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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| * ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-64641
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Philipp Brothers Chemicals, Inc.
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| * No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant computed by reference to the price at which such voting stock was
sold was $0 as of June 30, 2002.
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2002: 24,488.50
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
* By virtue of Section 15(d) of the Securities Act of 1934, the Registrant
is not required to file this Annual Report pursuant thereto, but has filed
all reports as if so required during the preceding 12 months.
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PHILIPP BROTHERS CHEMICALS, INC.
TABLE OF CONTENTS
Page
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PART I .................................................................... 1
Item 1. Business ................................................... 1
Item 2. Properties ................................................. 19
Item 3. Legal Proceedings .......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ........ 21
PART II ................................................................... 22
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ..................................... 22
Item 6. Selected Financial Data .................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 24
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk ............................................. 35
Item 8. Financial Statements and Supplementary Data ................ 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 35
PART III .................................................................. 36
Item 10. Directors and Executive Officers of the Registrant ......... 36
Item 11. Executive Compensation ..................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management .......................................... 41
Item 13. Certain Relationships and Related Transactions ............. 41
Item 14. Internal Controls .......................................... 43
PART IV ................................................................... 44
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ..................................... 44
Index to Financial Statements ............................................. F-1
Report of Independent Accountants ......................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and 2001 ............ F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 2002, 2001 and 2000 ........... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2002, 2001 and 2000 .................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, 2001 and 2000 ...................................... F-6
Notes to Consolidated Financial Statements .......................... F-7
Consolidating Financial Statements
Consolidating Balance Sheet as of June 30, 2002 ..................... F-32
Consolidating Statement of Operations for the year ended
June 30, 2002 ..................................................... F-33
Consolidating Statement of Cash Flows for the year ended
June 30, 2002 ..................................................... F-34
Consolidating Balance Sheet as of June 30, 2001 ..................... F-35
Consolidating Statement of Operations for the year ended
June 30, 2001 ..................................................... F-36
Consolidating Statement of Cash Flows for the year ended
June 30, 2001 ..................................................... F-37
Consolidating Statement of Operations for the year ended
June 30, 2000 ..................................................... F-38
Consolidating Statement of Cash Flows for the year ended
June 30, 2000 ..................................................... F-39
SIGNATURES ................................................................ II-1
PART I
Item 1. Business.
General
Philipp Brothers Chemicals, Inc. ("Philipp Brothers" or the "Company") is
a leading diversified global manufacturer and marketer of a broad range of
specialty agricultural and industrial chemicals, which are sold world-wide for
use in numerous markets including animal health and nutrition, agricultural,
pharmaceutical, electronics, wood treatment, glass, construction and concrete.
The Company also provides recycling and hazardous waste services primarily to
the electronics and metal treatment industries. The Company believes it has
leading positions in certain of its end markets, and has global marketing and
manufacturing capabilities. Approximately 38% of the Company's fiscal 2002 net
sales were made outside the United States. Unless the context otherwise
requires, references in this Report to the "Company" refer to the Company and/or
one or more of its subsidiaries, as applicable.
The Company manufactures and markets more than 670 specialty agricultural
and industrial chemicals, of which 50 products accounted for approximately 83%
of fiscal 2002 net sales. The Company focuses on specialty agricultural and
industrial chemicals for which it has a strong market position or an advantage
in product development, manufacturing or distribution. Many of the Company's
products provide critical performance attributes to its customers' products,
while representing a relatively small percentage of total end-product costs.
The Company reported in its third quarter Form 10-Q that due to lower
levels of economic activity and increased global competition, the Company was in
a position where cash flows from operations and available borrowing arrangements
may not have provided sufficient working capital to operate existing businesses,
to make budgeted capital expenditures and to service interest and current
principal coming due on outstanding debt over the ensuing twelve month period.
As of June 30, 2002 the Company was not in compliance with certain covenants
under its senior credit facility and certain provisions of the Company's
Norwegian subsidiary's revolving credit facilities. To alleviate this situation,
the Company's management has undertaken actions to improve the Company's
operating performance and overall liquidity in order to reduce debt levels and
bring the Company into compliance with those agreements.
Subsequent to March 31, 2002, the Company made significant changes in
senior management as a new Chief Executive Officer, Chief Financial Officer and
President of Specialty Chemicals Division have been appointed. Actions taken by
this team to improve liquidity and address the agreements in default include:
negotiating an amended senior credit facility with amended covenants that are
based on the Company's 2003 operating plan, restructuring of bank debt at the
Company's Norwegian subsidiary, negotiations with Pfizer, Inc. for the deferral
and forbearance of certain contingent purchase price payments relating to the
acquisition of the Medicated Feed Additives business of Pfizer (see Note 3 of
the Notes to Consolidated Financial Statements included in this Report), the
shutdown of unprofitable operations, the announced intention to sell the
Company's Prince Manufacturing operations and a U.K. operation which
manufactures and sells chemical intermediates to the pharmaceutical industry,
further consideration on the sale of additional businesses and other assets, and
the implementation of working capital improvement programs. These efforts are
ongoing and will continue to be a primary focus of management during fiscal
2003. In the event of adverse operating results and resultant violation of
covenants during fiscal 2003, the Company can not be certain it will be able to
obtain waivers, provide sufficient working capital to operate existing
businesses, make budgeted capital expenditures and to service interest and
current principal coming due on outstanding debt.
In the fourth quarter of fiscal 2001, the Company sold its Agtrol business
to Nufarm, Inc. ("Nufarm"). Agtrol developed, manufactured and marketed crop
protection products, including copper fungicides. The sale included inventory
and intangible assets to Nufarm, but did not include the manufacturing
facilities.
On November 30, 2000, the Company purchased the Medicated Feed Additives
business of Pfizer, Inc. Operating results of this business, Phibro Animal
Health ("PAH"), are included in operating results from the date of acquisition
and are reflected in the Animal Health and Nutrition segment. PAH produces
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and sells a broad range of medicated feed additive products to the global
poultry and livestock industries, either directly to large integrated livestock
producers or through a network of independent distributors.
The Company has four operating segments--Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other.
The Company's Animal Health and Nutrition segment manufactures and markets
a broad range of feed additive products including antibacterials,
anticoccidials, vitamins, vitamin premixes, trace minerals and other animal
health products to the animal feed, poultry and pet food industries. The Company
distributes its products through major multinational life science and animal
health companies.
The Company's Industrial Chemicals segment manufactures and markets
pigments and other mineral products for use in the chemical, catalyst,
pharmaceutical, construction, concrete, wood treatment, automotive, aerospace,
glass and coal mining industries. Certain of these products are produced from
the Company's recycling operations, mainly copper chemicals. The Company
supplies mineral oxides, such as iron and manganese compounds, which are used as
colorants and for other purposes in the brick, masonry, glass and other
industries. The Company also manufactures and recycles alkaline etchants in the
United States and sells fresh etchant to printed circuit board manufacturers.
The Company's Distribution segment markets a variety of industrial,
specialty and fine organic chemicals and intermediates. Most of these products
are manufactured by third parties, with certain products being purchased from
affiliates.
The Company's All Other segment manufactures and markets a variety of
specialty custom chemicals, primarily for the polymer and pharmaceutical
industries. In addition, the Company provides management and recycling of coal
combustion residues, including fly ash and bottom ash, and also mineral
processing residues. Typically, these products are provided to customers
directly from a utility's site or through the Company's terminals.
ANIMAL HEALTH AND NUTRITION
Through its subsidiary, Phibro Animal Health, Inc., the Company
manufactures and markets a broad range of medicated feed additive products to
the global poultry and livestock industries, either directly to large integrated
producers or through a network of independent distributors. PAH products include
antibacterials, anticoccidials, anthelmintics and other feed additives.
The use of these medicated feed additives assists the producer in
maintaining healthy and productive animals to better ensure the consumer of a
safe, healthy and wholesome meat supply. Virginiamycin, an antibiotic marketed
under the Stafac(R), Eskalin(R) and V-Max(R) brand names, is used to prevent and
control diseases in poultry, swine and cattle, including necrotic enteritis in
poultry, dysentary in swine and liver abscesses in cattle. Antibacterials,
including Terramycin(R), and Neo-Terramycin(R) which are derived from the active
ingredient oxytetracycline, are effective against a range of diseases including:
fowl cholera in chickens; airsacculitis in turkeys; bacterial enteritus in
swine; and bacteria diarrhea and liver abscesses in cattle. Carbadox
antibacterial is sold under the brand name Mecadox(R) for use in swine feeds to
control salmonellosis and swine dysentery in young and growing swine.
Anticoccidial products are marketed under the Aviax(R), Coxistac(R) and
Posistac(R) brand names and are sold to integrated poultry producers and feed
companies. Banmith(R), Oxibendazole(R) and Rumatel(R) are anthelmintics that are
used to control internal parasites in cattle, sheep and goats.
PAH manufactures active ingredients at facilities located in Guarulhos,
Brazil and Rixensart, Belgium. Other active ingredients are supplied by Pfizer
to PAH under a transition supply agreement. Alternate sources of these products
have been identified and are being qualified. Also under a transition agreement,
for many markets, Pfizer is formulating these active ingredients into the lower
concentration products that are sold to feed mills and producers. PAH is in the
process of transferring these operations to alternate sites. This effort is
expected to be completed during 2002 and 2003.
2
PAH has established sales and technical offices in 15 countries including:
U.S., Canada, Mexico, Costa Rica, Venezuela, Brazil, Argentina, Chile,
Australia, Japan, China, Thailand, Malaysia, South Africa and Belgium.
Additional offices will be opened as the business grows. Sales in the U.S.,
Australia, Brazil, China, South East Asia and Mexico accounted for 80% of PAH's
global sales in fiscal 2002. The business is not dependent on any one customer.
