corporation), a New Mexico corporation ("NMPC"), and EDP, Inc. (formerly Eddy Potash, Inc.), a Delaware corporation ("EDP"), sold substantially all of their assets for an aggregate consideration of $56,154,000, including a payment for working capital of $11,154,000 and the assumption of specified liabilities (but excluding, among other things, certain antitrust litigation - see Item 3 "Legal Proceedings"). NMPC and EDP had conducted the Company's potash mining and production operations. The sale of the Company's potash operations resulted in a pre-tax gain, after considering certain costs relating thereto, of $22,579,000. Such gain is included in "Interest and other income - net" in the Consolidated Statements of Operations. During the years ended December 31, 1995 and 1996, the potash operations contributed approximately $54,000,000 (14%) and $35,000,000 (9%), respectively, to the Company's consolidated revenues, after eliminating intercompany sales. Approximately 50% of the aggregate sales proceeds received from the buyers were applied to partially prepay debt secured in part by the assets of NMPC or EDP. In connection with the sale, Vicksburg entered into a five year potash supply agreement at prevailing market rates during the period (subject to certain adjustments), with the buyer.
During August 1997, Cedar and a subsidiary of Westrade, Inc., a privately-held Cayman Islands corporation ("Westrade"), formed Riceco LLC, a Delaware limited liability company ("Riceco"), to market propanil, combination rice herbicides and other rice-related chemicals (other than fertilizers) on a worldwide basis. Westrade's interest in Riceco is now held by a corporation (the "Westrade Member") which is 50% owned by E.I. Du pont de Nemours and Company ("DuPont") and 50% by the private investment group which currently owns 50% of Westrade. Westrade produces, markets and distributes various agricultural chemicals. Under a long-term supply agreement, the Company will produce all of the propanil required by Riceco. See "Riceco" below and Part II - Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
On November 9, 1997, Laser Industries Limited ("Laser"), a publicly traded manufacturer of lasers for medical use in which the Company had an ownership interest accounted for by the equity method, and ESC Medical Systems Ltd. ("ESC"), signed a definitive agreement (the "Agreement") to combine the two companies through an exchange of shares. The transaction closed on February 23, 1998. The Company's ability to sell the ESC shares it will receive pursuant to the combination will be governed by securities law volume restrictions. As of December 31, 1997, the Company carried its investment in the Laser shares at approximately $9,100,000, which amount is included in the caption "other assets" in the Consolidated Balance Sheet. Based on the quoted market value of the ESC shares ($35.00 per share), as of February 20, 1998, the last day of trading before the combination, the Company will recognize an after-tax gain of approximately $22,400,000 which will be recorded during the first quarter of 1998. In addition to the ownership of the Laser shares described above, the Company also owned a warrant (the "Laser Warrant") which enabled the Company to purchase additional Laser shares. The Laser Warrant, which had a carrying value of $750,000, was distributed as a dividend in February 1998.
On February 4, 1998, HCL completed the purchase of approximately 42% of the equity of Lego Irrigation Ltd., an Israeli developer, manufacturer and marketer of drip irrigation systems, for approximately $11,000,000. During 1996, Lego had revenues of approximately $20,000,000. Under certain circumstances, HCL could be required to increase its equity investment in Lego by an additional $11,000,000.
See "Employees" below and Part II - Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" for certain information regarding a labor dispute at HCL commencing in October 1996 and resulting in work stoppages and an HCL plant shut-down from December 3, 1996 to March 10, 1997 (the "HCL Labor Dispute"), which significantly impacted the Company's financial results during the fourth quarter of 1996 and the first two quarters of 1997.
In March, 1998 the Company refinanced its 11 7/8% Senior Subordinated Notes and issued $100,000,000 principal amount of 10 3/4% Senior Notes due 2008 (the "Senior Notes") and $135,000,000 principal amount of Senior Discount Notes due 2008 to provide gross proceeds to the Company of approximately $75,400,000 (the "Senior Discount Notes"). See Note G of Notes to Consolidated Financial Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Report are forward-looking statements, including, but not limited to, statements concerning future revenues (e.g., impact of the HCL Labor Dispute and inflation in Israel); expenses (e.g., labor savings resulting from the new SCA, future environmental costs and capital expenditures); and access to lending sources and Israeli Government entitlement. Such forward-looking statements involve unknown and uncertain risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors ("Cautionary Factors") include, among others, the following: political stability, inflation and currency rates in those foreign countries (including, without limitation, Israel) in which the Company generates a significant portion of its production, sales and earnings; current or future environmental developments or regulations which would require the Company to make substantial expenditures, and changes in, or the failure of the Company to comply with, such government regulations; the potentially hazardous nature of certain of the Company's products; the ability to achieve anticipated labor cost reductions at HCL; the Company's ability to continue to service and refinance its debt; new plant start-up costs; competition; changes in business strategy or expansion plans; raw material costs and availability; the final outcome of the legal proceedings to which the Company is a party (see Item 3 - "Legal Proceedings"); and other factors referenced in this Report.
Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the Cautionary Factors.
PRODUCTS
The Company develops, produces and distributes a range of specialty chemicals products for a variety of agricultural and industrial end-uses. The Company has grouped its operations into three general product categories that reflect the different industries and end-use markets serviced by the Company. These product groups are: Specialty Plant Nutrients, Industrial Chemicals and Organic Chemicals.
Specialty Plant Nutrients. The Company's Specialty Plant Nutrients consist of high-value nutrients designed for intensive agriculture, including greenhouses, nurseries and orchards. The Company's flagship product is potassium nitrate, which is marketed principally under the brand names K-Power domestically and Multi-K internationally (collectively referred to as "K-Power"). Potassium nitrate provides potassium and nitrogen, two of the three essential plant nutrients, is water soluble and does not contain chlorine or other environmentally harmful chemical residues that are generally found in commodity fertilizers. The unique combination of these performance characteristics allows potassium nitrate to command a price premium over other potassic plant nutrients and fertilizers and has led to a compound annual growth rate in tons shipped of approximately 6% for the industry over the past five years. With current annual production capacity of approximately 630,000 tons, the Company is the world's largest producer of potassium nitrate. The Company is in the process of increasing its annual potassium nitrate capacity to approximately 770,000 tons by year-end 1999. The Company believes that it currently accounts for approximately 60% of the world's production of potassium nitrate and 100% of North American production of potassium nitrate.
The Company's other Specialty Plant Nutrients include those designed for highly specialized horticultural applications. These include: (i) Polyfeed, a fully soluble and chlorine-free blend of varying combinations of plant nutrients containing the three essential plant nutrients, nitrogen, phosphorus and potassium; (ii) Magnisal, which acts as a magnesium supplement; (iii) monoammonium phosphate, or Multi-MAP, a fully soluble source of nitrogen and phosphorus; (iv) monopotassium phosphate, or Multi-MKP, a fully soluble, chlorine-free source of potassium and phosphorus; and (v) Multicote, a polymer coated specialty plant nutrient which provides for the controlled release of nutrients over specific periods of time ranging from four to 12 months, which optimizes plant feeding and minimizes labor requirements. The Company, through Na-Churs, is also the largest U.S. producer and marketer of high purity liquid fertilizers, which are sold under its Na-Churs brand name and are used both as a starter nutrient in growing corn and in growing high-value crops such as fruits, vegetables and flowers. Specialty Plant Nutrients revenues were approximately $220,500,000 in 1997.
The following table sets forth the Company's principal Specialty Plant Nutrients products, markets and applications:
Industrial Chemicals. The Company's Industrial Chemicals consist of a variety of specialty and other chemicals with applications in multiple end-use markets. The Company's Industrial Chemicals products are generally produced as co-products in the Company's potassium nitrate manufacturing processes. These products provide the Company with the ability to diversify its revenue base while maintaining its leadership position in potassium nitrate and to allocate its
fixed costs over a broader base of revenues and products. The Company is the world's largest manufacturer and marketer of technical grade potassium nitrate, a high purity product used for many industrial applications, including the production of television picture tubes, computer screens, other specialty glasses, ceramics, food additives and explosives. The Company, through Vicksburg, is also a manufacturer of potassium carbonate, marketed under the brand name K-Carb. K-Carb is used in the production of television picture tubes, computer screens, ceramics, detergents, in agricultural applications, and in the production of other potassic chemicals. In addition, the Company is the sole supplier to the U.S. Air Force of nitrogen tetroxide, an aerospace fuel additive.
Additional Industrial Chemicals produced by the Company include phosphoric acid, with approximately 66,000 tons of current annual production capacity, used for metal treatment, industrial cleaning solutions, fermentation and in the food and fertilizer industries; and a variety of phosphate products including: sodium tripolyphosphate ("STPP"), an ingredient in detergents; monoammonium phosphate ("MAP"), used in fire extinguishers and fire retardants; monopotassium phosphate ("MKP"), used in the fermentation process; monosodium phosphate ("MSP") and disodium phosphate ("DSP"), which are used by food processing companies as emulsifiers for cheese processing and as a buffer in foodstuffs; and sodium acid pyrophosphate ("SAPP"), used by food processing companies in baking powders and potato processing. The Company also produces chlorine sold to industrial and chemical manufacturing companies for water purification and production of paper pulp and PVC pipe. Industrial Chemicals revenues were approximately $109,000,000 in 1997.
The following table sets forth the Company's principal Industrial Chemicals products, markets and applications:
Organic Chemicals. The Company's Organic Chemicals consist primarily of a variety of herbicides and other products requiring expertise in complex organic synthesis. The Company's Organic Chemicals products include propanil, the world's leading rice herbicide, and DCA, the principal raw material for the production of propanil. The Company is the sole U.S. producer, and the only fully integrated producer worldwide, of propanil, and is the sole producer of DCA in North America. Other Organic Chemicals include Butoxone, a leading peanut and soybean herbicide; diuron, a broad use herbicide used on various crops, including alfalfa and cotton; and ethephon, a cotton, fruit and vegetable growth regulator. The Company also produces and sells trishydroxyaminomethane ("THAM"), a proprietary buffering agent used in pharmaceutical applications, including contact lens solutions. In addition, the Company utilizes its manufacturing expertise and capacity and serves as a contract manufacturer of organic chemicals for chemical companies. The Company recently formed Riceco with a strategic partner to market propanil, combination rice herbicides and other rice-related chemicals (other than fertilizers) on a worldwide basis. Organic Chemicals revenues were approximately $47,000,000 in 1997.
The following table sets forth the Company's principal Organic Chemicals products, markets and applications:
SALES AND MARKETING
The Company's sales and marketing network consists of a direct sales force of approximately 115 professionals as well as over 150 independent agents, distributors and brokers who market and distribute the Company's products in particular markets in which the Company does not have a significant direct sales and marketing presence. The Company's sales efforts are complemented by its product development and technical support staff, who work with customers to demonstrate the performance of the Company's existing products under specific climatic, soil and growing conditions and to develop new products and markets based on customer needs. At present, the Company maintains resident development and technical support staff in the United States, Israel, Italy, Spain, France, the United Kingdom, Greece, Mexico, South Africa, China, Japan and the Benelux countries.
The Industrial Chemicals produced by the Company are generally marketed through the Company's marketing network and through the Company's subsidiaries throughout the world. Nitrogen tetroxide is primarily sold under a long-term contract to the U.S. Air Force. Contract manufacturing business is generally secured on the basis of reputation for quality, efficiency and speed of execution and promotional activity, such as participation in trade shows.
In order to provide prompt and responsive service the Company uses warehouse and distribution facilities which are strategically located throughout the Company's global network. The Company maintains inventories of its products internationally to facilitate prompt deliveries to customers.
CUSTOMERS AND MARKETS
The Company's customers include blenders, distributors, professional growers, agrichemical companies, governmental agencies, and multinational manufacturers in many geographic markets throughout the world. The following chart sets forth the breakdown of the Company's sales by geographic market for the three year period ended December 31, 1997:
The Company's customers are diversified across each of the Company's product groups. Specialty Plant Nutrients are generally sold through the Company's network of representative offices and through its sales, technical support and distribution affiliates who in turn generally sell to blenders, growers or other end-users. In addition, the Company sells Specialty Plant Nutrients directly to certain large blenders and end-users. The Company sells its Industrial Chemicals principally through its own worldwide network of representative offices and through its sales, support and distribution affiliates to various industrial consumers. The Company's Organic Chemicals Group sells its products through distributors, co-operatives, regional dealers, international brokers and multinationals, as well as to Riceco. In addition, the Company sells its Organic Chemicals directly to some customers domestically and through a joint venture partner internationally. During the year ended December 31, 1997, no customer accounted for more than 4% of consolidated revenues and the 10 largest customers accounted for less than 18% of consolidated revenues.