The use of medicated feed additives is controlled by regulatory
authorities that are specific to each country (e.g., the Food and Drug
Administration ("FDA") in the U.S.; Health Canada in Canada, etc.). Each product
is registered separately. In most countries, these registrations have already
been transferred from Pfizer to the Company. The transfers are continuing in
several countries and under the PAH asset purchase agreement, Pfizer will
continue to support the registration transfer effort.
Currently, new product development at PAH is focused on geographical
expansion of the present product line, new label claims and applications for
existing active ingredients and new formulations. This effort is coordinated by
product development personnel located in Belgium, Brazil, and the U.S. PAH also
has an active program to identify and license new products and new technologies.
Through its subsidiary, Prince Agriproducts, Inc. ("Prince Agri"), the
Company manufactures and markets trace minerals, trace mineral and selenium
premixes and other ingredients to the animal and poultry feed and pet food
industries, predominantly in the United States. These products generally
fortify, enhance or make more nutritious or palatable the animal and poultry
feeds and pet foods with which they are mixed. The Company is a basic producer
of trace minerals for the U.S. animal feed industry. The majority of the other
ingredients the Company sells are nutrients that are used as supplement for
animal feed. The Company serves customers in major feed segments, including
swine, dairy, poultry and beef as well as pet food and aquaculture. The Company
customizes trace mineral and selenium premixes at its blending facilities in
Marion, Iowa, Bremen, Indiana and Bowmanstown, Pennsylvania, and markets a
diverse line of other trace minerals and macro-minerals. The Company's major
customers for these products are medium-to-large feed companies, co-ops,
blenders, integrated poultry operations and pet food companies. The Company
sells other ingredients, such as buffers, yeast, palatants, vitamin K and amino
acids, including lysine, tryptophan and threonine. The Company also markets
copper sulfate as an animal feed supplement.
The Company's Israeli subsidiary, Koffolk (1949) Ltd. ("Koffolk Israel"),
is a producer and distributor of vitamins and premixes for the animal feed and
poultry industries in Israel, and also sells such products worldwide. Koffolk
Israel also provides a wide range of services to the animal feed industry in
Israel including mobile computer units for on-the-spot feed information,
comprehensive feed laboratory services for both chemical and microbiological
assay, and an experimental farm for field testing of feed additives and animal
health products.
Koffolk Israel also produces fine chemicals and other intermediates used
in the manufacture of certain pharmaceuticals, cosmetics and films. Koffolk
Israel's plant in Ramat Hovav, Israel operates under the FDA's GMP regulations,
and has received FDA approval for some of its processes and production
operations.
Through Koffolk Israel and its Brazilian subsidiary, Planalquimica
Industrial Ltda. ("Planalquimica"), the Company produces nicarbazin. Through
Koffolk Israel, the Company also produces amprolium for distribution to the
world-wide poultry industry through major multinational life science and
veterinary companies. The Company believes it is the sole world-wide producer of
amprolium, and the largest volume world-wide producer of nicarbazin through its
facilities in Israel and Brazil. The Company is the sole Latin American producer
of nicarbazin. Modern, large scale poultry production is based on intensive
animal management practices. This type of animal production requires routine
prophylactic medications in order to prevent health problems. Coccidiosis is one
of the critical disease challenges which poultry producers face globally.
Coccidiosis is an infection of coccidia, a microscopic parasite which routinely
infects chickens. Nicarbazin and amprolium are among the most effective
medications for the prevention of coccidiosis in chickens when used in rotation
with other coccidiostats. In the United States, PAH markets nicarbazin under the
trademark Nicarb(R) and amprolium under the trademark of Amprol(R).
3
INDUSTRIAL CHEMICALS
The Company manufactures and markets a number of inorganic and organic
specialty chemicals for use in the chemical catalyst, construction, printed
circuit board, semiconductor, automotive, aerospace, glass and agricultural
industries. Some of these products are produced from raw materials derived from
the Company's recycling operations. The Company also purchases copper metal and
crude ores and processes these in various grades to produce chemicals and
industrial minerals for sale to manufacturers. These manufacturers incorporate
the resultant products into their finished products in various industrial
markets.
Through its U.S. subsidiaries comprising The Prince Manufacturing Group
("Prince"), the Company manufactures and markets various mineral oxides,
including iron compounds and manganese compounds. Iron compounds include red
iron oxide (Hematite) (sold to the brick, masonry, glass, foundry, electrode,
abrasive, feed, and other chemical industries); black iron oxide (Magnetite)
(sold under the Magna Float brand name to the heavy media, coal, steel foundry,
electrode, abrasive, colorant, fertilizer, and various other chemical
industries); iron chromite (sold under the Chromox brand as a colorant or
additive to the glass industry). Manganese compounds include manganese dioxide
(sold under the Brickox brand name, which is considered a standard color in many
applications to the brick, masonry, glass, and other chemical industries); and
manganous oxide (sold to customers requiring an acid soluble form of manganese,
such as animal feed, fertilizer and chemical manufacturers).
Through Phibro-Tech, the Company manufactures and recycles alkaline
etchants in the United States. The Company's four active facilities involved
with these products have RCRA Part B hazardous waste treatment and storage
permits (See "Environmental Matters"). The Company's etchants are used to remove
copper from printed circuit boards, leaving the desired circuit pattern. The
Company sells fresh etchant to printed circuit board manufacturers and recycles
spent etchants. Phibro-Tech generates revenue from the sale of fresh etchants as
well as the recovery of the dissolved copper contained in the spent etchants,
which are processed into saleable copper-based products. The Company believes
that it is the only national recycler of spent etchants generated principally
from the printed circuit board industry, with an etchant plant in every major
geographic area except New England. These plants generally allow the Company to
distribute product and transport spent etchant, a freight intensive product
which is classified as hazardous waste, over relatively short distances.
Beginning in early fiscal 2001, and continuing to the present, the U.S. printed
circuit board industry has incurred a severe reduction in volume, with a
resulting reduction in the Company's sales volumes in this market.
Phibro-Tech also manufactures and sells the following major products:
Copper Oxide. Copper oxide is used as an ingredient in the production of
water-borne wood preservatives. The Company also sells copper oxide to the
catalyst, dye, ceramic and feed industries.
Copper Sulfate. The Company sells multiple grades of copper sulfate. The
Company sells a high purity copper sulfate to worldwide producers of electroless
copper. Industrial uses of copper sulfate include the manufacturing of pigments,
electroplating, catalysts and chemical intermediates in water treatment. The
Company markets copper sulfate solution to the mining and wood treatment
industries. The Company sells copper sulfate to the animal feed industry,
primarily through Prince Agri. In addition, the Company also sells copper
sulfate SP, a super pure product to the semiconductor industry.
Copper Carbonate. Copper carbonate is used in certain wood treatment
compounds and water treatment applications. The Company produces copper
carbonate and believes that it is the largest producer in the world today.
Phibro-Tech is a leading recycler in the United States of hazardous
chemical waste streams that contain copper or nickel. Four of its facilities are
permitted to handle hazardous waste. These waste streams are generated
principally by printed circuit board manufacturers and metal finishers. The
metal finishing and printed circuit board industries also generate other spent
chemicals, which are raw material sources of acid, copper and nickel, and the
Company charges fees for processing such materials based on metal content. The
Company also recycles a variety of other metal-containing chemical waste,
including spent catalysts, pickling solutions and metal strippers containing
brass, cobalt, copper, nickel, iron, tin and zinc,
4
in liquid, solid or slurry form. The Company also uses these recovered materials
to produce copper and nickel chemicals for use as raw materials in certain of
its products.
The Company recycles and processes metal-containing hazardous chemical
waste streams using hydrometallurgical technology. This technology involves the
reclamation of various metals and the production of finished chemical products
using chemical reactions such as leaching, extraction and precipitation. The
Company determines the precise chemical process required to treat each batch of
hazardous waste based on the type and amount of the waste as well as the
proportion of useful raw materials it contains.
Through its Norwegian subsidiary, Odda Smelteverk AS ("Odda"), which it
acquired in October 1998 together with certain related distribution business
assets, the Company manufactured and distributed dicyandiamide and calcium
carbide. Dicyandiamide is used in several applications, including as a fire
retardant for fiber, wood and paint, for producing epoxy laminates for circuit
boards and adhesives, for producing paper chemicals, and as a dye fixative for
textiles. The principal uses of calcium carbide are in the production of
acetylene for welding and cutting, as a desulphurization agent in the steel and
foundry industry, and in the manufacture of chemicals. In the fourth quarter of
fiscal 2002, Odda ceased manufacturing calcium carbide. In the first quarter of
fiscal 2003, Odda reduced production of dicyandiamide pending market acceptance
of its calcium oxide, a by-product of the manufacturing process.
Odda also manufactured and distributed hydrogen cyanimide ("CY-50"). In
the fourth quarter of fiscal 2002, the Company ceased manufacturing CY-50.
DISTRIBUTION
The Company's PhibroChem division markets and distributes fine and
specialty chemicals to manufacturers of health and personal care products. Among
the Company's major products for such applications are sodium fluoride and
stannous fluoride, DL Panthenol and selenium disulfide. Sodium fluoride is the
active anti-cavity ingredient in fluoride toothpaste, powders and mouthwashes.
Selenium disulfide is used as a dandricide in shampoo and hair care
preparations.
Through its U.K. subsidiary, Ferro Metal & Chemical Ltd. ("Ferro"), the
Company markets dicyandiamides and calcium carbides. Ferro also markets fine and
specialty chemicals to customers in the steel, gas production, chemical
intermediates, health and personal care industries.
ALL OTHER
Through its subsidiary, Mineral Resource Technologies, Inc. ("MRT"), the
Company manages combustion and mineral by-products. MRT provides management and
recycling of coal combustion residues, including fly ash and bottom ash, and
also mineral processing residues. Fly ash is the fine residual product and
bottom ash is the heavier particles that result from the combustion of coal in
the electric power industry. Fly ash is a pozzolan; that is, a mixture that, in
the presence of water, combines with an activator, such as portland cement, to
produce a cement-like material. This allows fly ash to be used as a less
expensive substitute for other cementious materials, primarily portland cement.