RESEARCH AND DEVELOPMENT
As of December 31, 1997, the Company employed approximately 54 research and development scientists, engineers and technicians, who are involved in the development and evaluation of process technologies, efficiencies and quality control. For the years ended December 31, 1995, 1996 and 1997, the Company spent approximately $3,158,000, $2,693,000 and $2,421,000, respectively, on these efforts, which have been charged to current operations. The Company's extensive agronomic data base, which consists of the results of thousands of experiments under a wide range of soil and climatic conditions, enhances the Company's ability to develop and introduce new products, as horticultural and agricultural growers generally require substantial testing under their own specific climatic, soil and growing conditions before they will adopt a new plant nutrient. The Company also utilizes cooperative agronomic research and development partnerships with universities to further develop new products and applications.
RAW MATERIALS
The Company's raw materials consist primarily of ammonia, potash and phosphate rock. Other raw materials include orthodichlorobenzene, propionic acid and various other chemicals. In the United States, all of the Company's raw materials are readily available from multiple suppliers. A minimum of approximately 50% of Vicksburg's potash requirements are required to be purchased pursuant to a five year contract entered into in connection with the Company's 1996 sale of its potash operations with the buyer of the potash operations. This supplier has the right to supply Vicksburg's remaining potash requirements if it can meet market prices and specified quality standards. The contract is renewable for additional one year periods if mutually agreed. The remainder of Vicksburg's potash requirements are
available from multiple suppliers. Ammonia is generally purchased from a supplier under a renewable contract expiring in August 1999 at negotiated prices and is also available from multiple sources.
HCL (including HCSL) sources its potash exclusively from Dead Sea Works Ltd. ("DSW") under two long-term contracts which expire in 1999 and 2005, and sources its phosphate rock solely from Rotem Amfert Negev Ltd. ("Rotem") according to the terms of a variable price contract which expired in 1996 and which is currently being renegotiated. The potash contracts provide for prices to be established quarterly, based on the weighted average of the FOB Israeli port prices paid to DSW by its overseas customers during the preceding quarter plus certain adjustments thereto. DSW and Rotem are both subsidiaries of a large Israeli chemical company. While the Company believes that alternative sources of supply for raw materials supplied by Rotem and DSW are available, the loss of supply from DSW and Rotem could have an adverse impact on the Company's financial performance. Ammonia is sourced from a European supplier under a one year contract renewable at negotiated prices and is available from a number of alternative suppliers. Approximately 85% of HCL's energy requirements and approximately 50% of its steam requirements at its Haifa facility are provided by a co-generation plant owned and operated by a third party under a three year contract expiring in 2001 and renewable for an additional two years. The remainder of HCL's steam requirements in Haifa are supplied by HCL's own steam facility. Such third party also operates this steam facility for HCL under a contract having a similar term and at prices generally below those available from alternative steam sources other than the co-generation plant.
The Company has historically experienced fluctuations in the price of ammonia. The Company has not generally passed on ammonia price changes to its customers as price changes have generally been temporary.
MANUFACTURING
The production of Specialty Plant Nutrients, Organic Chemicals and Industrial Chemicals are each integrated multi-stage processes which in some cases involve chemical synthesis, formulation and mixing. Following these processes, the product is packaged based upon customer requirements.
The Company utilizes two unique synthetic manufacturing processes in producing Specialty Plant Nutrients and Industrial Chemicals. HCL utilizes a "solvent extraction" process in Israel and Vicksburg utilizes a "direct reaction" process in the United States. The solvent extraction process is based on reacting potassium chloride with nitric acid in the presence of an aqueous recycled brine and an organic solvent, producing potassium nitrate and hydrochloric acid as co-products. The hydrochloric acid is used on-site to acidulate phosphate rock and produce phosphoric acid, which in turn is used to manufacture a variety of phosphate products. The direct reaction process is based on the reaction of potassium chloride and nitric acid, which produces potassium nitrate and chlorine and nitrogen tetroxide as co-products. In the production of the Company's Organic Chemicals and contract manufacturing products, major processes and chemistries include the complex synthesis of organic chemicals to produce agrichemicals and pharmaceutical chemicals. Propanil is produced at Cedar's West Helena, Arkansas facility by reacting DCA with propionic acid and propionic anhydride to produce propanil technical, the active ingredient in all propanil products. Propanil technical is formulated into emulsifiable concentrate and then sold. Cedar also sells propanil technical in molten form and flake form.
RICECO
During August 1997, Cedar and Westrade formed Riceco to market propanil, combination rice herbicides and other rice-related chemicals (other than fertilizers) on a worldwide basis. The Company and the Westrade Member each have a 50% equity interest in Riceco and each exercises equal voting rights. Riceco's profits and losses are currently allocated 60% to the Company and 40% to the Westrade Member, but under specified conditions would be adjusted to 50% to each. At closing, both members contributed product registrations, labels and customer lists to Riceco and subsequently each member provided an interim working capital loan of $1,250,000 to be repaid in 1998 in accordance with covenants contained in a Riceco loan agreement. Under a long-term supply agreement, the Company will produce all of the propanil required by Riceco.
INTELLECTUAL PROPERTY
The Company seeks to protect the confidentiality of its manufacturing processes by maintaining these processes as trade secrets, and accordingly, has generally not sought patent protection. In addition, the Company has differentiated its products in the marketplace by pursuing a branded strategy. As a result, the Company has developed several brand names, such as K-Power, Magnisal, Polyfeed, Multicote, Poni, K-Carb and Na-Churs.
COMPETITION
In Specialty Plant Nutrients, the Company primarily competes with Sociedad Quimica y Minera de Chile, S.A., a Chilean corporation, and to a lesser extent with other producers. Competition among producers of agricultural grade potassium nitrate is primarily driven by customer preferences for quality, reliability, custom specifications and price.
In Industrial Chemicals, the Company competes with a wide variety of large and small specialty and commodity chemical companies. The primary competitive factors in the industrial chemicals market are product quality, technical specifications and price.
In Organic Chemicals, the Company primarily competes with a wide variety of large and small specialty and commodity chemical companies. Competitive factors in the production of organic chemicals primarily consist of manufacturing expertise in specific complex chemical processes, vertical integration, flexible manufacturing facilities and price.
FACILITIES
Vicksburg owns the property, plant and equipment located at its Vicksburg, Mississippi facility and Cedar owns the property, plant and equipment located at its West Helena, Arkansas facility. The Vicksburg plant consists of three manufacturing plants situated on 600 contiguous acres. The West Helena facility is ISO 9002 certified and is located on a 60 acre site. The plants are encumbered by first mortgages and security interests securing long-term bank indebtedness. The Company's corporate office in New York City and administrative office in Memphis, Tennessee are both in leased facilities.
HCL owns its machinery and equipment and leases the land for its Haifa, Israel operations from Oil Refineries Ltd. ("ORL"), a corporation which is majority-owned by the Israeli Government. The leases expire at various dates, primarily in the years 2015 and 2016. HCSL owns the machinery and equipment and leases the land for its Mishor Rotem, Israel operations from the Israeli Land Administration Authority under a 49 year lease which commenced in 1994. All of such lease payments for the Mishor Rotem land have already been paid and were included in the construction costs for this facility. HCL also owns ammonia terminal facilities located on leased property in the port in Haifa and leases from ORL a pipeline which transports ammonia from the port in Haifa to HCL's plant. Substantially all of these assets are subject to security interests in favor of the State of Israel or banks.
Management believes that its facilities are in good operating condition and adequate for its current needs.
EMPLOYEES
As of December 31, 1997 the Company employed approximately 840 people. Approximately 220 employees have advanced technical and academic qualifications. Except for certain employees at the Company's Israeli operations, none of the Company's employees are represented by any collective bargaining unit.
During the fourth quarter of 1996 and the first two quarters of 1997, the Company's operations were adversely impacted by the HCL Labor Dispute.
Most HCL employees are members of the "Histadrut," the Israeli national labor federation, and are represented by collective bargaining units. Terms of employment of most HCL employees are currently governed predominantly
by a Specific Collective Agreement ("SCA") negotiated by HCL with the Histadrut, the respective unions representing the employees and representatives of the employees.
In 1994, HCL signed an agreement with the unions and representatives of the technicians and engineers for the three year period ended December 31, 1996. In 1995, an SCA was signed with the unions and representatives of the other employees for the two year period ended December 31, 1996. In September 1996, the Company announced the cancellation of such agreements effective upon their expiration dates and its intention to negotiate a new SCA with basic changes aimed at reducing labor costs and enhancing operating flexibility for the period following December 31, 1996.
As a result of the announced cancellation of the labor agreements, HCL suffered several work stoppages and other job actions which adversely affected productivity during October and November 1996, including a period of temporary plant shut-down. On December 3, 1996 the plant was shutdown until March 10, 1997 when a new SCA providing for certain wage freezes and reductions in benefits was signed for the three year period ending December 31, 1999. Subsequent to March 10, 1997, the HCL plant re-opened and gradually began production. By the end of May 1997 and subsequent thereto, the HCL plant was generally operating at approximately full capacity; however, there have been several periods of operations at less than full capacity due to the need for increased maintenance for certain equipment resulting from the lengthy period of shut-down.
Management believes that the new SCA will result in cost savings for the Company compared to the costs it would otherwise have incurred during the next few years had HCL merely renewed the terms of the prior SCAs and continued the pattern of increased costs included in recent SCAs. Further, management believes that the aggregate amount of such cost savings over the next few years will substantially exceed the incremental costs experienced during the HCL Labor Dispute. Such savings commenced during the second quarter of 1997.
Following the settlement of the HCL Labor Dispute, HCL achieved the following objectives: (i) a reduction in absenteeism from about 7% per annum to about 2% per annum; (ii) greater ability to freely transfer employees between departments and production units; (iii) increased flexibility regarding the ability to promote employees and incentivize them based on performance measures and evaluations developed and implemented by management; (iv) greater ability to dismiss employees on the basis of poor performance (which has already been utilized); (v) on-going and more effective communication between management and employees; and (vi) increased freedom to use sub-contractors. In addition, following the settlement of the HCL Labor Dispute, HCL restructured its workforce with the result being a net 100 person reduction (or 18%) in the number of its employees, and an approximate 16% reduction in the average cost per employee. Under the new labor agreement, such reductions in headcount and in average cost per employee resulted in estimated annual cost savings of $9,000,000. See Part II - Item 7 - -"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Special Note Regarding Forward Looking Statements" above.
A third party provides operating and management services for HCSL's Mishor Rotem, Israel facility as a subcontractor, and is reimbursed for costs based on an approved budget plus a variable incentive fee designed to increase efficiency, volumes produced and quality of production.
ENVIRONMENTAL MATTERS
Cedar and Vicksburg.Vicksburg's plant located in Vicksburg, Mississippi and Cedar's West Helena, Arkansas plant discharge process waste water and storm water pursuant to permits issued in accordance with the Federal Clean Water Act and related state statutes. Air emissions at each plant are regulated by permits issued pursuant to the Federal Clean Air Act and related state statutes.
The Federal Environmental Protection Agency ("EPA") notified the Company in 1989 that unspecified corrective action will be required under the Federal Resource Conservation and Recovery Act of 1976, as amended, to protect against the release of contaminants allegedly present at the Vicksburg plant as a result of previous pesticide manufacturing operations. As a result of the notice, an agreement was reached with the EPA and the Department of Justice on the terms of a Consent Decree which was filed in the United States District Court at Jackson, Mississippi in January 1992. Pursuant to the Consent Decree, a facility investigation work plan was submitted to the EPA. Following
its approval, Vicksburg intends to undertake a site investigation and corrective measures study, followed by implementation of appropriate corrective action. Compliance with the Consent Decree is expected to occur over a five to six year period following the EPA's approval of the facility investigation work plan.
Cedar's West Helena plant utilizes a surface impoundment for biological treatment of non-hazardous waste streams which was the subject of an enforcement proceeding initiated by the Arkansas Department of Pollution Control and Ecology (the "ADPCE") in 1986 which required Cedar to carry out various studies, ultimately leading to the implementation of a groundwater monitoring system. Based in part on the results of groundwater monitoring and in part on the discovery of a drum burial area on the West Helena plant site, the ADPCE requested Cedar to initiate an expanded plant-wide investigation pursuant to a Consent Administrative Order entered in 1991 (the "Order"). In December 1997, ADPCE accepted the final facility investigation report and requested Cedar to initiate a corrective measures study to address eight separate locations on Cedar's West Helena plant site which ADPCE believes may require remedial action. In addition, ADPCE requested a plan for interim measures to address groundwater contamination on and adjacent to the West Helena plant. Cedar removed the buried drums from the West Helena site in accordance with a work plan incorporated in the Order and, shortly thereafter, filed a suit against a former operator of the plant site for contribution for the costs incurred. In October 1994, Cedar reached a settlement pursuant to which it recovered a substantial portion of its previously incurred drum removal and investigative costs. The settlement also provides for binding arbitration among Cedar and two former operators at the plant site to apportion future investigative and remedial costs required under the Order.
The Company believes that the future costs required to complete the site investigation and corrective measures studies at Vicksburg and any supplemental plant-wide investigation (if required) and the corrective measures studies at West Helena will be between $500,000 and $1,000,000 and will be expended over two to three years. Interim corrective measures may also be implemented at one or both of these locations during this same period. As of December 31, 1997, the Company has accrued an aggregate of $1,250,000 for these matters. Until these investigations are completed, it is not possible to determine the costs of any final corrective actions which will be required. Any such corrective action costs will be expended over a period of years. There can be no assurance that such costs will not be material.
In December 1997, the EPA requested 34 companies, including Cedar, to provide information about their dealings with the previous owners and operators of a drum reclamation and recycling site known as the W&R Drum Superfund Site in Memphis, Tennessee. Cedar could have potential liability to share costs of remediating this site, which is on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.
HCL. As a result of the production of phosphoric acid, HCL generates acid sludge and liquid acid effluents. In accordance with a permit issued pursuant to the Law for the Prevention of Sea Pollution (Disposing of Wastes) of 1983, HCL is now disposing of the acid sludge in a designated site in the Mediterranean Sea, situated 20 nautical miles from the Israeli coast. The permit allows for the disposal of a quantity which is sufficient to satisfy HCL's needs. The permit is effective until September 30, 1998, after which disposal of acid sludge to the sea should cease in accordance with the Plan described below.
HCL currently disposes of its liquid acid effluents to the Haifa Bay through a local river in accordance with a permit issued pursuant to the Law for the Prevention of Sea Pollution from Land Sources of 1988, effective until September 30, 1998. Both above-mentioned permits set forth restrictions on quantities and concentrations, inspection, reporting duties and certain other conditions.
During July 1996 the Ministry of Environment (the "Ministry") approved a proposed comprehensive land solution plan for the handling and disposal of the sludge and effluents produced by HCL's plant (the "Plan"). The Plan was based on the joint work of HCL and representatives of the Ministry. In general, the Plan consists of two objectives: (i) decreasing the quantities and concentrations of the effluents, and (ii) a permanent land solution for the sludge currently being disposed of in the Mediterranean Sea, by filtering and purifying it in a purifying plant to be built by HCL, and the disposal thereof at a land site to be approved by the Ministry. The overall time schedule for the complete
execution of the Plan is four and one-half years, with up to an additional one and one-half year grace period available under certain conditions, with estimated capital expenditures of up to $15,000,000 which commenced in 1997.
In November 1996 HCL signed a settlement agreement (the "Agreement") for resolution of a private criminal complaint, alleging violation of specified Israeli environmental laws as a result of HCL's dumping of chemical waste into a local river without adequate permits, which was submitted against HCL and its directors on December 21, 1994 by Man, Nature and Law, an Israeli fellowship for the protection of the environment (the "Society") and six fishing companies (collectively, the "Petitioners") before the Magistrate's Court of Haifa. On November 26, 1996 the court approved the Agreement, and the Petitioners withdrew the complaint.
While the Agreement is consistent with the Plan, it is more specific regarding prescribed time schedules, concentrations of effluents and the maintenance of such concentrations. It also establishes a Supervising Committee to review and supervise HCL's progress in complying with the Agreement and prescribes enforcement penalty provisions. In addition, HCL compensated the Petitioners and reimbursed the Society for certain legal expenses and agreed to contribute to an educational and monitoring fund to be established under the Agreement. The Society agreed that after implementation of the plans pursuant to the Agreement, it would not make any further demands on HCL or to any judicial or administrative body regarding the alleged contamination of water or the sea unless the Agreement is breached.
HCSL disposes of liquid effluents in plastic lined evaporation ponds in accordance with a business license issued under the Business Licenses Act of 1968. Based on recent results of groundwater monitoring in the area, the Ministry notified HCSL of its intention to seek an alternate solution to be implemented in the future, including the imposition of a requirement to decrease the concentrations of acid effluents. HCSL believes that the solution used by it heretofore in coordination with the authorities provides adequate protection to avoid groundwater contamination. HCSL notified the Ministry of its objection to the imposition of new purifying requirements.
On March 3, 1998, a criminal proceeding was initiated against HCL and its Managing Director in the Magistrate's Court of Haifa for alleged 1995 nitrous oxide air emissions beyond prescribed levels. During 1995, HCL adopted additional technical and administrative measures to monitor such emissions and believed that it had resolved this matter with the Ministry in 1995. The Company believes that even if this proceeding were adversely decided, the penalty would be a fine which would not have a material adverse effect on it operations or financial conditions.
Appropriate provisions have been made in the consolidated financial statements with respect to the above matters. See Notes A and O of Notes to Consolidated Financial Statements.
ITEM 2.
ITEM 2. Properties
Reference is made to "Facilities" in Item 1 above, "Business," for information concerning the Company's properties. See also Note D of Notes to Consolidated Financial Statements for additional information.
ITEM 3.
ITEM 3. Legal Proceedings
Beginning in April 1993 a number of class action lawsuits were filed in several United States District Courts against the major Canadian and United States potash producers, including EDP and NMPC. The purported class actions were filed on behalf of all direct United States purchasers of potash from any of the named defendants or their respective affiliates, at any time during the period from April 1987 to the present, and alleged that the defendants conspired to fix, raise, maintain and stabilize the prices of potash in the United States purchased by the plaintiffs and the other members of the class in violation of the United States antitrust laws. The complaints sought unspecified treble damages, attorneys' fees and injunctive relief against the defendants. Pursuant to an order of the Judicial Panel for Multidistrict Litigation, all of the Federal District Court actions were consolidated for pretrial purposes in the United States District Court for Minnesota and captioned In Re Potash Antitrust Litigation. Several additional and/or amended complaints were filed in the Minnesota Federal District Courts making substantially the same allegations as the earlier complaints. These complaints have been superseded by or deemed included in the Third Amended and Consolidated Class Action
Complaint, to which NMPC and EDP served and filed answers denying all the material allegations thereof on or about July 22, 1994. On or about January 12, 1995 the Court granted plaintiffs' motion to certify the plaintiff class. On or about December 21, 1995, the defendants filed motions for summary judgement. On September 13, 1996 Magistrate Judge Erickson issued a Report and Recommendation recommending that U.S. District Court Judge Kyle grant the motions filed by NMPC, EDP and the other defendants for summary judgment as to all of the plaintiffs' claims. Plaintiffs filed objections to the Report and Recommendation under Rule 72 F.R.Civ.P. On January 2, 1997, after written briefs were submitted by plaintiffs and defendants and after oral argument before Judge Kyle on December 19, 1996, Judge Kyle issued an order accepting and adopting Magistrate Judge Erickson's Report and Recommendation and ordering that the motions filed by NMPC, EDP and the other defendants for summary judgment as to all of the plaintiffs' claims be granted. Plaintiffs, by Notice of Appeal dated January 31, 1997, appealed Judge Kyle's order to the U.S. Court of Appeals for the Eighth Circuit, before which oral argument on the appeal occurred on November 17, 1997.
On or about May 27, 1993 a purported class action captioned Angela Coleman v. New Mexico Potash Corp., et al. was filed against the major Canadian and United States potash producers, including EDP and NMPC, and unnamed co-conspirators in the Superior Court of the State of California for the County of Los Angeles. The Coleman action was commenced by Angela Coleman on behalf of a class consisting of all California indirect purchasers of potash, and alleges that the defendants conspired to fix, raise, maintain and stabilize the prices of potash indirectly purchased by the members of the class in violation of specified California antitrust and unfair competition statutes. The complaint in Coleman seeks unspecified treble damages, attorneys' fees and injunctive relief against the defendants. In addition, on or about March 29, 1994, a purported class action captioned Neve Bros. et al. v. Potash Corporation of Saskatchewan, et. al., was commenced in the Superior Court of the State of California for the City and County of San Francisco against the major Canadian and United States potash producers and unnamed co-conspirators. EDP, NMPC, NMPC's parent, Cedar, Cedar's parent corporation, Nine West Corporation ("Nine West"), and the Company are among the named defendants in the Neve action. The Neve action, also brought on behalf of a class of indirect purchasers of potash in California, makes substantially the same allegations as made in the Coleman action and seeks substantially the same legal and equitable remedies and relief. Nine West and the Company have been dismissed from the Neve action, in each case for lack of personal jurisdiction. Cedar, EDP and NMPC have served and filed answers in the Neve action, and EDP and NMPC have served and filed answers in the Coleman action, in each case denying all material allegations of the respective complaint. The Coleman action has been consolidated with the Neve action in the Superior Court of the State of California for the City and County of San Francisco. By stipulation, this consolidated action has been stayed pending the outcome of the appeal to the Court of Appeals for the Eighth Circuit in the federal action discussed above.
Management has no knowledge of any conspiracy of the type alleged in these complaints.
In June 1996, the grand jury authorized by the U.S. Department of Justice Antitrust Division to investigate possible violations of the antitrust laws in connection with the allegations made in the civil actions described above closed its investigation without bringing any action.
On October 24, 1995, several suits were filed in both the State Court in Bogalusa, Louisiana and in the United States District Court for the Eastern District of Louisiana, each purporting to be class actions arising out of an October 23, 1995 explosion of a tank car at a plant of a Vicksburg customer located in Bogalusa, Louisiana. The tank car contained nitrogen tetroxide which had been produced and sold by Vicksburg. Subsequently, approximately 146 suits were filed in the State Court for the 22nd Judicial District, Washington Parish, Louisiana. The cases have been consolidated in this State Court and the consolidated suit certified as a class action. The class is estimated to contain approximately 8,000 claimants. Vicksburg, Cedar and the Company are included among the defendants in the class action. In addition, two later suits, one on behalf of the City of Bogalusa, have been filed in the same court naming, among the defendants, Vicksburg, Cedar and the Company. Also, 10 separate suits naming an aggregate of more than 8,000 plaintiffs have been filed in the Circuit Court of Hinds County, Mississippi naming, among the defendants, Vicksburg, Cedar and the Company. Among other defendants included in the consolidated Louisiana class action and in the Mississippi suits are Gaylord Chemical Company and its parent corporation, Gaylord Container Corporation; Union Tank Car Company; Illinois Central Railroad; and Kansas City Southern Railroad. The plaintiffs in all of these suits seek unspecified damages arising out of the alleged exposure to toxic fumes which were allegedly released as a result of the explosion and the City of Bogalusa also seeks reimbursement of expenses allegedly resulting from the
explosion. The Company has filed motions and/or exceptions in the Mississippi and Louisiana actions denying personal jurisdiction, which motions/exceptions remain pending. The Mississippi court has established a trial date for an initial group of plaintiffs to be determined for September 1998. The Louisiana court has established a plan culminating in a trial in October 1998. The suits have been tendered to the Company's liability insurance carriers for defense and indemnification. Vicksburg and Cedar have commenced an action in the 22nd Judicial District Court, Washington Parish, Louisiana against their principal insurance carriers (whose insurance policies also include the Company as an additional named insured) seeking a declaratory judgement that Cedar and Vicksburg are entitled to defense costs and indemnification with respect to these claims.
There are several other legal proceedings pending against the Company and certain of its subsidiaries arising in the ordinary course of its business which management does not consider material.
Management of the Company believes, based upon its assessment of the actions and claims outstanding against the Company and certain of its subsidiaries, and after discussion with counsel, that the eventual disposition of the matters described or referred to above should not have a material adverse effect on the financial position, future operations or liquidity of the Company. However, management of the Company cannot predict with certainty the outcome of the potash and Louisiana matters described above.
For information relating to certain environmental proceedings affecting the Company, see "Environmental Matters" in Item 1 above, "Business."
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended December 31, 1997.
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
All of the Company's equity securities are owned by TPR Investment Associates, Inc. ("TPR"). See Part III Item 12 - "Security Ownership of Certain Beneficial Owners and Management." In addition, see Note G of Notes to Consolidated Financial Statements for information regarding certain restrictions on the Company's payment of dividends. During 1995, 1996 and 1997, the Company paid or declared dividends on its Common Stock in the amounts of $856,000, $5,208,000 and $3,736,000, respectively.
ITEM 6.
ITEM 6. Selected Financial Data
The following table presents selected consolidated financial data of the Company for the five year period ended December 31, 1997. This data has been derived from the consolidated financial statements of the Company and should be read in conjunction with the notes thereto.
(1) Includes (a) gains of $18,100,000 and $1,700,000 in the years ended December 31, 1994 and 1995, respectively, representing the excess of insurance proceeds over the carrying value of certain HCL property destroyed in a fire, (b) security gains (losses) of $2,261,000, ($1,178,000), ($413,000), $341,000 and $2,713,000 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997, respectively, (c) foreign currency gains (losses) of $850,000, ($3,800,000), $5,400,000, ($1,600,000) and $0 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997, respectively, and (d) a gain of $22,579,000 in the year ended December 31, 1996 relating to the Company's sale of its potash operations in 1996. See Item 7
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth as a percentage of revenues and the percentage change of those items as compared to the prior period, certain items appearing in the Consolidated Financial Statements.