MRT typically provides these products to its customers directly from a utility's
site or through its own terminals.
In connection with its fly ash management operations, MRT has entered into
long-term sales and distribution agreements with utilities providing for minimum
payments and/or purchase obligations by MRT of varying durations. Certain of
these contracts also require MRT to construct (at its expense) facilities to
store and/or process ash. MRT's ability to achieve long-term revenue growth and
profitability is dependent upon securing additional long-term ash management
contracts with utilities and developing fly ash processing facilities.
Consistent with industry practice, in connection with its long-term contracts,
the Company has furnished and expects to furnish performance bonds or guarantees
to such utilities.
Through an English subsidiary, the Company develops and markets a wide
range of halogenated organic compounds, mainly brominated and fluorinated. These
chemical intermediates are sold primarily into the pharmaceutical industry as
building blocks for further synthesis. The Company is able to tailor the
5
quality and supply characteristics of these chemicals to those desired by its
customers by close coordination with the customer at an early stage in the
customer's product development. In certain cases the product supplied is novel
and included in the customer's regulatory submissions.
In the fourth quarter of fiscal 2001, the Company sold its Agtrol business
to Nufarm, Inc. ("Nufarm"). Agtrol developed, manufactured and marketed crop
protection products, including copper fungicides. The sale included inventory
and intangible assets to Nufarm, but did not include the manufacturing
facilities. The Company, through its Phibro-Tech subsidiary, also entered into
agreements to supply copper fungicide products to Nufarm from its Sumter, South
Carolina plant for five years, and from its Bordeaux, France plant for three
years.
Nufarm is obligated, during the terms of the agreements, to purchase all
of its requirements for products and substitute products, up to the capacity of
the facilities. The product price will be the Company's full standard cost plus
margin, as defined in the agreements. The agreements provide for minimum
payments to the Company during each contract year equal to 70% of base volume
multiplied by the product price.
Sales, Marketing And Distribution
The Company sells a broad range of specialty agricultural and industrial
chemicals for use in numerous markets including animal health and nutrition,
agricultural, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company has approximately 3,800 customers. Sales to the top
ten customers represented approximately 15% of the Company's fiscal 2002 net
sales and no single customer represented more than 4% of the Company's fiscal
2002 net sales.
The Company's world-wide sales and marketing network consists of
approximately 163 employees, 26 independent agents and 117 distributors who
specialize in particular markets.
The Company's products are often critical to the performance of its
customers' products while representing a relatively small percentage of the
total end-product cost. Management believes the three key factors to marketing
its products successfully are high quality products, a highly trained and
technical sales force, and customer service.
Raw Materials
The raw materials used in the Company's business consist chiefly of copper
metal and a wide variety of organic intermediates and inorganic chemicals that
are purchased from manufacturers in the United States, Europe and Asia. In
fiscal 2002, no single raw material accounted for more than 3% of the Company's
cost of goods sold. Total raw materials cost was approximately $166 million or
42% of net sales in fiscal 2002.
The Company believes that for most of its raw materials alternate sources
of supply are available to the Company at competitive prices. In addition, the
Company's ability to recycle hazardous waste streams allows the Company to
recover certain metals and other raw materials that it substitutes in its
products for virgin materials, thereby reducing the Company's cost of goods and
its reliance on suppliers of certain virgin materials.
Research and Development
Research, development and technical service efforts are conducted by 170
chemists and technicians at the various facilities of the Company. The Company
operates a Research and Development Center in Sumter, South Carolina, relating
to inorganic chemicals and crop protection products, and at Stradishall,
England, relating to organic chemical intermediates. In addition, Koffolk Israel
conducts research and development at its Ramat Hovav facility. The Company also
conducts research and development at its MRT Technology center in Atlanta, GA
for concrete and cement products. PAH's Rixensart, Belgium facility provides a
base for fermentation development in the areas of micro-biological strain
improvement as well as process scale-up. Most of the Company's plants have
chemists and technicians on staff involved in product development, quality
assurance, quality control and also providing technical services to customers.
Technical assurance is an important aspect of the Company's overall sales
effort.
6
Technology is an important component of the Company's competitive
position, providing the Company with a low cost position and enabling the
Company to produce high quality products. Patents protect some of the Company's
technology, but a great deal of the Company's competitive advantage revolves
around know-how built up over many years of commercial operation.
The Company entered into a research and development joint venture
agreement with IMI (TAMI) Institute for R&D Ltd. ("IMI") to develop custom made
specialty fine chemicals. As part of the agreement, the parties have also
entered into an agreement with the Israel-U.S. Binational Industrial Research
and Development ("BIRD") Foundation, whereby development costs, subject to a cap
of $1.7 million, are reimbursed 50%. On commercialization of developed products,
royalties will be due to BIRD based on achieved sales levels. Should
commercialization not occur, receipts from BIRD need not be returned.
The Company and its predecessors have over 25 years experience in the use
of hydrometallurgical technology for recycling metal-containing by-products and
a strong technological position in the production of metal-containing chemicals.
Patents, Trademarks and Product Registrations
The Company owns certain patents, tradenames, trademarks and product
registrations, and uses know-how, trade secrets, formulae and manufacturing
techniques which assist in maintaining the competitive positions of certain of
its products. Product registrations are required to manufacture and sell
medicated feed additives. Formulae and know-how are of particular importance in
the manufacture of a number of the products sold in the Company's specialty
chemical business. The Company believes that no single patent, trademark or
product registration is of material importance to its business and, accordingly,
that the expiration or termination thereof would not materially affect its
business. See "Government Regulation".
Customers
The Company does not consider its business to be dependent on a single
customer or a few customers, and the loss of any of its customers would not have
a material adverse effect on the Company's results. No single customer accounted
for more than 4% of the Company's fiscal 2002 net sales. The Company typically
does not enter into long-term contracts with its customers. However, the Company
has entered into certain long-term contracts with respect to nicarbazin and
amprolium, as well as its ferric chloride recycling, copper MEA carbonate and
fly ash management activities.
Competition
The Company is engaged in highly competitive industries and, with respect
to all of its major products, faces competition from a substantial number of
global and regional competitors. Some of the companies with which the Company
competes have greater financial, research and development, production and other
resources than the Company. The Company's competitive position is based
principally on customer service and support, product quality, manufacturing
technology, facility location and price. The Company has competitors in every
market in which it participates. Many of the Company's products face competition
from products that may be used as an alternative or substitute.
Employees
As of June 30, 2002, the Company had approximately 1,423 employees
worldwide. Of these, 267 employees were in management and administration, 163 in
sales and marketing, 170 were chemists or technicians, and 823 were in
production. Approximately 8% of the Company's domestic employees were covered by
collective bargaining agreements with two unions. These agreements expire in
2005 and 2006. Certain employees are covered by individual employment
agreements. Koffolk Israel continues to operate under the terms of Israel's
national collective bargaining agreement, portions of which expired in 1994. In
Norway, approximately 74% of employees are covered by collective bargaining
agreements.
The Company considers its relations with both its union and non-union
employees to be good.
7
Environmental Matters
Like similar companies, the Company and its subsidiaries are subject to a
wide variety of complex and stringent federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials and wastes, the manufacture, sale and use of pesticides and
the health and safety of employees. Pursuant to environmental laws, subsidiaries
of the Company are required to obtain and retain numerous governmental permits
and approvals to conduct various aspects of their operations, any of which may
be subject to revocation, modification or denial under certain circumstances.
Under certain circumstances, the Company or any of its subsidiaries might be
required to curtail operations until a particular problem is remedied. Known
costs and expenses under environmental laws incidental to ongoing operations are
generally included within operating budgets. Potential costs and expenses may
also be incurred in connection with the repair or upgrade of facilities to meet
existing or new requirements under environmental laws or to investigate or
remediate potential or actual contamination and from time to time the Company
establishes reserves for such contemplated investigation and remediation costs.
In many instances, the ultimate costs under environmental laws and the time
period during which such costs are likely to be incurred are difficult to
predict.
Subsidiaries of the Company have, from time to time, implemented
procedures at their facilities designed to respond to obligations to comply with
environmental laws. The Company believes that its operations are currently in
material compliance with such environmental laws, although at various sites the
Company's subsidiaries are engaged in continuing investigation and/or
remediation efforts to address contamination associated with their historic
operations. As many environmental laws impose a strict liability standard,
however, there can be no assurance that future environmental liability will not
arise.
In addition, the Company cannot predict the extent to which any future
environmental laws may affect any market for the Company's products or services
or its costs of doing business. For instance, if governmental enforcement
efforts should lessen, the market for Phibro-Tech's recycling services could
decline. Alternatively, changes in environmental laws might increase the cost of
the Company's products and services by imposing additional requirements on the
Company. States that have received authorization to administer their own
hazardous waste management programs may also amend their applicable statutes or
regulations, and may impose requirements which are stricter than those imposed
by the U.S. Environmental Protection Agency (the "EPA"). No assurance can be
provided that such changes will not adversely affect the Company's ability to
provide products and services at competitive prices and thereby reduce the
market for the Company's products and services.
As such, the nature of the current and former operations of the Company
and its subsidiaries exposes them to the risk of claims with respect to such
matters and there can be no assurance that material costs and liabilities will
not be incurred in connection with such claims. Based upon its experience to
date, the Company believes that the future cost of compliance with existing
environmental laws, and liability for known environmental claims pursuant to
such environmental laws, will not have a material adverse effect on the Company.
However, future events, such as new information, changes in existing
environmental laws or their interpretation, and more vigorous enforcement
policies of regulatory agencies, may give rise to additional expenditures or
liabilities that could be material. For all purposes of the discussion under
this caption, under "Legal Proceedings" and elsewhere in this Report, it should
be noted that the Company takes and has taken the position that neither the
parent company, Philipp Brothers Chemicals, Inc., nor any of its subsidiaries is
liable for environmental or other claims made against one or more of its other
subsidiaries or for which any of such other subsidiaries may ultimately be
responsible. Accordingly, references to the Company should not be read or
interpreted as a statement or admission that Philipp Brothers or any of its
subsidiaries is liable for activities of or claims made against any of its other
subsidiaries.
Federal Regulation
The following summarizes the principal federal environmental laws
affecting the business of the Company:
8
Resource Conservation and Recovery Act of 1976, as amended ("RCRA").
Congress enacted RCRA to regulate, among other things, the generation,
transportation, treatment, storage and disposal of solid and hazardous wastes.
RCRA required the EPA to promulgate regulations governing the management of
hazardous wastes, and to allow individual states to administer and enforce their
own hazardous waste management programs as long as such programs were equivalent
to and no less stringent than the federal program.
The EPA's regulations, and most state regulations in authorized states,
establish categories of regulated entities and set standards and procedures
those entities must follow in their handling of hazardous wastes. The three
general categories of waste handlers governed by the regulations are hazardous
waste generators, hazardous waste transporters, and owners and operators of
hazardous waste treatment, storage and/or disposal facilities. Generators are
required, among other things, to obtain identification numbers and to arrange
for the proper treatment and/or disposal of their wastes by licensed or
permitted operators and all three categories of waste handlers are required to
utilize a document tracking system to maintain records of their activities.
Transporters must obtain permits, transport hazardous waste only to properly
permitted treatment, storage or disposal facilities, and maintain required
records of their activities. Treatment, storage and disposal facilities are
subject to extensive regulations concerning their location, design and
construction, as well as the operating methods, techniques and practices they
may use. Such facilities are also required to demonstrate their financial
responsibility with respect to compliance with RCRA, including closure and
post-closure requirements.
The Federal Water Pollution Control Act, as amended (the "Clean Water
Act"). The Clean Water Act prohibits the discharge of pollutants to the waters
of the United States without governmental authorization. Like RCRA, the Clean
Water Act provides that states with programs approved by the EPA may administer
and enforce their own water pollution control programs. Pursuant to the mandate
of the Clean Water Act, the EPA has promulgated "pre-treatment" regulations,
which establish standards and limitations for the introduction of pollutants
into publicly-owned treatment works.
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws,
the Company and its subsidiaries may have strict and, under certain
circumstances, joint and several liability for the investigation and remediation
of environmental pollution and natural resource damages associated with real
property currently and formerly-owned or operated by the Company or a subsidiary
and at third-party sites at which the Company's subsidiaries disposed of or
treated, or arranged for the disposal of or treatment of, hazardous substances.
Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA").
FIFRA governs the manufacture, sale and use of pesticides, including the
copper-based fungicides sold by the Company. FIFRA requires such products and
the facilities at which they are formulated to be registered with the EPA before
they may be sold. If the product in question is generic in nature (i.e.,
chemically identical or substantially similar to a previously registered
product), the new applicant for registration is entitled to cite and rely on the
test data supporting the original registrant's product in lieu of submitting
data of its own. Should the generic applicant choose this citation option, it
must offer monetary compensation to the original registrant and must agree to
binding arbitration if the parties are unable to agree on the terms and amount
of compensation. The Company has elected this citation option in the past and
intends to use the citation option in the future should it conclude it is, in
some instances, economically desirable to do so. While there are cost savings
associated with the opportunity to avoid one's own testing and demonstration to
the EPA of test data, there is, in each instance, a risk that the level of
compensation ultimately required to be paid to the original registrant will be
substantial.
Under FIFRA, the EPA also has the right to "call in" additional data from
existing registrants of a pesticide, should the EPA determine, for example, that
the data already in the file need to be updated or that a specific issue or
concern needs to be addressed. The existing registrants have the option of
submitting data separately or by joint agreement. Alternatively, if one
registrant agrees to generate and submit the data, the other(s) may meet their
obligations under the statute by making a statutory offer to jointly develop or
9
share in the costs of developing the data. In that event, the offering party
must, again, agree to binding arbitration to resolve any dispute as to the terms
of the data development arrangement.
The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and
Amendments to the Clean Air Act ("Clean Air Act Amendments"), and corresponding
state laws regulate the emissions of materials into the air.
Such laws affect the coal industry both directly and indirectly and,
therefore, MRT. The coal industry is directly affected by the Clean Air Act
permitting requirements and/or emissions control requirements relating to
particulate matter (such as "fugitive dust"), and may also be impacted by future
regulation of fine particulate matter. Every five years, the EPA reviews and
revises, if necessary, its National Ambient Air Quality Standards ("NAAQS"),
which is a set of national air quality standards relating to fine particulate
matter and ozone, among other criteria air pollutants. In July 1997, the EPA
adopted stringent new NAAQS, and the impact of such new standards on the coal
industry will depend on the policies and control strategies associated with the
state implementation process under the Clean Air Act, as well as on pending
legislative proposals to delay or eliminate aspects of the new NAAQS.
The Clean Air Act indirectly affects operations of the Company and its
subsidiaries by extensively regulating the air emissions of sulfur dioxides and
other compounds emitted by coal-fired utility power plants. Title IV of the
Clean Air Act Amendments places limits on sulfur dioxide emissions from electric
power generation plants, setting baseline emission standards for such
facilities. The effect of the Clean Air Act Amendments on MRT cannot be
completely ascertained at this time.
The Clean Air Act Amendments also require utilities that currently are
major sources of nitrogen oxides in moderate or higher ozone NAAQS nonattainment
areas to install reasonably available control technology for nitrogen oxides,
which are precursors to the atmospheric formation of ozone. In October 1998, the
EPA released a ruling (the "NOx SIP Call") requiring 22 eastern states to revise
their state implementation plans to substantially reduce emissions of nitrogen
oxide. The EPA expects that states will achieve these reductions by requiring
power plants to make substantial reductions in their nitrogen oxide emissions.
Installation of reasonably available control technology and additional control
measures required under the NOx SIP Call will make it more costly to operate
coal-fired utility power plants and, depending on the requirements of individual
state implementation plans and the development of revised new source performance
standards, could make coal a less attractive fuel alternative in the planning
and building of utility power plants in the future. Numerous states,
municipalities, industry trade groups, manufacturers and utilities have filed
petitions in federal court challenging the NOx SIP Call. The effect of the NOx
SIP Call and other regulations or requirements that may be imposed in the future
on the coal industry in general and on MRT in particular cannot be predicted
with certainty. No assurance can be given that the implementation of the Clean
Air Act Amendments, state implementation plans or any future regulatory
provisions will not materially adversely affect MRT.
In addition, the Clean Air Act Amendments require a study of utility power
plant emissions of certain toxic substances, including mercury, and direct the
EPA to regulate these substances, if warranted. Future federal or state
regulatory or legislative activity may seek to reduce mercury emissions and such
requirements, if enacted, could result in reduced use of coal if utilities
switch to other sources of fuel.
Phibro-Tech is also impacted by the Clean Air Act and has various air
quality permits, including a Title V operating air permit at its Sumter, South
Carolina facility.
State and Local Regulation
In addition to those federal programs described above, a number of states
and some local governments have also enacted laws and regulations similar to the
federal laws described above governing hazardous waste generation, handling and
disposal, emissions to the water and air and the design, operation and
maintenance of recycling facilities.
10
Foreign Regulation
The Company's foreign subsidiaries are subject to a variety of foreign
environmental laws relating to pollution and protection of the environment,
including the generation, handling, storage, management, transportation,
treatment and disposal of solid and hazardous materials and wastes, the
manufacture and processing of pesticides and animal feed additives, emissions to
the air, discharges to land, surface water and subsurface water, human exposure
to hazardous and toxic materials and the remediation of environmental pollution
relating to their past and present properties and operations.
Regulation of Recycling Activities
The Company's recycling activities may be broken down into the following
segments for purposes of regulation under RCRA or equivalent state programs: (i)
transport of wastes to the Company's facilities; (ii) storage of wastes prior to
processing; (iii) treatment and/or recycling of wastes; and (iv) corrective
action at its RCRA facilities. Although all aspects of the treatment and
recycling of waste at its recycling facilities are not currently the subject of
federal RCRA regulation, subsidiaries of the Company made decisions to permit
its recycling facilities as RCRA regulated facilities. Final RCRA "Part B"
permits to operate as hazardous waste treatment and storage facilities have been
issued at its facilities in Santa Fe Springs, California; Garland, Texas;
Joliet, Illinois; Sumter, South Carolina; and Sewaren, New Jersey. Part B
renewal applications have been submitted for the Santa Fe Springs, Garland and
Sumter sites. The applications are being reviewed.
In connection with RCRA Part B permits for the waste storage and treatment
units of various facilities, the Company's subsidiaries have been required to
perform extensive site investigations at such facilities to identify possible
contamination and to provide regulatory authorities with plans and schedules for
remediation. Soil and groundwater contamination has been identified at several
plant sites and has required and will continue to require corrective action and
monitoring over future years. In order to maintain compliance with RCRA Part B
permits, which are subject to suspension, revocation, modification or denial
under certain circumstances, the Company has been, and in the future may be,
required to undertake additional capital improvements or corrective action.
Subsidiaries of the Company are required by the RCRA and their Part B
permits to develop and incorporate in their Part B permits estimates of the cost
of closure and post-closure monitoring for their operating facilities. In
general, in order to close a facility which has been the subject of a RCRA Part
B permit, a RCRA Part B closure permit is required which approves the
investigation, remediation and monitoring closure plan, and requires
post-closure monitoring and maintenance for up to 30 years. Accordingly,
additional costs are incurred in connection with any such closure. These cost
estimates are updated annually for inflation, developments in available
technology and corrective actions already undertaken. The Company has, in most
instances, chosen to provide the regulatory guarantees required in connection
with these matters by means of its coverage under an environmental impairment
liability insurance policy. There can be no assurance that such policy will
continue to be available in the future at economically acceptable rates, in
which event other methods of financial assurance will be necessary.