1997 Compared with 1996
Revenues decreased by 8.7% to $376,531,000 in 1997 from $412,305,000 in 1996, a decrease of $35,774,000. The decrease resulted from a $35,300,000 reduction in sales associated with the Company's sale of its potash operations
and a $3,900,000 decrease in sales of Specialty Plant Nutrients and Industrial Chemicals primarily as a result of the HCL Labor Dispute and less favorable currency exchange rates in 1997. These decreases in sales were partially offset by higher sales of Organic Chemicals of $3,400,000. See Part I - Item 1 - "Business" - "Significant Developments" and "Employees" above.
Cost of goods sold as a percentage of revenues decreased to 81.2% in 1997 compared with 83.4% in 1996. Gross profit was $70,943,000 in 1997, or 18.8% of revenues, compared with $68,375,000 in 1996, or 16.6% of revenues. The primary factors resulting in the increased gross profit were related to higher Organic Chemicals margins in the 1997 period, lower raw material and energy costs and increased selling prices for the Company's Specialty Plant Nutrients and Industrial Chemicals, with such increases partially offset by less favorable currency exchange rates in the 1997 period of $15,000,000.
Both 1997 and 1996 were adversely affected by the HCL Labor Dispute. The adverse effect of the HCL Labor Dispute related to: (i) a reduction in sales volume; (ii) the increased cost of production resulting from reduced manufacturing during the period which affected the fixed charge component of cost of sales; and (iii) lower gross margins due to inventory shortages which required purchases from third parties at substantially increased costs compared to the Company's costs. These adverse impacts were partially offset by lower labor costs during the HCL Labor Dispute and the net proceeds received from the Israeli manufacturers association under HCL's claim for damages, amounting to $3,100,000 and $2,000,000 in the years ended December 31, 1997 and 1996, respectively, applied for partial contribution towards the costs suffered during the period of the labor disruption.
General and administrative expense decreased by $3,797,000 to $42,622,000 in 1997, from $46,419,000 in 1996, but remained the same as a percentage of revenues at 11.3%. Most of the decreased expense related to the Company's potash operations, which were sold in 1996. In addition, during the 1997 period, certain HCL general and administrative expenses declined as a result of lower wages.
As a result of the matters described above, the Company's operating income increased by $6,365,000 to $28,321,000 in 1997 as compared with $21,956,000 in 1996. As a percentage of revenues operating income increased to 7.5% in 1997 from 5.3% in 1996.
Interest expense decreased by $2,720,000 to $29,475,000 in 1997 compared with $32,195,000 in 1996 primarily as a result of: (i) the maturity of the Company's Senior Subordinated Reset Notes in September 1996 and (ii) the prepayment of senior bank debt with a portion of the proceeds from the sale of the Company's potash operations. Interest and other income - net decreased in 1997 by $19,898,000, principally as the result of the gain on the sale of the Company's potash operations of $22,579,000 in the 1996 period, partially offset by increased realized gains on sales of marketable securities in the 1997 period.
As a result of the above factors, income before income taxes and extraordinary item decreased by $10,813,000 in 1997. The Company's provisions for income taxes are impacted by the mix between domestic and foreign earnings and vary from the U.S. Federal statutory rate principally due to the impact of foreign operations and certain losses for which there is no current tax benefit.
In the 1996 period the Company acquired $19,122,000 principal amount of its Senior Subordinated Reset Notes, which resulted in a loss of $553,000. Such loss (which has no current tax benefit) is classified as an extraordinary item in the accompanying Consolidated Statements of Operations. No such debt was acquired in the 1997 period.
1996 Compared with 1995
Revenues increased by 6.9% to $412,305,000 in 1996 from $385,564,000 in 1995, an increase of $26,741,000. This increase resulted from increased sales of Specialty Plant Nutrients and Industrial Chemicals of $45,900,000, partially offset by decreased sales of Organic Chemicals of $800,000 and Potash of $18,400,000. Effective August 16, 1996, the Company sold its potash operations - see Note A of Notes to Consolidated Financial Statements.
Cost of goods sold as a percentage of revenues decreased to 83.4% in 1996 compared with 83.8% in 1995. Gross profit was $68,375,000 in 1996, or 16.6% of revenues, compared with $62,438,000, or 16.2% of revenues, an increase of $5,937,000. The primary factors resulting in the increased 1996 gross profit were (i) more favorable currency rates, (ii) higher quantities of potassium nitrate sold, (iii) the inclusion of the results of Na-Churs for the full year in 1996 as compared with only nine months in 1995 and (iv) lower ammonia prices in 1996. These increases were partially offset by lower Potash and Organic Chemicals margins in 1996 and the adverse effect of the labor dispute and strike at HCL commencing in October, 1996. See Part I - Item 1 - "Business" - "Significant Developments" and "Employees" above.
As a result of the HCL Labor Dispute, the fourth quarter of 1996 was significantly impacted by: (i) a reduction in sales volume; (ii) increased cost of production resulting from reduced manufacturing which affected the fixed charge component of cost of sales; (iii) the cost of raw materials destroyed in the production process during work stoppages and job actions; (iv) lower gross margins due to inventory shortages requiring purchases from third parties at substantially increased costs compared to the Company's cost of production; and (v) increased general and administrative expenses arising from higher security and other costs. This adverse impact was partially offset by lower labor costs during the HCL Labor Dispute and the net proceeds received from the Israeli manufacturers association under HCL's claim for damages, applied for partial contribution towards the costs suffered during the period of labor disruption.
General and administrative expense increased to $46,419,000 in 1996, or 11.3% of revenues, from $43,193,000 in 1995, or 11.2% of revenues, primarily as a result of (i) the inclusion of the results of Na-Churs for the full year in 1996 and (ii) the inclusion in 1995 of a $750,000 reimbursement of certain general and administrative expenses incurred in prior years on behalf of an entity in which the Company has an investment.
As a result of the matters described above, the Company's operating income increased by $2,711,000 to $21,956,000 in 1996 as compared with $19,245,000 in 1995.
Interest expense decreased by $2,303,000 to $32,195,000 in 1996 compared with $34,498,000 in 1995, primarily as a result of reduced interest expense resulting from the repurchase and maturity of the Company's outstanding Senior Subordinated Reset Notes, partially offset by increased interest on the long-term debt that financed the construction of HCSL's Plant in Mishor Rotem, Israel. Interest and other income - net increased in 1996 by $16,320,000 principally as the result of (i) the 1996 period including a $22,579,000 gain relating to the sale of the Company's potash operations and an increase in equity in the earnings of Laser of $2,600,000, partially offset by (ii) the net change in adjustments relating to the marking-to-market of forward exchange contracts which do not qualify as hedges of $7,000,000 and (iii) the inclusion in 1995 of a $1,700,000 gain relating to the February, 1994 fire at HCL. See Note K of Notes to Consolidated Financial Statements.
As a result of the above factors, income before income taxes and extraordinary item increased by $21,334,000 in 1996. The Company's provisions for income taxes are impacted by the mix between domestic and foreign earnings and vary from the U.S. Federal statutory rate principally due to the impact of foreign operations and certain losses for which there is no current tax benefit. In addition, during 1995 HCL recorded a tax benefit for a $1,100,000 tax refund related to prior years. See Note J of Notes to Consolidated Financial Statements for information regarding effective tax rates.
In 1995 and 1996 the Company acquired $3,250,000 and $19,122,000, respectively, of principal amount of its Senior Subordinated Reset Notes, which resulted in losses of $103,000 and $553,000, respectively. Such losses (which have no current tax benefit) are classified as extraordinary items in the accompanying Consolidated Statements of Operations. See Note G of Notes to Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated working capital at December 31, 1997 and 1996 was $73,597,000 and $86,986,000, respectively.
Operations for the years ended December 31, 1997, 1996 and 1995, after adding back non-cash items, provided cash of approximately $22,800,000, $11,100,000 and $16,100,000, respectively. During such years, other changes in working capital used cash of approximately $13,100,000, $7,700,000 and $14,300,000, respectively, resulting in net cash being provided from operating activities and working capital management of approximately $9,700,000, $3,400,000 and $1,800,000, respectively.
Investment activities during the years ended December 31, 1997, 1996 and 1995 provided (used) cash of approximately ($33,500,000), $35,300,000 and $84,800,000, respectively. These amounts include: (i) additions to property in 1997, 1996 and 1995 of $26,900,000, $13,600,000 and $35,700,000, respectively; (ii) purchases of marketable securities and other short-term investments in 1997, 1996 and 1995 of $7,700,000, $9,400,000 and $4,400,000, respectively; (iii) sales of marketable securities and other short-term investments in 1997, 1996 and 1995 of $8,000,000, $2,000,000 and $132,300,000, respectively, including a 1995 liquidation of certificates of deposit securing a bank loan, and (iv) other items providing (using) cash in 1997, 1996 and 1995 of ($6,900,000), $56,400,000 and ($7,400,000), respectively, including, in 1996, the gross proceeds relating to the Company's sale of its potash operations. The property additions in 1995 include the completion of two major capital projects: (i) replacement of the Company's potassium nitrate production facility in Haifa, Israel damaged in a fire in 1994; and (ii) construction of the Company's new operating facility in Mishor Rotem, Israel.
Financing activities during the years ended December 31, 1997, 1996 and 1995 provided (used) cash of approximately $14,400,000, ($42,500,000) and ($69,300,000), respectively. These amounts include: (i) a $100,000,000 loan borrowed from a bank in 1994 and prepaid in 1995; (ii) borrowings to finance the Company's construction of its Mishor Rotem facility in 1995; (iii) the Company's acquisition of its Senior Subordinated Reset Notes in 1995 and 1996; and (iv) the prepayment of certain bank debt in 1996 with a portion of the proceeds from the sale of the Company's potash operations.
As of December 31, 1997, the Company had outstanding long-term debt (excluding current maturities) of $269,014,000. The Company's primary sources of liquidity are cash flow generated from operations and the unused credit lines described in Note E of Notes to Consolidated Financial Statements. See also Note G of Notes to Consolidated Financial Statements for information relating to the Company's refinancing (the "Refinancing") of its 11 7/8% Senior Subordinated Notes.
FORWARD-LOOKING LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Refinancing, interest payments on the Senior Notes and interest and principal repayments under other indebtedness will represent significant obligations of the Company and its subsidiaries. For a description of the amortization required on the Company's other indebtedness see Note G of Notes to Consolidated Financial Statements. In 1997, the Company spent approximately $26,900,000 on capital projects, of which: (i) approximately $10,800,000 relates to the Company's initial capital expenditures pursuant to its plan to increase capacity for potassium nitrate, food grade phosphates and the construction of a plant to manufacture MAP and MKP; and (ii) $3,800,000 relates to the Company's construction of a co-generation facility. In addition, the Company plans to complete its plan to increase capacity for potassium nitrate and food grade phosphates and the construction of the MAP and MKP plant by spending approximately $63,000,000 during 1998 and 1999. Ongoing maintenance capital expenditures are expected to be approximately $13,000,000 per year.
The Company's primary sources of liquidity will be cash flows from operations and borrowings under the credit facilities of the Company and its subsidiaries. As of December 31, 1997, the Company and its subsidiaries had approximately $72,000,000 of borrowing availability, consisting of $37,000,000 of borrowing availability of the Company and $35,000,000 of total availability at the Company's subsidiaries. HCL intends to enter into a new $80,000,000 credit facility which will be used primarily to finance its planned capacity expansion at its Mishor Rotem facility. Dividends and other distributions from the Company's subsidiaries are, in part, a source of cash flow available to the Company. The Company believes that, based on current and anticipated financial performance, cash flow from operations, borrowings under the Company's credit facilities and dividends and other distributions available from the Company's subsidiaries will be adequate to meet anticipated requirements for capital expenditures, working capital and
scheduled interest payments. However, the Company's capital requirements may change, particularly if the Company would complete any material acquisitions. The ability of the Company to satisfy its capital requirements and to repay or refinance its indebtedness will be dependent upon the future financial performance of the Company, which in turn will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control.
FOREIGN CURRENCIES
The Company has no significant foreign currency denominated revenues except at HCL. Approximately $135,000,000 of HCL's total sales for the year ending December 31, 1998 will be made outside of Israel in currencies other than the U.S. dollar (principally Western European currencies). Accordingly, to the extent that the U.S. dollar weakens or strengthens versus the applicable corresponding foreign currency, HCL's results are favorably or unfavorably affected. In order to mitigate the impact of currency fluctuations against the U.S. dollar, the Company has a policy of hedging a significant portion of its foreign sales denominated in Western European currencies by entering into forward exchange contracts. A portion of these contracts qualify as hedges pursuant to Statement of Financial Accounting Standards No. 52 and, accordingly, applicable unrealized gains and losses arising therefrom are deferred and accounted for in the subsequent year as part of sales. Unrealized gains and losses for the remainder of the forward exchange contracts are recognized in income currently. If the Company had not followed such a policy of entering into forward exchange contracts in order to hedge its foreign sales, and instead recognized income based on the then prevailing foreign currency rates, the Company's income before income taxes for the years ended December 31, 1997, 1996 and 1995 would have increased (decreased) by approximately ($7,000,000), ($5,300,000) and $11,200,000, respectively.
The principal purpose of the Company's hedging program (which is for other than trading purposes) is to mitigate the impact of fluctuations against the U.S. dollar, as well as to protect against significant adverse changes in exchange rates. Accordingly, the gains and losses recognized relating to the hedging program in any particular period and the impact on revenues had the Company not had such a program are not necessarily indicative of its effectiveness.
INFLATION
Inasmuch as only approximately $59,000,000 of HCL's annual operating costs are denominated in New Israeli Shekels ("NIS"), HCL is exposed to inflation in Israel to a limited extent. The combination of price increases coupled with devaluation of the NIS have in the past generally enabled HCL to avoid a material adverse impact from inflation in Israel. However, HCL's earnings could increase or decrease to the extent that the rate of future NIS devaluation differs from the rate of Israeli inflation. For the years ended December 31, 1997, 1996 and 1995, the inflation rate of the NIS as compared to the U.S. Dollar was greater (less) than the devaluation rate in Israel by (1.8%), 6.9% and 4.2%, respectively.
ENVIRONMENTAL MATTERS
See Part I - Item 1 - "Business" - "Environmental Matters" above and Note O of Notes to Consolidated Financial Statements for information regarding environmental matters relating to the Company's various facilities.
OTHER MATTERS
The Company is evaluating the potential impact of the situation commonly referred to as the "Year 2000 problem". The Year 2000 problem, which is common to most corporations, concerns the inability of information systems, primarily computer software programs, to properly recognize and process date sensitive information related to the year 2000. Preliminary assessment indicates that solutions will involve a mix of purchasing new systems and modifying existing systems and confirming vendor compliance. The Company is currently evaluating the expected costs to be incurred in connection with the Year 2000 problem, but expects that such costs will not be significant.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), and SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 131 establishes standards for reporting financial and descriptive information for reportable segments on the same basis that is used internally for evaluating segment performance and the allocation of resources to segments. The Company is evaluating the effect, if any, of SFAS 131, on its operating segment reporting disclosure. SFAS 130 establishes standards for presenting certain items that are excluded from net income and reported as components of stockholders' equity, such as foreign currency translation. These statements are effective for fiscal years beginning after December 15, 1997. The adoption of these statements will not have a material effect on the Company's results of operations or financial position.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements and Schedules on page.
ITEM 9.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
In addition, the following are key employees of the Company's subsidiaries:
The Financial Advisory Committee advises the Board of Directors regarding financial matters and, when the Committee deems appropriate, makes recommendations to the Board of Directors. The members of the Financial Advisory Committee are Mr. Lawrence M. Small and Messrs. Hardy and Spencer.
The following are descriptions of the directors, executive officers and key employees of the Company.
Arie Genger has been a director and Chairman of the Board of Directors and Chief Executive Officer of the Company since 1986, the sole member of the Executive Committee since June 1988, and was President of the Company from 1986 to December 1993.
Thomas G. Hardy has been President and Chief Operating Officer of the Company since December 1993, was Executive Vice President of the Company from June 1987 to December 1993 and has been a director and member of the Financial Advisory Committee since October 1992. He was a director of Laser from January 1990 until February
1998 and has been a director of ESC since February 1998 (see Part I - Item 1 - "Business" - "Significant Developments").
Gabriel Politzer has been a Senior Vice President of the Company since January 1, 1998, with responsibilities for the Company's worldwide Specialty Plant Nutrients products. He was Executive Vice President of Vicksburg from September 1993 to January 1998. From January 1989 through September 1993, he was Vice President of Sales and Marketing at HCL. From 1983 to 1989 he was Chief Financial Officer of Negev Phosphates (a major subsidiary of Israel Chemicals Ltd.).
Lester W. Youner has been Vice President, Treasurer and Chief Financial Officer of the Company since October 1987 and has been Secretary since December 31, 1996. From June 1979 until October 1987 he was a Partner of Deloitte & Touche LLP, a public accounting firm. He was a director of Laser from November 1996 to February 1998.
John J. Lewandowski has been Vice President-Corporate Development of the Company since September 1996. From September 1995 until August 1996 he served as the President of the Company's Potash Group. From January 1995 (when he accepted a position with the Company) until September 1995 he served as the Company's Director of Business Development. From 1991 through 1994 he served in a variety of consulting and business advisory roles for several chemical producers in the United States and Eastern Europe. From 1983 to 1990 he was employed by Arcadian Corporation, in positions of increasing responsibility, his last position being Director--Nitrogen Products.
Michael P. Oravec has been Vice President-Corporate Taxation since January 1997. From December 1994 (when he accepted a position with the Company) until December 1996 he served as the Company's Director of Taxes. From 1980 to 1994 he was employed by The Mennen Company, in positions of increasing responsibility, his last position being Director of Taxes.
Martin A. Coleman has been a director since March 1993. Since January 1991 he has been a private investor. Prior to that he was a member of the law firm of Rubin Baum Levin Constant & Friedman, general counsel to the Company, for more than five years.
Sash A. Spencer has been a director since October 1992 and a member of the Financial Advisory Committee since March 1993. He has been an investor and Chairman of Holding Capital Management Corp., a private investment firm, for more than five years and is on the board of directors of several private companies.
Amiad Cohen has been the Managing Director of HCL since 1988. Mr. Cohen has over thirty years of experience in the chemical industry. Effective April 1, 1998, Mr. Cohen will become the President of HCL.
Esther Eldan has been general manager of HCL's Specialty Fertilizer Division since its inception in January 1996. Previously, she was the Chief Financial Officer of HCL for more than five years. Ms. Eldan joined HCL in 1981. Effective April 1, 1998, Ms. Eldan will become the Managing Director of HCL.
J. Randal Tomblin has been Senior Vice President of Cedar and President of its Organics Division since 1989. He was Vice President of NMPC from 1985 to 1986, President and Chief Executive Officer of Vertac Chemical Corporation from 1986 to 1987 and was in private business for a period between 1987 and 1989. Prior to joining NMPC, he served for 20 years with Hoechst Celanese Corporation, most recently as a Director of Manufacturing with Hoechst Celanese Chemical Company, and Director of Strategic Planning and Director of New Business Development with Hoechst Celanese Fibers Division.
Yale L. Schalk joined the Company in December of 1997 as President of Vicksburg after over 20 years of experience with Shell Oil Company and DuPont, where he held a variety of positions in sales, marketing and business management. Most recently from 1994 to 1997, he was U.S. Marketing Manager, interim Director of U.S. Business and North American Business Unit Leader of DuPont's Agricultural Products Division.
Lawrence M. Small, 56, has been Chairman of the Financial Advisory Committee of the Board of Directors since October 1992. Mr. Small is President and Chief Operating Officer of Fannie Mae, the country's largest investor in home mortgages and issuer of mortgage-backed securities, headquartered in Washington, DC, which he joined in September 1991. Prior to that, he was Vice Chairman and Chairman of the Executive Committee of the Boards of Directors of Citicorp and Citibank, N.A., where he was employed for 27 years. He serves as a director of Fannie Mae, The Chubb Corporation and Marriott International, Inc.
Directors hold office until the next annual meeting of stockholders or until their successors are elected and qualified. There are no arrangements or understandings between any director or executive officer of the Company and any other person pursuant to which such person was elected as a director or executive officer. The executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any directors, executive officers or key employees of the Company.
ITEM 11.
ITEM 11. Executive Compensation
The following table sets forth the aggregate compensation paid or accrued by the Company for the past three fiscal years to its Chief Executive Officer and to other executive officers during the 1997 fiscal year whose annual compensation exceeded $100,000 for the year ended December 31, 1997:
- ------------------ (a) During the period covered by the table, the Company did not make any restricted stock awards and did not have in effect any stock option or stock appreciation rights plan. See "Compensation Agreements" for Mr. Hardy's bonus arrangement.
(b) Includes the cost to the Company of split-dollar life insurance policies on the life of Mr. Genger. The Company paid premiums on these policies of $286,000 in 1997. The Company is entitled to a refund of the cumulative annual premiums paid by it to the insurers pursuant to the split-dollar life insurance arrangements before any benefits are paid by the insurers to the owner or beneficiaries of the policies. Additionally, for 1997, includes: (i) in the case of Mr. Genger, $250,000 for an annual premium on ordinary life insurance, $250,000 for related income tax gross-up, $4,000 for the Company's matching contribution to a profit sharing thrift plan, and $7,000 for the premium on term life insurance; (ii) in the case of Messrs. Hardy, Youner, Lewandowski and Oravec, $4,000 each for the Company's matching contribution to a profit sharing thrift plan; and (iii) $1,000 each for Messrs. Hardy, Youner and Oravec for the premium on term life and disability insurance.
Includes the cost to the Company of split-dollar life insurance policies on the life of Mr. Genger. The Company paid premiums on these policies of $171,000 in 1996. The Company is entitled to a refund of the cumulative annual premiums paid by it to the insurers pursuant to the split-dollar life insurance arrangements before any benefits are paid by the insurers to the owner or beneficiaries of the policies. Additionally, for 1996, includes: (i) in the case of Mr. Genger, $250,000 for an annual premium on ordinary life insurance, $250,000 for related income tax gross-up, $4,000 for the Company's matching contribution to a profit sharing thrift plan, and $7,000 for the premium on term life insurance; (ii) in the case of Messrs. Hardy, Youner and Lewandowski, $4,000 each for the Company's matching contribution to a profit sharing thrift plan; and (iii) $1,000 each for Messrs. Hardy and Youner for the premium on term life insurance. In the case of Mr. Hardy, also includes $1,400,000 deposited in trust for Mr. Hardy. See "Compensation Agreements".
For 1995, consists of: (i) in the case of Mr. Genger, $250,000 for an annual premium on ordinary life insurance, $250,000 for related income tax gross-up, $4,000 for the Company's matching contribution to a profit sharing thrift plan, and $6,000 for the premium on term life insurance; (ii) in the case of Messrs. Hardy and Youner, $4,000 each for the Company's matching contribution to a profit sharing thrift plan; and (iii) $1,000 each for Messrs. Hardy and Youner for the premium on term life insurance.
COMPENSATION AGREEMENTS
Pursuant to an Agreement entered into in March 1994 (the "New Agreement"), which modified and superseded a 1988 bonus arrangement under which no payments had been made, the Company was required to irrevocably deposit in trust for the benefit of Mr. Hardy an aggregate of $2,800,000, of which $1,400,000 was deposited upon execution of the New Agreement, and the remaining $1,400,000 was deposited in March, 1996. The deposited funds are held under a Trust Agreement (the "Trust Agreement"), which provides that the assets held thereunder are subject to the claims of the Company's general creditors in the event of insolvency of the Company. The Trust Agreement provides that the assets are payable in a lump sum to Mr. Hardy or his beneficiaries upon the earlier of December 1, 2001 or the termination of his employment with the Company.
An employment agreement between the Company and Mr. Hardy, effective as of June 1, 1993, having a primary term of seven years, renewable for 10 additional years unless either party gives at least 12 months' prior written notice of termination, provides for an annual salary of $400,000, subject to negotiated annual increases commencing in the year 2000. With certain restrictions, Mr. Hardy will be entitled to receive a bonus (the "Bonus") based on a percentage of the fair market value (the "Value") of the Company's equity at December 31st of the year Mr. Hardy's employment terminates, he turns 65 or certain acceleration events, including a change of control of the Company, occur. If the Company and Mr. Hardy cannot agree on the Value, each may propose an amount. If only one makes a proposal, that would constitute the Value. If each makes a proposal, an investment banker would choose between them. The Bonus, generally payable in installments, would be equal to the excess over $2,800,000 (the aggregate amount Mr. Hardy received under the New Agreement) of specified percentages of different ranges of Value. Mr. Hardy is not entitled to the Bonus if he voluntarily terminates his employment during the primary term (other than by death or disability) or if Mr. Hardy's employment is terminated for cause (as defined).