In addition to certain operating facilities, the Company or its
subsidiaries have been and will be required to investigate and remediate certain
environmental contamination at shutdown plant sites. The Company or its
subsidiaries are also required to monitor such sites and continue to develop
controls to manage these sites within the requirements of RCRA corrective action
programs.
Based upon available information, accruals for management estimates of the
cost of further environmental investigation and remediation at operating,
curtailed and closed sites are approximately $2.6 million as of June 30, 2002.
Waste Byproducts
In connection with the Company's subsidiaries' production of finished
chemical products, limited quantities of waste by-products are generated.
Depending on the composition of the by-product, the subsidiaries of the Company
either sell it, send it to smelters for metal recovery or send it for treatment
or disposal to regulated facilities.
11
Particular Facilities
The following is a description of certain environmental matters relating
to certain facilities of certain subsidiaries of the Company. References
throughout to the Company are intended to refer only to the applicable
subsidiary unless the context otherwise requires. These matters should be read
in conjunction with the description of litigation matters below under Item 3,
certain of which involve such facilities, and Note 13 to the Company's
Consolidated Financial Statements.
In 1984, Congress enacted certain amendments to RCRA under which
facilities with RCRA permits were required to have RCRA facility assessments
("RFA") by the EPA or the authorized state agency. Following an RFA, a RCRA
facility investigation, a corrective measures study, and corrective measure
implementation must, if warranted, be developed and implemented. As indicated
below, the Company's subsidiaries are in the process of developing or completing
various actions associated with these regulatory phases at certain of their
facilities.
Sewaren, New Jersey. In April 1989, the New Jersey Department of
Environmental Protection, Division of Waste Management and Division of Water
Resources (collectively the "DEP"), issued an Administrative Order and Notice of
Civil Administrative Penalty Assessment against C.P. Chemicals, Inc. ("CP"), a
subsidiary of the Company, relating to CP's recycling and manufacturing facility
in Sewaren, New Jersey. This proceeding resulted in an Administrative Consent
Order (the "ACO") mandating the development and implementation of an
environmental remediation plan. CP has substantially completed its investigation
and remediation efforts which included installation of a hydraulic control
system and pre-treatment of ground water on the site and capping to address soil
contamination concerns and satisfy storm water management requirements. Such
efforts remain subject to continuing review by the DEP.
In 1998, operations at the Sewaren facility were curtailed. In June 2000,
CP transferred title to the Sewaren property to the local township. At the same
time, CP entered into a 10-year lease with the township, providing for lease
payments aggregating $2,000,000, and covering certain areas of the property, in
order to allow it to conduct operations relating to its RCRA Part B Facility
Permit. While the township took title to the property and assumed basic property
related obligations, including the operation and maintenance of the ground water
control system called for by the ACO, the Company retained other environmental
obligations under the ACO and also entered into an indemnification agreement
with the township regarding environmental conditions existing at the time of the
transfer.
Sumter, South Carolina. In 1991, in connection with the RCRA Part B permit
for its Sumter, South Carolina facility, Phibro-Tech undertook the closure of
certain waste water treatment impoundments pursuant to RCRA closure requirements
and installed a waste water treatment system at the plant and is engaged in an
additional phase of facility investigation at the site. Phibro-Tech has
completed remedial action to remove material from an area used by a former owner
of the site. The South Carolina Department of Health and Environmental Control
("SCDHEC") has requested additional sampling in this area. Separately,
Phibro-Tech and certain adjacent land owners have entered into a consent
agreement to conduct an environmental investigation regarding certain property
located next to the Sumter facility, including a small portion of the Sumter
facility property, which has been identified as containing debris, and to remove
such debris. An engineering firm has been hired to investigate the situation and
to make recommendations. Phibro-Tech has also received certain notices of
violations from SCDHEC alleging certain permit violations. Phibro-Tech does not
believe that these claims are material and fully expects these claims to be
resolved in a mutually acceptable manner.
Santa Fe Springs, California. In connection with its request for renewal
of its RCRA Part B permit for its Santa Fe Springs, California facility, and the
administrative order noted below for this facility, Phibro-Tech has implemented
various phases of environmental investigation and corrective measure study and
assessments. It is currently in a continuing investigation and corrective
measure phase, which will involve additional sampling to determine the level of
corrective action. At this time, it is anticipated that this will involve a pump
and treat system through an existing on-site pre-treatment plant. Phibro-Tech is
also subject to an investigative and enforcement order, the ultimate scope and
disposition of which is currently being discussed with the California Department
of Toxic Substances Control ("DTSC"). The principal outstanding issue under the
order was the requirement of further soil investigation and the development of a
12
remediation plan, if necessary, beyond that already covered by the facility
investigation originally conducted. The study has been completed and
Phibro-Tech's consulting environmental engineers have recommended to DTSC no
further action in this regard. Separately, Phibro-Tech has reached an accord
with Communities for a Better Environment regarding allegations that Phibro-Tech
violated Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of
1985, and the California Health and Safety Code.
Phibro-Tech has also received a summary of violations from the DTSC for
its Santa Fe Springs facility alleging certain permit violations as well as
violations of the California Health and Safety Code and corresponding
regulations. Phibro-Tech is in contact with the DTSC with regard to these
claims, in an attempt to determine whether they can be resolved through a
mutually acceptable compliance schedule.
Union City, California. Phibro-Tech's Union City, California facility has
been shut down and a closure plan has been submitted to the California DTSC. It
is presently under review.
Joliet, Illinois. In connection with the RCRA Part B permit for this
facility, Phibro-Tech completed an initial RCRA facility investigation and an
additional sampling and investigative phase. The results of such sampling and
investigation were submitted to the Illinois Environmental Protection Agency
and, based on the agency's response, Phibro-Tech will develop a plan for further
investigation or monitoring, or, if necessary, corrective action.
Garland, Texas. In connection with the RFA for its Garland, Texas
facility, no action was recommended. However, during a subsequent inspection
some discoloration of soil was noted. Accordingly, Phibro-Tech developed a
corrective action plan to address discolored top soil at the site. The project
included the upgrading of pollution control equipment. The next phase is
additional site characterization, which is presently being undertaken. A renewal
application for the Part B permit has been submitted to the Texas authorities.
It is presently under review.
Powder Springs, Georgia. Phibro-Tech's facility in Powder Springs, Georgia
has been operationally closed since 1985. Phibro-Tech retains environmental
compliance responsibility for this facility and has effected a RCRA closure of
the regulated portion of the facility, a surface impoundment. Post-closure
monitoring and the implementation of a corrective measures plan are required.
Phibro-Tech has submitted and received Georgia Department of Environmental
Protection approval for a remedial investigation plan, and has granted
Phibro-Tech's Part B permit renewal application. The permit calls for a Phase II
work plan for corrective action. Certain corrective action, primarily
groundwater treatment has begun.
Union, Illinois. Phibro-Tech's facility in Union, Illinois has also been
operationally closed since 1986. Phibro-Tech has performed additional soil
sampling and submitted a closure plan to the Illinois EPA, which is under
review.
Rixensart, Belgium and Guarulhos, Sao Paulo, Brazil. In connection with
the acquisition of the medicated feed additives business from Pfizer, Inc., the
Company acquired manufacturing and laboratory facilities in Rixensart, Belgium
and Guarulhos, Sao Paulo, Brazil. Both of these facilities operate pursuant to
the environmental and related laws of their respective countries as well as, in
the case of Rixensart, the EU. The Company is not aware of any material
environmental liabilities in connection with these sites and further believes
that indemnification agreements from Pfizer, Inc. are adequate to protect the
Company in the event of discovery of covered environmental liabilities at the
respective sites.
Third Party Sites. The Company has, and certain of the Company's
subsidiaries have, sent products to customers at chemical processing or
manufacturing sites and sent wastes from their operations to various third party
waste disposal sites. In addition to the litigation described in Item 3 - Legal
Proceedings with respect to the Jericho, South Carolina site and the Casmalia,
California site, from time to time the Company or a subsidiary receives notice
from representatives of governmental agencies and private parties, or is named
as a potentially responsible party in legal proceedings, in which claims are
made that it is potentially liable for a portion of the investigation and
remediation costs and natural resource damages at such third party sites. Such
claims are for strict liability and carry with them the possibility of joint and
several liability under applicable Environmental Laws such as CERCLA, regardless
of the relative fault or level of involvement of the Company and other
potentially responsible parties. Although there can be no assurance, the Company
does not believe that liabilities in connection with such third party sites as
to which claims
13
have been received to date will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Ramat Hovav, Israel. Koffolk Israel's Ramat Hovav plant produces a wide
range of organic chemical intermediates for the chemical, pharmaceutical,
fragrance and veterinary industries. Israeli legislation enacted in 1997 amended
certain environmental laws by authorizing the relevant administrative and
regulatory agencies to impose certain sanctions, including issuing an order
against any person that violates such environmental laws to remove the
environmental hazard. In addition, such law imposes criminal liability on the
officers and directors of a corporation that violates such environmental related
laws, and increases the monetary sanctions that such officers, directors and
corporations may be ordered to pay as a result of such violations. The Ramat
Hovav plant operates under the supervision of the Ministry of Environment of the
State of Israel. The sewage system of the plant is connected to the Ramat Hovav
Local Industrial Council's central installation, where Koffolk Israel's sewage
is treated together with sewage of other local plants. Owners of the plants in
the area, including Koffolk Israel, have been required by the Israeli Ministry
of Environment to build facilities for pre-treatment of their sewage.
Odda, Norway. Like other Norwegian companies, Odda has to ensure that the
activities of the enterprise are planned, organized, performed and maintained in
conformity with requirements laid down in or pursuant to Norwegian health,
environmental and safety legislation. Norwegian law requires the person
responsible for an enterprise to ensure compliance with the requirements of,
among other laws, the Working Environment Act, the Pollution Control Act, the
Products Control Act, the Civil Defense Act and the Electrical Installations and
Electrical Equipment Act.