Pursuant to a salary continuation agreement between the Company and Lester W. Youner, the Company is obligated to pay Mr. Youner a retirement allowance (the "Allowance") of $100,000 per year for life commencing at age 65. In the event of Mr. Youner's death after the commencement of the payment of the Allowance, Mr. Youner's designated beneficiary is to receive the Allowance until 10 annual payments shall have been made to Mr. Youner and his beneficiary. Mr. Youner became 30% vested in the Allowance on December 31, 1997 and shall continue to vest at the rate of 5% per year thereafter provided that he remains in the employ of the Company. Notwithstanding the foregoing, the Allowance will become 100% vested on the earlier of Mr. Youner's 65th birthday or the occurrence of an acceleration event, including a change of control of the Company. Mr. Youner forfeits the Allowance if his employment is terminated for cause (as defined) or, if within two years after the voluntary termination of his employment, Mr. Youner engages directly or indirectly in any activity competitive with the Company or any of its subsidiaries. The agreement further provides that in the event of Mr. Youner's death prior to his 65th birthday while in
the active employ of the Company, his designated beneficiary is to receive an annual death benefit of $100,000 for 10 years. Mr. Youner's death benefit is currently 100% vested.
The Company is also a party to certain split-dollar insurance agreements on the life of Mr. Genger as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors does not have a Compensation Committee. Executive officer compensation matters were determined by the Board of Directors, whose four members currently include Mr. Genger, Chairman of the Board and Chief Executive Officer of the Company, and Mr. Hardy, President and Chief Operating Officer of the Company. No director has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity.
COMPENSATION OF DIRECTORS
Officers of the Company who serve as directors do not receive any compensation for serving as directors. Martin A. Coleman and Sash A. Spencer each receive $15,000 annually for serving as directors.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 20, 1998, as to the beneficial ownership of the Common Stock of the Company, which is the only outstanding class of voting security of the Company:
- ----------------- (a) All of the shares of the Common Stock of the Company are pledged to secure an outstanding TPR note of $7,000,000 issued to a former indirect stockholder and director of the Company. See Item 13
ITEM 13. Certain Relationships and Related Transactions
The Company is, for Federal income tax purposes, a member of a consolidated tax group of which TPR is the common parent. The Company, TPR, EDP, Cedar, Na-Churs and certain other subsidiaries are parties to a tax sharing agreement, dated as of December 30, 1991, under which, among other things, the Company and such other parties have each agreed to pay TPR amounts equal to the amounts of Federal income taxes that each such party would be required to pay if it filed a Federal income tax return on a separate return basis (or in the case of Cedar, a consolidated Federal income tax return for itself and its eligible subsidiaries), computed without regard to net operating loss carrybacks and
carryforwards. However, TPR may, at its discretion, allow tax benefits for such losses. See Note A of Notes to Consolidated Financial Statements.
See Notes G and L of Notes to Consolidated Financial Statements for a description of a 1994 transaction pursuant to which TPR acquired the Company's outstanding $9,000,000, 9.5% junior subordinated debentures due 2005 (the "9.5% Debentures") and became the obligor on an outstanding 8.75%, $4,000,000 note due 2005 payable to the Company. Upon TPR's acquisition of the 9.5% Debentures, TPR exchanged the 9.5% Debentures for a new preferred stock of the Company described in said Note L. In addition, during 1995 TPR assumed the Company's obligation for $9,000,000 principal amount of outstanding 9.5% Debentures due in 1998 and Company's liability thereon was extinguished. TPR pledged the above-mentioned Company preferred stock to secure TPR's $9,000,000 obligation.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1)-(2) See Index to Consolidated Financial Statements and Schedule on Page.
(3) See Index to Exhibits on Page E-1.
(b) No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1997.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Trans-Resources, Inc. (Registrant)
By Lester W. Youner --------------------- Lester W. Youner Vice President, Treasurer and Chief Financial Officer
Dated: March 20, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
PRINCIPAL EXECUTIVE OFFICER:
ARIE GENGER Chairman of the Board and Chief Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
LESTER W. YOUNER Vice President, Treasurer and Chief Financial Officer
By Lester W. Youner Lester W. Youner For Himself and As Attorney-In-Fact
Directors:
Arie Genger Dated: March 20, 1998 Thomas G. Hardy Martin A. Coleman Sash A. Spencer
POWERS OF ATTORNEY AUTHORIZING LESTER W. YOUNER TO SIGN THIS REPORT AND ANY AMENDMENTS HERETO ON BEHALF OF THE PRINCIPAL EXECUTIVE OFFICER AND THE DIRECTORS ARE BEING FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITH THIS REPORT.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT:
No annual report or proxy materials have been sent to the Company's security holders. This Annual Report on Form 10-K will be furnished to the holders of the Company's 11 7/8% Notes.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FINANCIAL STATEMENTS Page - -------------------- ----
Independent Auditors' Report...................................... Report of Independent Accountants................................. Consolidated Balance Sheets, December 31, 1996 and 1997........... Consolidated Statements of Operations, for the Years Ended December 31, 1995, 1996 and 1997.......... Consolidated Statements of Stockholder's Equity, for the Years Ended December 31, 1995, 1996 and 1997.......... Consolidated Statements of Cash Flows, for the Years Ended December 31, 1995, 1996 and 1997.......... Notes to Consolidated Financial Statements........................
SCHEDULE - --------
Schedule I - Condensed Financial Information of Registrant, for the Years Ended December 31, 1995, 1996 and 1997.......... S-1
F - 1 INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of Trans-Resources, Inc. New York, New York
We have audited the accompanying consolidated financial statements and financial statement schedule of Trans-Resources, Inc. (a wholly-owned subsidiary of TPR Investment Associates, Inc.) and Subsidiaries listed in the foregoing Index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the consolidated financial statements of Cedar Chemical Corporation, a wholly-owned subsidiary, which statements reflect total assets constituting 22 percent and 20 percent of consolidated total assets as of December 31, 1997 and 1996, respectively, and total revenues constituting 31 percent, 33 percent and 34 percent of consolidated total revenues for the years ended December 31, 1997, 1996 and 1995, respectively. Such financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Cedar Chemical Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Trans-Resources, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and (as to the amounts included for Cedar Chemical Corporation) the report of other auditors, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP February 25, 1998 (except as to Note G, the date of which is March 16, 1998) New York, New York
F - 2 Report of Independent Accountants
To the Board of Directors and Shareholder of Cedar Chemical Corporation:
In our opinion, the consolidated balance sheets and the related consolidated statements of income and retained earnings and of cash flows (not presented separately herein) present fairly, in all material respects, the financial position of Cedar Chemical Corporation (a wholly-owned subsidiary of Trans-Resources, Inc.) and its subsidiaries ("Cedar") at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Cedar's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Memphis, Tennessee January 30, 1998
F - 3 TRANS-RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
F - 4 TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1996 and 1997
See notes to consolidated financial statements.
F - 5 TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1995, 1996 and 1997
See notes to consolidated financial statements.
F - 6 TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1996 and 1997
See notes to consolidated financial statements.
F - 7 TRANS-RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements of Trans-Resources, Inc. ("TRI"), include TRI and its direct and indirect wholly-owned subsidiaries, after elimination of intercompany accounts and transactions. TRI's principal subsidiaries are Cedar Chemical Corporation ("Cedar"), and Cedar's two wholly-owned subsidiaries, NMPC, Inc. (name changed from New Mexico Potash Corporation upon completion of the sale of its potash operations in August, 1996; "NMPC"); and Vicksburg Chemical Company ("Vicksburg"); EDP, Inc. (name changed from Eddy Potash, Inc. upon completion of the sale of its potash operations in August, 1996; "EDP"); Na-Churs Plant Food Company ("Na-Churs"); and Haifa Chemicals Ltd. ("HCL") and HCL's wholly-owned subsidiary, Haifa Chemicals South, Ltd. ("HCSL"). TRI is a wholly-owned subsidiary of TPR Investment Associates, Inc. ("TPR"). As used herein, the term "the Company" means TRI together with its direct and indirect subsidiaries.
On August 16, 1996 NMPC and EDP sold their potash producing assets for an aggregate consideration of $56,154,000, including a payment for working capital of $11,154,000, and the assumption of specified liabilities (but excluding, among other things, certain antitrust litigation - see Part I - Item 3 - "Legal Proceedings"). The sale of the Company's potash operations resulted in a pre-tax gain, after considering certain costs relating thereto, of $22,579,000. Such gain is included in "Interest and other income - net" in the accompanying Consolidated Statements of Operations (see Note K).
During the years ended December 31, 1995 and 1996, the potash operations contributed approximately $54,000,000 (14%) and $35,000,000 (9%), respectively, to the Company's consolidated revenues, after eliminating intercompany sales.
Approximately 50% of the aggregate sales proceeds were applied to prepay debt secured by the assets of NMPC or EDP. In connection with the sale, Vicksburg entered into a five year potash supply agreement, at prevailing market rates during the period (subject to certain adjustments), with the buyer.
Substantially all of the companies' revenues, operating profits and identifiable assets are related to the chemical industry. The Company is a global developer, producer and marketer of specialty plant nutrients and specialty industrial and agricultural chemicals and distributes its products internationally.
F - 8 Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates used are reasonable.
Operating Data
The Company's revenues by region for the years ended December 31, 1995, 1996 and 1997 are set forth below:
As of December 31, 1996 and 1997, the Company's assets were located in the United States (36% and 37%, respectively) and abroad (principally Israel) (64% and 63%, respectively). The Company has no single customer accounting for more than 10% of its revenues.
HCL leases land and buildings from Oil Refineries Ltd. ("ORL"), a corporation which is majority-owned by the Israeli Government. The leases expire at various dates, principally in the years 2015 and 2016. HCL also has a lease from ORL of a pipeline which transports ammonia from the port in Haifa to HCL's plant. HCSL leases its land from the Israeli government under a 49 year lease which commenced in 1994.
HCL obtains its major raw materials, potash and phosphate rock, in Israel. Potash is purchased solely from Dead Sea Works, Ltd. ("DSW") in accordance with two supply contracts which expire in 1999 and 2005. HCL currently sources phosphate rock from Rotem Amfert Negev Ltd. ("Rotem") according to the terms of a variable price contract which expired in 1996, which is currently being renegotiated. DSW and Rotem are subsidiaries of Israel Chemicals Ltd., a large Israeli chemical company, and are the sole suppliers in Israel of potash and phosphate rock, respectively. While management views its current relationships with both of its principal suppliers to be good, the loss of supply from either of these sources could have a material adverse effect on the Company.
Functional Currency and Transaction Gains and Losses
Approximately 90% of HCL's sales are made outside of Israel in various currencies, of which approximately 40% are in U.S. dollars, with the remainder principally in Western European currencies. Accordingly, to the extent the U.S. dollar weakens or strengthens versus the applicable corresponding currency, HCL's results are favorably or unfavorably affected. In order to mitigate the impact of currency fluctuations against the U.S. dollar, the Company has a policy of hedging a significant portion of its foreign sales denominated in Western European currencies by entering into forward exchange contracts. A portion of these contracts qualify as hedges pursuant to Statement of Financial Accounting Standards No. 52 and, accordingly, unrealized gains and losses arising therefrom are deferred and accounted for in the subsequent year as part of sales. Unrealized gains and losses for the remainder of the forward exchange contracts are recognized in operations currently. At December 31, 1996 and 1997, there were outstanding
F - 9 contracts to purchase $53 million and $27 million, respectively, in various European currencies, principally Deutsche Marks and Italian Lira in 1996 and British Pounds and Spanish Pesetas in 1997. In addition, at December 31, 1996 there were outstanding contracts to purchase 26 million Deutsche Marks and to sell a corresponding aggregate amount of Italian Lira and Spanish Pesetas. No gains or losses were deferred at December 31, 1996 and 1997 for foreign exchange contracts which qualify as hedges.
If the Company had not followed such a policy of entering into forward exchange contracts in order to hedge its foreign sales, and instead recognized income based on the then prevailing foreign currency rates, the Company's operating income for the years ended December 31, 1995, 1996 and 1997 would have increased (decreased) by $16,600,000, ($6,900,000) and ($7,000,000), respectively, and income before income taxes would have increased (decreased) by approximately $11,200,000, ($5,300,000) and ($7,000,000), respectively.
The Company determines when to enter into hedging transactions based on its ongoing review of the currency markets. The principal purpose of the Company's hedging program (which is for other than trading purposes) is to mitigate the impact of fluctuations against the U.S. dollar, as well as to protect against significant adverse changes in exchange rates. Accordingly, the gains and losses recognized relating to the hedging program in any particular period and the impact on revenues had the Company not had such a program are not necessarily indicative of its effectiveness.
Raw materials purchased in Israel are mainly quoted at prices linked to the U.S. dollar. The U.S. dollar is the functional currency and accordingly the financial statements of HCL are prepared, and the books and records of HCL (except for a subsidiary described below) are maintained, in U.S. dollars.
The assets, liabilities and operations of one of HCL's foreign subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Revenues, expenses, gains and losses are translated at the weighted average exchange rate for the period. Translation adjustments, resulting from the process of translating such subsidiary's financial statements from its currency into U.S. dollars, are recorded as a separate component of stockholder's equity.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is recorded under the straight-line method at generally the following annual rates:
Buildings.................................... 3 - 8% Machinery, plant and equipment............... 5 - 25% Office furniture and equipment............... 6 - 20%
Expenditures for maintenance and repairs are charged to expense as incurred. Investment grants from the Israeli Government are initially recorded as a reduction of the capitalized asset and are recognized in income over the estimated useful life of the respective asset. HCL recorded investment grants for the years ended December 31, 1995, 1996 and 1997 amounting to $995,000, $248,000 and $1,646,000, respectively.
F - 10 Investments In Marketable Securities and Other Short-Term Investments
In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), the Company classifies its equity and fixed maturity securities as available-for-sale and reports such securities at fair value, with unrealized gains and losses recorded as a separate component of stockholder's equity.
Income Taxes
The Company is included in the consolidated Federal income tax return of TPR. Under the tax allocation agreement with TPR, the annual current Federal income tax liability for the Company and each of its domestic subsidiaries reporting profits is determined as if such entity had filed a separate Federal income tax return; no tax benefits are given for companies reporting losses. However, TPR may, at its discretion, allow tax benefits for such losses.
For purposes of the consolidated financial statements, taxes on income have been computed as if the Company and its domestic subsidiaries filed its own consolidated Federal income tax return without regard to the tax allocation agreement. Payments to TPR, if any, representing the excess of amounts determined under the tax allocation agreement over amounts determined for the purposes of consolidated financial statements are charged to retained earnings. During the three years in the period ended December 31, 1997, TPR did not require payment of amounts different from that which was computed as if the Company and its consolidated subsidiaries filed its own consolidated income tax returns.
The Company accounts for income taxes under the asset and liability method. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates that are expected to be in effect when the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Environmental Costs
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations (including fines levied under environmental laws, reclamation costs and litigation costs), and which do not contribute to current or future revenue generation ("environmental clean-up costs"), are expensed. Such environmental clean-up costs do not encompass ongoing operating costs relating to compliance with environmental laws, including disposal of waste. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, the cost can be reasonably estimated and the Company's responsibility is established. Generally, the timing of these accruals coincides with the earlier of completion of a feasibility study or the Company's commitment to a formal plan of action. Accruals relating to costs to be incurred, if any, at the end of the useful life of equipment, facilities or other assets are made over the useful life of the respective assets.
During 1995, 1996 and 1997 the Company incurred environmental clean-up costs of approximately $300,000, $300,000 and $400,000, respectively. In addition, at both December 31, 1996 and 1997, the Company has accrued approximately $1,600,000 related to the estimated costs to be incurred for various environmental liabilities.
In October, 1996 the AICPA Accounting Standards Executive Committee issued Statement of Position 96-1, "Environmental Remediation Liabilities", which required adoption in 1997. The adoption of this pronouncement did not have a material effect on the Company's consolidated financial condition or results of operations.
F - 11 Research and Development Costs
Research and development costs are charged to expense as incurred and amounted to $3,158,000, $2,693,000 and $2,421,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Risk Management Derivatives
Amounts receivable or payable under interest rate swap agreements are recognized as interest expense.
Long-Lived Assets
Management evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that a recorded asset might not be recoverable by taking into consideration such factors as recent operating results, projected undiscounted cash flows and plans for future operations. At December 31, 1996 and 1997 there were no impairments of the Company's assets.
Cash and Cash Equivalents
Investments with original maturities of three months or less are classified as cash equivalents by the Company.
Concentration of Credit Risk
The Company believes no significant concentration of credit risk exists with respect to investments and accounts receivable. The Company places its cash investments with high quality financial institutions, and the Company's receivables are diversified across a diverse customer base and geographical regions.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), and SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 131 establishes standards for reporting financial and descriptive information for reportable segments on the same basis that is used internally for evaluating segment performance and the allocation of resources to segments. The Company is evaluating the effect, if any, of SFAS 131, on its operating segment reporting disclosure. SFAS 130 establishes standards for presenting certain items that are excluded from net income and reported as components of stockholders' equity, such as foreign currency translation. These statements are effective for fiscal years beginning after December 15, 1997. The adoption of these statements will not have a material effect on the Company's results of operations or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the manner of presentation in the current year.
F - 12 B. OTHER CURRENT ASSETS AND INVESTMENT IN LASER INDUSTRIES LIMITED
Other Current Assets
Other current assets consist of the following at December 31, 1996 and 1997:
The Company classifies all of its marketable securities (including U.S. Government obligations) as available-for-sale securities as of December 31, 1996 and 1997:
F - 13 The cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are as follows:
During 1995, the gross realized gains on sales of securities totaled approximately $555,000 and the gross realized losses totaled approximately $968,000; during 1996, the gross realized gains on sales of securities totaled approximately $411,000 and the gross realized losses totaled approximately $70,000; during 1997 the gross realized gains on sales of securities totaled approximately $3,052,000 and the gross realized losses totaled approximately $339,000 (see Note K).
Investment in Laser Industries Limited ("Laser")
On November 9, 1997, Laser, a publicly traded manufacturer of lasers for medical use in which the Company had an ownership interest accounted for by the equity method, and ESC Medical Systems Ltd. ("ESC"), signed a definitive agreement (the "Agreement") to combine the two companies through an exchange of shares. The transaction closed on February 23, 1998. The Company's ability to sell the ESC shares it will receive pursuant to the combination will be governed by securities law volume restrictions.
As of December 31, 1997, the Company carried its investment in the Laser shares at approximately $9,100,000, which amount is included in the caption "other assets" in the accompanying Consolidated Balance Sheet. Based on the quoted market value of the ESC shares ($35.00 per share) as of February 20, 1998, the last day of trading before the combination, the Company will recognize an after-tax gain of approximately $22,400,000 which will be recorded during the first quarter of 1998.
In addition to the ownership of the Laser shares described above, the Company also owned a warrant (the "Laser Warrant") which enabled the Company to purchase additional Laser shares. The Laser Warrant, which had a carrying value of $750,000, was distributed to TPR as a dividend in February 1998 prior to Laser's combination with ESC.
During the years ended December 31, 1995, 1996 and 1997, the Company recorded equity in Laser's earnings (losses), inclusive of goodwill amortization, of ($478,000), $2,280,000 and $1,558,000, respectively. Such amounts are included in "Interest and other income-net" in the accompanying Consolidated Statements of Operations (see Note K).
ESC develops, manufactures and markets medical devices utilizing both state-of-the-art lasers and proprietary intense pulsed light source technology for non-invasive treatment of varicose veins and other benign vascular lesions, as well as for hair removal, skin cancer, skin rejuvenation and other clinical applications. ESC shares are traded in the United States on the NASDAQ National Market System. The Company's investment in ESC will be accounted for pursuant to SFAS 115.
F - 14 C. INVENTORIES
Inventories consist of the following at December 31, 1996 and 1997:
D. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment at December 31, 1996 and 1997 consists of the following:
The Company capitalized interest costs aggregating $953,000, $0 and $35,000 during the years ended December 31, 1995, 1996 and 1997, respectively, with respect to several construction projects. Certain property, plant and equipment has been pledged as collateral for long-term debt (see Note G).
On February 7, 1994, the smaller of HCL's two potassium nitrate production units was damaged by a fire, causing a temporary reduction of the Company's potassium nitrate production capacity. The Company completed the replacement of the damaged unit during 1995. The impact of the loss of the facility, including the effect of business interruption, was substantially covered by insurance. The insurance proceeds relating to the property damage was for replacement value, which was greater than the recorded carrying value of the damaged assets. Accordingly, during the year ended December 31, 1995 HCL recorded a pre-tax gain of approximately $1,700,000, (which amount was the residual adjustment over and above the initial gain recorded in 1994). Such pre-tax gain is included in the caption "Interest and other income-net" in the accompanying Consolidated Statements of Operations (see Note K).
E. SHORT-TERM DEBT AND UNUSED CREDIT LINES
The weighted average interest rates for short-term debt outstanding at December 31, 1996 and 1997 were 5.9% and 6.4%, respectively.
As of December 31, 1997, the Company and its subsidiaries have unused revolving loan commitments and other credit lines from banks aggregating approximately $72,000,000.
F - 15 F. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at December 31, 1996 and 1997:
G. LONG-TERM DEBT - NET
Long-term debt consists of the following at December 31, 1996 and 1997:
* As prevailing on respective balance sheet dates. Such rates (other than the subordinated debt) generally "float" according to changes in the Prime or LIBOR rates. At December 31, 1997 such rates were approximately 8.25% and 5.80%, respectively.
1. As of December 29, 1995, the Company entered into a Loan Agreement with a bank for borrowings upon the Company's request prior to December 29, 1998 in the aggregate principal amount not to exceed $40,000,000. The loan matures on December 29, 2004. The Company pledged all of the capital stock of HCL to secure its obligations under the Loan Agreement.
2. The 11 7/8% senior subordinated notes (the "11 7/8% Notes") mature July 1, 2002 and are redeemable at the option of the Company at any time after July 1, 1998 at stipulated redemption prices. There are no mandatory sinking fund requirements. On March 11, 1998, the Company commenced the sale in a private placement of $100,000,000 principal amount of 10 3/4% Senior Notes due 2008 (the "Senior Notes") and $135,000,000 principal amount of 12% Senior Discount Notes due 2008 to provide gross proceeds to the Company of approximately $75,400,000 (the "Senior Discount Notes"). The sale of the Senior Notes and the Senior Discount Notes closed on March 16, 1998. A substantial portion (approximately $118,000,000) of the net proceeds from the sale was used to purchase (pursuant to a tender offer) approximately $110,000,000 principal amount of the 11 7/8% Notes (the "Refinancing"), resulting in an extraordinary charge for the early extinguishment of debt of approximately $10,900,000 (no tax effect) which will be recorded in the first quarter of 1998.
F - 16 The Senior Notes and the Senior Discount Notes are unsecured obligations of the Company and are pari passu in right of payment with all existing and future unsecured and unsubordinated indebtedness of the Company and senior in right to payment of all subordinated indebtedness of the Company. Interest on the Senior Notes is payable semi-annually. Interest on the Senior Discount Notes will accrue and compound semi-annually but will not be payable until 2003, after which interest will be payable semi-annually.
The Company intends to use the balance of the proceeds from the sale of the Senior Notes and Senior Discount Notes for working capital, general corporate purposes, and the repayment of $13,900,000 of borrowings (of which $10,900,000 was borrowed subsequent to December 31, 1997, of which $9,000,000 was dividended to TPR) under the Loan Agreement discussed above.
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On November 28, 1986, the Company issued junior subordinated debentures (the "9.5% Debentures") in the aggregate principal amount of $9,000,000, with interest payable quarterly. The 9.5% Debentures were initially recorded at $6,700,000, the estimated value on the date of issue, and were scheduled to mature in 1998.
During 1991, the Company's then outstanding redeemable preferred stock was converted into another $9,000,000 principal amount of the Company's 9.5% Debentures. Subsequently, during 1991, the then holder of this $9,000,000 principal amount of 9.5% Debentures agreed to extend the maturity date of such principal amount by seven years to the year 2005. The carrying value of the 9.5% Debentures issued upon conversion of the redeemable preferred stock was equivalent to the previous carrying value of the preferred stock. During 1994, as a result of the settlement of certain litigation with a former indirect stockholder and director of the Company, TPR acquired the 9.5% Debentures then held by the wife of such stockholder. Upon TPR's acquisition of such 9.5% Debentures, TPR exchanged these 9.5% Debentures for a new Company preferred stock (see Note L). Also as part of the settlement of such litigation, TPR assumed a $4,000,000 obligation that was previously owed to the Company by the wife of the former indirect stockholder and director. Such obligation, which is included in "other assets" in the accompanying Consolidated Balance Sheets, bears interest at the rate of 8.75% per year and is due in the year 2005.
During 1995, TPR assumed the Company's obligation for the remaining outstanding 9.5% Debentures and the Company's liability thereon was extinguished. The Company recorded such assumed obligation as an $8,177,000 capital contribution by TPR, the amount equivalent to the then net carrying value of the 9.5% Debentures.
Certain of the Company's and its subsidiaries' loan agreements and its Indentures require the Company and/or the respective subsidiary to, among other things, maintain various financial ratios including minimum net worth, ratios of debt to net worth, interest and fixed charge coverage tests and current ratios. In addition, there are certain limitations on the Company's ability make certain Restricted Payments and Restricted Investments (each as defined), etc. In the event of a Change in Control (as defined), the Company is required to offer to purchase all the Senior Notes and Senior Discount Notes as well as to repay certain bank loans. Certain of the respective instruments also limit the payment of dividends, capital expenditures and the incurring of additional debt and liens by both the Company and its subsidiaries. As of December 31, 1997, the Company and its subsidiaries are in compliance with the covenants of each of the respective loan agreements and the Indenture then in effect.