The applicable supervisory authority pursuant to such legislation is
responsible for supervising and providing guidance on implementation of and
compliance with such regulations. The supervisory authorities can respond to
violations of health, environmental and safety legislation with various
sanctions, including orders, fines, pollution charges and/or notification to the
police.
Norwegian legislation requires that Odda produce its products according to
its discharge permit and implementation system for environmental control and
improvements. Both local and central authorities have focused on the
environmental situation in the fjord at Odda and on waste disposal there by the
three primary manufacturers in the area, including Odda. In Odda's case, the
focus has been on the reduction of discharge of polynucleated aromatic
hydrocarbons ("PAHY") from the Venturi scrubber in the calcium carbide plant and
the nitrogen content in the filtercake (1%) discharge from the dicyandiamide
plant. In June 2002, the Company ceased manufacturing calcium carbide and,
therefore, the discharge of PAHY.
Government Regulation
Most Animal Health and Nutrition Group products offered by the Company
require licensing by a governmental agency before marketing. In the United
States, governmental oversight of animal nutrition and health products is shared
primarily by the United States Department of Agriculture ("USDA") and the Food
and Drug Administration. A third agency, the Environmental Protection Agency,
has jurisdiction over certain products applied topically to animals or to
premises to control external parasites.
The issue of the potential for increased bacterial resistance to certain
antibiotics used in certain food producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotics in these food producing animals. The sale
of feed additives containing antibiotics is a material portion of the Company's
business. Should regulatory or other developments result in restrictions on the
sale of such products, it could have a material adverse impact on the Company's
financial position, results of operations and cash flows.
The FDA is responsible for the safety and wholesomeness of the human food
supply. It regulates foods intended for human consumption and, through The
Center for Veterinary Medicine, regulates the manufacture and distribution of
animal drugs, including feed additives and drugs that will be given to animals
from which human foods are derived, as well as feed additives and drugs for pet
(or companion) animals.
14
To protect the food and drug supply for animals, the FDA develops
technical standards for animal drug safety and effectiveness and evaluates data
bases necessary to support approvals of veterinary drugs. The USDA monitors the
food supply for animal drug residues.
The Office of New Animal Drug Evaluation ("NADE") is responsible for
reviewing information submitted by drug sponsors who wish to obtain approval to
manufacture and sell animal drugs. A new animal drug is deemed unsafe unless
there is an approved new animal drug application ("NADA"). Virtually all animal
drugs are "new animal drugs" within the meaning of the term in the Federal Food,
Drug, and Cosmetic Act. Although the procedure for licensing products by the
USDA are formalized, the acceptance standards of performance for any product are
agreed upon between the manufacturer and the NADE. A NADA in animal health is
analogous to a New Drug Application ("NDA") in human pharmaceuticals. Both are
administered by the FDA. The drug development process for human therapeutics can
be more involved than that for animal drugs. However, for food-producing
animals, food safety residue levels are an issue, making the approval process
longer than for animal drugs for non-food producing animals, such as pets.
The FDA may deny a NADA if applicable regulatory criteria are not
satisfied, require additional testing or information, or require postmarketing
testing and surveillance to monitor the safety or efficacy of a product. There
can be no assurances that FDA approval of any NADA will be granted on a timely
basis or at all. Moreover, if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for NADA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to GMP regulations. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to ensure compliance.
For clinical investigation and marketing outside the United States, the
Company is also subject to foreign regulatory requirements governing
investigation, clinical trials and marketing approval for animal drugs. The
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above. Currently, in the European Union ("EU"), feed
additives which are successfully sponsored by a manufacturer are assigned to an
Annex. Initially, they are assigned to Annex II. During this period, member
states may approve the feed additive for local use. After five years or earlier,
the product passes to Annex I if no adverse reactions or trends develop over the
probationary period.
The Company currently markets nicarbazin in the EU. Nicarbazin holds an
Annex I registration. This means that the compound must be registered in each of
the member states and can be used legally by customers in the EU. Any
manufacturer, including generic producers, is permitted to sell nicarbazin in
the EU on the basis of a Certificate of Analysis. The distributor selling the
product warrants that it contains what is indicated on the label. The
registration may not be transferred in a manner similar to an FDA registration.
The originator of the registration, however, retains certain rights. For one,
the originator or a successor to the rights of the originator may refer to the
data file of the originator and any predecessors when making a submission.
The EU is in the process of centralizing the regulatory process for animal
drugs for member states. In 1997, the EU drafted new regulations requiring the
re-registration of feed additives, including coccidiostats. Part of these
regulations include a provision for manufacturers to submit quality data for
their own formulation, in effect adopting a Product License procedure similar to
that of the FDA. The provision is known as Brand Specific Approval ("BSA"), and
provides manufacturers with the opportunity to register their own unique brands,
instead of simply the generic compound. The BSA process is being implemented
over time. The new system is more like the U.S. system, where regulatory
approval is for the formulated product or "brand." A number of manufacturers,
including the Company, have completed dossiers in order to re-register various
anticoccidials for the purpose of obtaining regulatory approval from the
European Commission. As a result of its review of said dossiers, the Commission
withdrew marketing authorization of a number of anticoccidials, including
nicarbazin, as the Commission did not consider the submissions to be in full
compliance with its new regulations. The Company has subsequently completed the
necessary
15
data and resubmitted its nicarbazin dossier. Feasibility and timetable for new
registration will depend on the nature of demands and remarks from the
Commission.
The Company estimates that the loss of sales of nicarbazin as a result of
the ban in the EU will be partially compensated by increased sales of other
anticoccidials containing nicarbazin which had received a BSA and are not
subject to the ban.
16
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that
could affect the Company's Israeli subsidiary, Koffolk Israel. As of June 30,
2002 and for the year then ended, Israeli operations (excluding Koffolk Israel's
non-Israeli subsidiaries) accounted for approximately 13% of the Company's
consolidated assets and approximately 14% of its consolidated net sales. The
Company is, therefore, directly affected by the political, military and economic
conditions in Israel.
Political and Military Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with certain Arab countries and the Palestinian Authority,
since October 2000 there has been a significant increase in violence and
terrorist activity in Israel. During the last year the state of hostility has
increased in intensity. In April 2002, and from time to time thereafter, Israel
undertook military operations in several Palestinian cities and towns. The
Company cannot predict whether the current violence and unrest will continue and
to what extent it will have an adverse impact on Israel's economic development
or on Koffolk Israel's or the Company's results of operations. The Company also
cannot predict, particularly considering the current tensions between the United
States and Iraq, whether or not any further hostilities will erupt in Israel and
the Middle East and to what extent such hostilities, if they do occur, will have
an adverse impact on Israel's economic development or on Koffolk Israel's or the
Company's results of operations.
Certain countries, companies and organizations continue to participate in
a boycott of Israeli firms and other companies doing business in Israel or with
Israel companies. The Company does not believe that the boycott has had a
material adverse effect on the Company, but there can be no assurance that
restrictive laws, policies or practices directed toward Israel or Israeli
businesses will not have an adverse impact on the operation or expansion of the
Company's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 54 are, unless exempt, obligated to perform certain military duty
annually. Additionally, all such residents are subject to being called to active
duty at any time under emergency circumstances and since July 2001 some
reservists have been called to active duty. Some of the employees of Koffolk
Israel currently are obligated to perform annual reserve duty. While Koffolk
Israel has operated effectively under these and similar requirements in the
past, no assessment can be made of the full impact of such requirements on
Koffolk Israel and the Company in the future, particularly if emergency
circumstances occur and employees of Koffolk Israel are called to active duty.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and security incidents. Further disruptions to the Israeli economy as a result
of these or other factors could have a material adverse affect on Koffolk
Israel's and the Company's results of operations.
Koffolk Israel receives a portion of its revenues in U.S. dollars while
its expenses are principally payable in New Israeli Shekels. An increase in the
rate of inflation in Israel without a devaluation of the New Israeli Shekel,
could have an adverse effect on Koffolk Israel's results of operations.
17
Investment Incentives
Certain of the Israeli production facilities of the Company have been
granted Approved Enterprise status pursuant to the Law for the Encouragement of
Capital Investments, 1959, and consequently may enjoy certain tax benefits and
investment grants. Taxable income of Koffolk Israel derived from these
production facilities is subject to a lower rate of company tax than the normal
rate applicable in Israel. Dividends distributed by Koffolk Israel out of the
same income are subject to lower rates of withholding tax than the rate normally
applicable to dividends distributed by an Israeli company to a non-resident
corporate shareholder. The grant available to newly Approved Enterprises was
decreased throughout recent years. Certain of the Israeli production facilities
of the Company further enjoyed accelerated depreciation under regulation
extended from time to time and other deductions. There can be no assurance that
the Company will, in the future, be eligible for or receive such or similar
grants.
18
Item 2. Properties.
The Company maintains its principal executive offices and a sales office
in Fort Lee, New Jersey. The Company has 21 company-owned manufacturing
facilities and utilizes third party toll manufacturers. The chart below sets
forth the locations and sizes of the principal manufacturing and other
facilities operated by the Company and uses of such facilities for
non-manufacturing purposes, all of which are owned, except as noted.
Approximate
Location Square Footage Uses
- -------- -------------- ----
Atlanta, Georgia (a) 34,000 All Other; Administrative, Sales, Research
and Distribution Center
Bowmanstown, Pennsylvania 56,500 Industrial Chemicals
Bordeaux, France 141,000 All Other; Administrative and Sales
Braganca Paulista, Brazil 35,000 Animal Health and Nutrition; Administrative and Sales
Bremen, Indiana 50,000 Animal Health and Nutrition; Warehouse
Fairfield, New Jersey (a) 9,600 Animal Health and Nutrition; Administrative
Fort Lee, New Jersey (a) 23,500 Corporate Headquarters
Garland, Texas 20,000 Industrial Chemicals
Guarulhos, Brazil 1,234,000 Animal Health and Nutrition; Administrative, Sales and
Warehouse
Joliet, Illinois 34,500 Industrial Chemicals
Kuala Lumpur, Malaysia (a) 7,300 Animal Health and Nutrition; Warehouse and Office
Ladora, Iowa 9,500 Animal Health and Nutrition; Warehouse
Lee Summit, Missouri (a) 1,500 Animal Health and Nutrition; Administrative and Sales
Marion, Iowa 32,500 Animal Health and Nutrition
Odda, Norway 364,000 Industrial Chemicals; Warehouse,
Administrative and Sales
Petach Tikva, Israel 60,000 Animal Health and Nutrition; Administrative and Sales
Phenix City, Alabama 6,000 Industrial Chemicals
Pretoria, South Africa (a) 3,200 Animal Health and Nutrition; Administrative and Sales
Quincy, Illinois (b) 187,000 Animal Health and Nutrition; Warehouse,
Administrative and Sales
Ramat Hovav, Israel (a) 140,000 Animal Health and Nutrition; Research
Reading, Berks, United Kingdom (a) 3,100 Distribution; Administrative and Sales
Rixensart, Belgium 865,000 Animal Health and Nutrition, Sales,
Administrative and Research
Santa Fe Springs, California (c) 90,000 Animal Health and Nutrition; Industrial Chemicals
Santiago, Chile (a) 6,500 Animal Health and Nutrition; Administrative and Sales
Scunthorpe, United Kingdom (a) 93,000 Industrial Chemicals; Warehouse
Stradishall, United Kingdom 20,000 Industrial Chemicals; Administrative,
Sales and Research
Sumter, South Carolina 123,000 Industrial Chemicals; Research
The Woodlands, Texas (a) 12,100 All Other; Administrative, Sales and Research
Tokyo, Japan (a) 2,100 Animal Health and Nutrition; Administrative and Sales
Valencia, Venezuela (a) 1,100 Animal Health and Nutrition; Administrative and Sales
Wilmington, Illinois 119,000 Industrial Chemicals; Warehouse
19
- ----------
(a) This facility is leased. The Company's leases expire through 2027. For
information concerning the Company's rental obligations, see Note 13 to
the Company's Consolidated Financial Statements included herein.
(b) Comprises six facilities, including three warehouses, two manufacturing
and one sales facility.
(c) The Company leases the land under this facility from a partnership owned
by Jack Bendheim, Marvin Sussman and James Herlands. See "Certain
Relationships and Related Transactions".
The Company's subsidiary, C.P. Chemicals, Inc., leases portions of a
previously owned inactive, former manufacturing facility in Sewaren, New Jersey,
and another subsidiary of the Company owns inactive, former manufacturing
facilities in Powder Springs, Georgia and Union, Illinois. MRT leases property
and operates terminal facilities in Atlanta, Georgia, South Beloit, Illinois,
Pittsburg, California and Corona, California, and operates loading and storage
facilities in Pryor, Oklahoma, Joppa, Illinois, St. John, Arizona, Gentry,
Arkansas, Labadie, Missouri, Rush Island, Missouri and Presque Isle, Michigan.
The Company believes that its existing and planned facilities are and will
be adequate for the conduct of its business as currently conducted and as
currently contemplated to be conducted.
The Company and its subsidiaries are subject to extensive regulation by
numerous governmental authorities, including the FDA and corresponding state and
foreign agencies, and to various domestic and foreign safety standards.
Manufacturing facilities of the Company in Ramat Hovav and Brazil manufacture
products that conform to the FDA's GMP regulations. Four domestic facilities
involved with recycling have final RCRA Part B hazardous waste storage and
treatment permits. The Company's regulatory compliance programs include plans to
achieve compliance with international quality standards known as ISO 9000
standards, which became mandatory in Europe in 1999 and environmental standards
known as ISO 14000. The FDA is in the process of adopting the ISO 9000 standards
as regulatory standards for the United States, and it is anticipated that these
standards will be phased in for U.S. manufacturers over a period of time. The
Company's plants in Bowmanstown, Pennsylvania and Petach Tikva, Israel have
achieved ISO 9000 certification. The Company does not believe that adoption of
the ISO 9000 standards by the FDA will have a material effect on its financial
condition, results of operations or cash flows.
Item 3. Legal Proceedings.
Reference is made to the discussion above under "Environmental Matters" in
Item 1 for information as to various environmental investigation and remediation
obligations of the Company's subsidiaries associated principally with their
recycling and production facilities and to certain legal proceedings associated
with such facilities.
In addition to such matters, the Company or certain of its subsidiaries is
subject to certain litigation described below.
On or about April 17, 1997, CP and the Company were served with a
complaint filed by Chevron USA, Inc. ("Chevron") in the United States District
Court for the District of New Jersey, alleging that operations of CP at its
Sewaren plant affected adjoining property owned by Chevron and that Philipp
Brothers, as the parent of CP, is also responsible to Chevron. In July 2002, a
phased settlement agreement was reached under which the Company and another
defendant will, subject to certain conditions, take title to the property,
subject to a period of due diligence investigation of the property. The
Company's portion of the settlement for past costs and expenses was $495,000 and
is included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income. The payable of $495,000 is
included in accrued expenses and other current liabilities as of June 30, 2002
and was subsequently paid in July 2002. The Company and the other defendant
will, if the sale becomes final, share equally in the costs of remediation.
While the costs cannot be estimated at this time, the Company believes the costs
will not be material and insurance recoveries will be available to offset some
of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under CERCLA by
the EPA, involving a former third-party fertilizer manufacturing site in
Jericho, South Carolina. An agreement has been reached under which the Company
has agreed to contribute up to $900,000 of which $500,000 has been paid as of
June 30, 2002.
20
Some recovery from insurance and other sources is expected. The Company has also
accrued its best estimate of any future costs.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposed of at a licensed Casmalia, California disposal site,
including a business, assets of which were originally acquired by a subsidiary
of the Company in 1984. A settlement has been reached in this matter and the
Company has paid $171,103 of the settlement amount.
The Company and its subsidiaries are party to a number of claims and
lawsuits arising out of the normal course of business including product
liabilities and governmental regulation. Certain of these actions seek damages
in various amounts. In most cases, such claims are covered by insurance. The
Company believes that none of the claims or pending lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended June 30, 2002.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information. There is no public trading market for the
Company's common equity securities.
(b) Holders. As of June 30, 2002, there was one holder of the Company's
Class A Common Stock and two holders of the Company's Class B Common Stock.
(c) Dividends. The Company did not declare dividends on any of its common
stock during the two years ended June 30, 2002.
Item 6. Selected Financial Data.
The following table sets forth summary consolidated financial data for the
Company for the past five years ended June 30, 2002. The summary consolidated
financial data for the five years are derived from the Company's audited
consolidated financial statements. The consolidated financial data set forth
below should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained herein.
SUMMARY OF CONSOLIDATED FINANCIAL DATA
Year Ended June 30,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Income Statement Data:
Net sales ........................................... $ 388,813 $ 364,410 $ 323,026 $ 302,057 $ 275,577
Net (loss) income before extraordinary items ........ (51,770) (14,895) 10,053 (466) (7,065)
Extraordinary items ................................. -- -- -- -- (1,962)
Net (loss) income ................................... (51,770) (14,895) 10,053 (466) (9,027)
Balance Sheet Data:
Total assets ........................................ $ 296,444 $ 330,019 $ 258,451 $ 238,779 $ 192,196
Debt ................................................ 187,027 173,331 150,772 140,103 104,296
Redeemable Preferred Stock .......................... 56,602 48,980 -- -- --
Notes to Summary Consolidated Financial Data:
- ----------
(a) Fiscal 2002 includes charges totaling $24.5 million related to accelerated
depreciation and restructuring costs associated with the shutdown of two
product lines of the Company's Odda subsidiary, and the fixed asset and
intangible writedowns related to the Company's Odda and Carbide Industries
subsidiaries' ongoing operations.
(b) Fiscal 2002 includes a charge of $12.2 million for an increased valuation
allowance for deferred tax assets recorded in previous years. In addition,
a full valuation allowance of $13.6 million was recorded for deferred tax
assets relating to fiscal year 2002 operating losses.
(c) Included in net sales is shipping and handling income of $7.2, $6.1, $5.4
and $4.8 million for the fiscal years ended June 30, 2002, 2001, 2000 and
1999, respectively. The amount for 1998 is not readily determinable and a
restatement has not been made.
(d) Results of operations include the PAH business from the November 30, 2000
date of acquisition.
(e) The Company sold its Agtrol crop protection business in the fourth quarter
of fiscal 2001 and recognized a pre-tax gain of $1.5 million.
(f) The Company issued redeemable preferred securities in connection with the
acquisition of the Pfizer medicated feed additives business in 2001.
(g) Fiscal 2001 and 1999 include $1.3 and $1.5 million charges, respectively,
related to the severance of senior executives.
(h) Fiscal 2000 includes a $13.7 million gain resulting from Odda's sale of
its minority equity interest in a local Norwegian hydroelectric power
company and related power rights.
(i) Fiscal 2000 includes $1.5 million of income resulting from the transfer of
title of property in Sewaren, New Jersey.
22
(j) Fiscal 2000 and 1999 includes $.9 million and $3.7 million, respectively,
of property damage insurance gains as a result of a fire at the
Bowmanstown, Pennsylvania facility.
(k) Fiscal 1998 includes a $10 million nonrecurring plant curtailment charge
and $5.6 million for the forgiveness of limited recourse notes receivable
from certain executives of the Company and payment for related income
taxes resulting from the cancellation.
(l) Debt is equal to loans payable to banks, long-term debt and current
portion of long-term debt.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This information should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto, contained in
this Report.