F - 17 The aggregate maturities of long-term debt at December 31, 1997 (after giving effect to the Refinancing of the 11 7/8% Notes) are set forth below.
Substantially all of the assets of HCL and HCSL are subject to security interests in favor of the State of Israel and/or banks. In addition, substantially all of the assets of the Company's United States subsidiaries are subject to security interests in favor of banks pursuant to loan agreements. The capital stock of HCL and Cedar have also been pledged to the banks pursuant to these agreements. The Company's common stock is pledged to secure the repayment obligations of TPR under a note issued by it to a former indirect shareholder of the Company.
During 1995 and 1996, the Company acquired $3,250,000 and $19,122,000, respectively, principal amount of its senior subordinated reset notes (the "Reset Notes") prior to their scheduled maturity of September 1, 1996. In connection with such acquisitions of the Reset Notes, the Company has recorded extraordinary losses of $103,000 and $553,000, respectively. Such losses had no current tax benefit.
Interest paid, net of capitalized interest, totaled $33,445,000, $31,672,000 and $28,193,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
H. OTHER LIABILITIES
Under Israeli law and labor agreements, HCL is required to make severance and pension payments to dismissed employees and to employees leaving employment in certain other circumstances. These liabilities are covered by regular deposits to various severance pay funds and by payment of premiums to an insurance company for officers and non-factory personnel under approved plans. "Other liabilities" in the Consolidated Balance Sheets as of December 31, 1996 and 1997 include accruals of $2,731,000 and $1,653,000, respectively, for the estimated unfunded liability of complete severance of all HCL employees. Costs incurred were approximately $2,060,000, $2,629,000 and $1,912,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
No information is available regarding the actuarial present value of HCL's pension plans and the plans' net assets available for benefits, as these plans are multi-employer, external and independent of HCL.
Cedar has a defined benefit pension plan which covers all of the full-time employees of Cedar and Vicksburg. Funding of the plan is made through payment to various funds managed by a third party and is in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA").
F - 18 Cedar's net pension cost for the years ended December 31, 1995, 1996 and 1997 included the following benefit and cost components:
The funded status and the amounts recognized in the Company's December 31, 1996 and 1997 Consolidated Balance Sheets for Cedar's benefit plan was as follows:
At December 31, 1996 and 1997 the actuarial present value of Cedar's vested benefit obligation was $10,666,000 and $12,865,000 and the accumulated benefit obligation was $11,304,000 and $13,614,000, respectively.
Actuarial assumptions used at December 31, 1996 and 1997 were as follows:
The unrecognized net transition obligation is being amortized on a straight-line basis over fifteen years beginning January 1, 1987.
Certain of the Company's United States subsidiaries have profit sharing thrift plans designed to conform to Internal Revenue Code Section 401(k) and to the requirements of ERISA. The plans, which cover all full-time employees (and one of which includes Company headquarters employees), allow participants to contribute as much as 15% of their annual compensation, up to a maximum permitted by law, through salary reductions. The companies' contributions to the plans are based on a percentage of the participant's contributions, and the companies may make additional contributions to the plans at the discretion of their respective Boards of Directors. The contribution expense relating to the profit sharing thrift plans totaled $559,000, $505,000 and $202,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
F - 19 I. OPERATING LEASES
The Company and its subsidiaries are obligated under non-cancelable operating leases covering principally land, office facilities and equipment. At December 31, 1997, minimum annual rental commitments under these leases are:
Rent expense for 1995, 1996 and 1997 was $5,308,000, $4,683,000 and $4,489,000, respectively, covering land, office facilities and equipment.
J. INCOME TAXES
The Company's income tax provision for the years ended December 31, 1995, 1996 and 1997 consist of the following:
F - 20 The provision for income taxes for the years ended December 31, 1995, 1996 and 1997 amounted to $773,000, $4,016,000 and $2,952,000, respectively, representing effective income tax rates of 12.0%, 26.4% and 67.2%, respectively. These amounts differ from the amounts of ($2,144,000), $5,323,000 and $1,539,000, respectively, computed by applying the statutory Federal income tax rates to income (loss) before income taxes and extraordinary item. The reasons for such variances from statutory rates were as follows:
At December 31, 1996 and 1997, deferred tax assets (liabilities) consisted of the following:
At December 31, 1996, deferred tax assets of $2,563,000 are classified as "other current assets" and deferred tax liabilities of $23,315,000 are classified as "other liabilities". At December 31, 1997, deferred tax assets of $3,325,000 are classified as "other current assets" and deferred tax liabilities of $25,807,000 are classified as "other liabilities".
F - 21 At December 31, 1997, the Company had various tax loss and credit carryovers which expire as follows:
Income taxes paid, including prepaid amounts, totaled approximately $3,700,000, $3,100,000 and $3,800,000, respectively, during the years ended December 31, 1995, 1996 and 1997. These amounts are exclusive of a prior year tax refund received by HCL in 1995 of approximately $4,000,000.
No taxes on income have been provided on approximately $47,000,000 of undistributed earnings of foreign subsidiaries as of December 31, 1997, since management believes these amounts to be permanently invested.
K. INTEREST AND OTHER INCOME - NET
Interest and other income - net for the years ended December 31, 1995, 1996 and 1997 consists of the following:
L. PREFERRED STOCK
As discussed in Note G, preferred stock was issued to TPR in December, 1994. The dividend on the preferred stock is cumulative at the rate of $8.50 per share per annum. The preferred shares are non-voting and were recorded at $7,960,000, TRI's carrying value of the 9.5% Debentures held by TPR on the date of conversion. The preferred shares are redeemable, at the option of the Company, at any time, at a redemption price of $79.60 per share, plus an amount equal to cumulative dividends, accrued and unpaid thereon up to the date of redemption.
F - 22 M. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In connection with a credit agreement, Cedar has entered into five three-year interest rate swap agreements with a bank to effectively convert a portion of its floating rate debt to fixed, thereby managing its credit risk. An interest rate swap generally involves the exchange of fixed for floating rate interest payment streams on specified notional principal amounts for an agreed-upon period of time, without the exchange of the underlying principal amounts. Notional amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Cedar's credit risk involves the possible default of the counter party (the bank). No collateral requirements are imposed.
Cedar entered into the following interest rate swap agreements which are used to manage its interest-rate risk. Cedar receives variable rate payments and pays fixed rate payments. The following is a summary of the contracts outstanding (in thousands of dollars) at December 31, 1997:
The variable rate received is tied to the three-month LIBOR rate.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
F - 23 Cash and Cash Equivalents, Accounts Receivable, Short-Term Debt and Accounts Payable - The carrying amounts of these items are a reasonable estimate of their fair value.
Investments in Securities - The fair value of these securities is estimated based on quoted market prices.
Long-Term Debt - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used on a discounted cash flow basis to estimate fair value for debt issues for which no market quotes are available.
Foreign Currency Contracts - The fair value of foreign currency purchase contracts is estimated by obtaining quotes from brokers. The contractual amount of these contracts totals approximately $70,000,000 and $27,000,000 as of December 31, 1996 and 1997, respectively.
Risk Management Derivatives - The fair value generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1996 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein.
O. CONTINGENT LIABILITIES AND OTHER MATTERS
For a description of certain pending legal proceedings, see Part I - Item 3 - "Legal Proceedings", which is an integral part of these financial statements. The Company is vigorously defending against the allegations described therein.
Management of the Company believes, based upon its assessment of the actions and claims outstanding against the Company and certain of its subsidiaries, and after discussion with counsel, that the eventual disposition of the matters referred to above should not have a material adverse effect on the financial position, future operations or liquidity of the Company. However, management of the Company cannot predict with certainty the outcome of the potash and Louisiana matters described in Part I - Item 3 - "Legal Proceedings".
The production of fertilizers and chemicals involves the use, handling and processing of materials that may be considered hazardous within the meaning of applicable environmental or health and safety laws. Accordingly, the Company's operations are subject to extensive Federal, state and local regulatory requirements in the United States and regulatory requirements in Israel relating to environmental matters. Operating permits are required for the operation of the Company's facilities, and these permits are subject to revocation, modification and renewal. Government authorities have the power to enforce compliance with these regulations and permits, and violators are subject to civil and criminal penalties, including civil fines, injunctions or both. The Company has entered into consent decrees and administrative orders with certain governmental authorities which are expected to result in unspecified corrective actions - see Part I - Item 1 - "Business" - "Environmental Matters". There can be no assurance that the costs of such corrective actions will not be material.
The Company has accrued for the estimated costs of facility investigations, corrective measures studies and known remedial measures relating to environmental clean-up costs. However, the Company has been unable to ascertain the range of reasonably possible costs that may be incurred for environmental clean-up costs pending completion of investigations and studies.
Based on currently available information, Management believes that the Company's expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental actions will not have a material
F - 24 adverse effect on the Company's liquidity and capital resources, competitive position or financial statements. However, Management cannot assess the possible effect of compliance with future requirements.
During the fourth quarter of 1996 and the first two quarters of 1997, the Company's operations were adversely impacted by a labor dispute at HCL (the "Haifa Labor Dispute") - see Part I - Item 1 - "Business" - "Employees".
Most employees at HCL's manufacturing facility (the "Haifa Facility") are members of the "Histradrut," the Israeli national labor federation, and are represented by collective bargaining units. Terms of employment of most employees at the Haifa Facility are currently governed predominantly by a Specific Collective Agreement ("SCA") negotiated by the Company with the Histadrut, the respective unions representing the employees and representatives of the employees.
In 1994, an agreement was signed with the unions and the representatives of the technicians and engineers at the Haifa Facility for the three year period ended December 31, 1996. In 1995, an SCA was signed with the unions and representatives of the other employees for the two year period ended December 31, 1996. In September 1996, the Company announced the cancellation of such agreements effective upon their expiration dates and its intention to negotiate a new SCA with basic changes aimed at reducing labor costs and enhancing operating flexibility for the period following December 31, 1996.
As a result of the announced cancellation of the labor agreements, the Company suffered several work stoppages and other job actions which adversely affected productivity at the Haifa Facility during October and November 1996, including a period of temporary plant shut-down. On December 3, 1996 the plant was shut down until March 10, 1997 when a new SCA providing for certain wage freezes and reductions in benefits was signed for the three year period ending December 31, 1999. Subsequent to March 10, 1997, the Haifa Facility re-opened and gradually began production. By the end of May 1997 and subsequent thereto, the Haifa Facility was generally operating at approximately full capacity; however, there have been several periods of operations at less than full capacity due to the need for increased maintenance for certain equipment resulting from the lengthy period of shut-down.
The Company's financial results subsequent to the commencement of the Haifa Labor Dispute have been adversely affected (particularly in the fourth quarter of 1996 and the first quarter of 1997) as a result of several factors, including: (i) the increased cost of production resulting from reduced manufacturing during the periods which affected the fixed charge component of cost of sales; (ii) the cost of raw materials destroyed in the production process during work stoppages and job actions; (iii) lower gross margins due to inventory shortages which required purchases from third parties at substantially increased costs compared to the Company's costs; and (iv) increased general and administrative expenses arising from higher security and other costs. These adverse impacts were partially offset by lower labor costs during the Haifa Labor Dispute.
Management believes that the new SCA will result in substantial cost savings for the Company compared to the costs it would otherwise have incurred during the next few years had the Company merely renewed the terms of the prior SCAs and continued the pattern of increased costs included in recent SCAs. Further, management believes that the aggregate amount of such cost savings over the next few years will substantially exceed the incremental costs experienced during the period of the Haifa Labor Dispute. Such savings commenced during the second quarter of 1997.
Prior to 1996, HCL's last major labor dispute took place in July 1991 and related to negotiations of the SCA for 1990 and 1991. As a result of this dispute, HCL's employees went on strike for approximately four weeks during the third quarter of 1991. Prior to that, the last major labor dispute took place in 1983, which resulted in a strike of approximately two weeks.
F - 25 CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
TRANS-RESOURCES, INC.
BALANCE SHEETS
- --------------------- Note - The aggregate maturities of long-term debt during the next five years, after giving effect to the Refinancing of the 11 7/8% Notes referred to in Note G of Notes to Consolidated Financial Statements is approximately as follows: 1998-$0; 1999-$0; 2000-$1,000,000; 2001-$1,000,000 and 2002 - $1,000,000.
S - 1 CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I (continued)
TRANS-RESOURCES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1996 and 1997
S - 2 CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I (concluded) TRANS-RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1996 and 1997
S - 3 TRANS-RESOURCES, INC.
INDEX TO EXHIBITS
E - 1
E - 2
E - 3
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* Incorporated by reference
(1) Management contract or compensatory plan or arrangement
E - 4