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of specialty agricultural and industrial chemicals, which are sold
world-wide for use in numerous markets, including animal health and nutrition,
agriculture, pharmaceutical, electronics, wood treatment, glass, construction
and concrete. The Company also provides recycling and hazardous waste services
primarily to the electronics and metal treatment industries. These operations
are classified into four segments--Animal Health and Nutrition, Industrial
Chemicals, Distribution and All Other.
During fiscal 2002, the Company reported a net loss of $51.8 million. This
was primarily due to: worsening economic conditions in both domestic and foreign
markets; acceleration of depreciation of $14.5 million related to the
discontinuance of production for certain products at the Odda, Norway facility;
writedown of long-lived assets of $6.8 million at the Odda and Carbide, U.K.
operations; restructuring charges of $3.2 million at the Odda facility; and
deferred income tax asset valuation allowances (based on evaluation of the
recoverability of prior period operating loss carryforwards and other deferred
tax assets) of $12.2 million.
On November 30, 2000, the Company purchased the medicated feed additives
business of Pfizer, Inc. ("Pfizer"). The operating results of this business, now
called Phibro Animal Health ("PAH"), are included in the Company's consolidated
statements of operations from the date of acquisition and are included in the
Animal Health and Nutrition segment.
In the fourth quarter of fiscal 2001, the Company sold its Agtrol business
to Nufarm, Inc. ("Nufarm"). Agtrol developed, manufactured and marketed crop
protection products, including copper fungicides. The sale included inventory
and intangible assets to Nufarm, but did not include the manufacturing
facilities. The Company, through its Phibro-Tech subsidiary, also entered into
agreements to supply copper fungicide products to Nufarm from its Sumter, South
Carolina plant for five years, and from its Bordeaux, France plant for three
years. The operating results of Agtrol are included in the Company's
consolidated statements of operations up to the date of disposition and are
included in the All Other segment.
During fiscal 2002, the Company elected to include warehousing and freight
costs in cost of sales. Such costs were previously included in selling, general
and administrative expenses. Prior periods have been reclassified to conform to
the current year presentation. See Note 1 of the Consolidated Financial
Statements.
Results of Operations
Sales
($000's)
Year Ended June 30,
-----------------------------------
Operating Segments: 2002 2001 2000
--------- --------- ---------
Animal Health and Nutrition .......... $ 243,436 $ 202,573 $ 135,088
Industrial Chemicals ................. 90,897 97,227 99,712
Distribution ......................... 36,880 44,452 49,254
All Other ............................ 39,407 46,979 69,198
Intersegment ......................... (21,807) (26,821) (30,226)
--------- --------- ---------
$ 388,813 $ 364,410 $ 323,026
========= ========= =========
24
Operating Income (Loss)
($000's)
Year Ended June 30,
-----------------------------------
Operating Segments: 2002 2001 2000
--------- --------- ---------
Animal Health and Nutrition .......... $ 28,298 $ 17,562 $ 11,539
Industrial Chemicals ................. (34,079) (3,350) 5,355
Distribution ......................... 1,391 3,936 3,817
All Other ............................ (2,678) (7,086) 4,045
Corporate expenses and adjustments ... (14,596) (10,086) (9,082)
--------- --------- ---------
$ (21,664) $ 976 $ 15,674
========= ========= =========
Comparison of Fiscal Year Ended June 30, 2002 to Fiscal Year Ended
June 30, 2001.
Net Sales. Net sales increased by $24.4 million, or 7%, to $388.8 million
in 2002, as compared to the prior year. The increase was primarily due to a full
year of operations of the PAH business in 2002 offset in part by the sale of the
Company's Agtrol operations in the fourth quarter of 2001.
The Animal Health and Nutrition segment's net sales increased by $40.9
million, or 20%, to $243.4 million in 2002, as compared to the prior year. The
net sales increase was due to increased unit volume primarily as a result of the
PAH purchase. Excluding PAH, sales for the segment in 2002 approximated the
prior year. The Company's domestic operations reported higher net sales of $6.2
million due to increased unit volume sales of vitamin, mineral and other pre-mix
products offset in part by lower average selling prices and other product mix
changes. The adverse business climate in Israel and the discontinuation of sales
of vitamin exports by the Company's Koffolk Israel operations lowered
international net sales by a comparable amount.
The Industrial Chemicals segment's net sales decreased by $6.3 million, or
7%, to $90.9 million in 2002, as compared to the prior year. Sales by the
Company's Phibro-Tech subsidiary declined by $6.0 million due to volume declines
in the recycling and sale of etchant related to the contraction of the U.S.
printed circuit board industry. Sales price declines at the Company's Prince
operations, partially offset by volume improvements of iron and manganese
oxides, decreased revenues by $1.0 million. Favorable exchange rates, offset in
part by lower unit volumes at the Company's Odda subsidiary, increased revenues
by $.7 million. Odda discontinued production and sale of the CY-50 and calcium
carbide product lines in the fourth quarter of 2002.
Net sales for the Distribution segment decreased by $7.6 million, or 17%,
to $36.9 million in 2002, as compared to the prior year. The net sales decrease
was primarily due to lower unit volumes of carbide, dicyandiamide and cyanide
products during the current year.
Net sales for the All Other segment decreased by $7.6 million, or 16%, to
$39.4 million in 2002, as compared to the prior year. This decrease is related
to lower sales of crop protection chemicals. The Company's Agtrol crop
protection business was sold during the fourth quarter of fiscal 2001 and sales
of certain crop protection chemicals are currently being made under supply
agreements to Nufarm. Excluding Agtrol, sales for the segment in 2002 were $4.0
million above the prior year. The Company's fly ash business increased by $2.7
million primarily due to improved average selling prices and also increased unit
volume as a result of additional contracts with utilities in Missouri and
Michigan. The remaining $1.3 million improvement in sales was due to an increase
in specialized lab projects and formulations at the segment's U.K. operations.
25
Gross Profit. Gross profit decreased by $6.8 million, or 9%, to $66.5
million in 2002, as compared to the prior year. Purchase accounting adjustments
relating to inventory acquired in the PAH acquisition resulted in an increase to
cost of goods sold of $3.2 million and $8.9 million for the years 2002 and 2001,
respectively. Excluding the results of PAH, gross profit declined by $29.6
million as compared to the prior year.
Gross profit in the Animal Health segment increased $21.4 million
principally as a result of a full year of operations of PAH in 2002. Excluding
the results of PAH, gross profit declined by $1.4 million due to the adverse
business climate in Israel, offset in part by improved performance of the
segment's domestic operations.
The Industrial Chemicals segment's gross profit declined by $22.7 million
as compared to the prior year primarily due to a charge of $14.5 million
recorded during fiscal 2002 for the acceleration of depreciation related to the
Company's decision to cease production of two products and a related $2.1
million restructuring charge (primarily inventory writedowns and production
personnel severance costs) at the Company's Odda facility. Excluding the charges
for acceleration of depreciation and restructuring, lower production volumes
reduced profits at the Company's Odda facility by $.7 million. Furthermore,
lower production volumes and environmental recovery services revenues at the
Company's Phibro-Tech facilities reduced gross profits by $5.4 million.
Gross profit in the Distribution segment declined $1.1 million as compared
to the prior year primarily as a result of lower unit volume.
All Other segment's gross profit declined by $4.0 million primarily due to
sales of crop protection products sold to Nufarm under a supply agreement in the
current year as opposed to higher margin sales to third parties in the prior
period of $2.5 million, unfavorable operating performance at the Company's fly
ash operations of $2.0 million offset in part by the impact on gross margin of
higher revenues at the segment's U.K. facility of $.5 million.
Elimination of inter-company profit in inventory accounted for the balance
of the decline in gross profit.
Selling, General and Administrative Expenses. Costs increased by $9.0
million to $81.3 million in 2002, as compared to the prior year. Costs increased
by $11.6 million over the prior period at PAH due to a full year of operations
versus seven months in 2001, increased staffing levels, and increased
advertising and research and development costs associated with the transition of
operations from Pfizer. In addition, a full year of management advisory fees to
Palladium Equity Partners, LLC ($.9 million), write-offs of unamortized permit
fees at closed facilities ($.7 million) and additional environmental remediation
reserves ($.9 million) increased 2002 expense. The prior period included an
accrual for severance costs ($1.3 million) associated with the termination of
employment of an executive of the Company. The 2001 divestiture of Agtrol
reduced costs by $8.0 million. In addition, the prior period included a $3.1
million non-cash gain to reflect the decrease in repurchase value of redeemable
common stock of a minority shareholder, as compared to the gain in the current
period of $.4 million. Other general spending accounted for the balance of the
increase ($1.5 million).
Asset writedown. During fiscal 2002, the Company recorded a charge of $6.8
million related to the impairment of long-lived assets at the Company's Odda,
Norway and Carbide, UK operations. (See Note 2 to the Consolidated Financial
Statements).
Operating Income (Loss). Operating income decreased by $22.6 million to an
operating loss of $21.7 million in 2002, as compared to the prior year. The
Animal Health and Nutrition segment increased primarily due to the inclusion of
PAH for the entire period offset by the adverse business climate in Israel.
Operating income declined in the Industrial Chemicals segment primarily due to
the accelerated depreciation, restructuring and long-lived asset impairment
charges at Odda. In addition, Odda also experienced lower sales and production
volumes. Reduced sales volumes from printed circuit board customers resulted in
a further decrease in the segment's operating income. The Distribution segment
was
26
below the prior year primarily due to sales volume declines and a charge for
intangible asset impairment at the Company's Carbide operations. The improvement
in operating income of the All Other segment is primarily the result of the sale
of Agtrol in 2001.
Interest Expense, Net. Costs increased by $.1 million to $17.8 million in
fiscal 2002 as compared to the prior year primarily due to debt incurred in
connection with the PAH acquisition and higher levels of average bank
borrowings, offset in part by lower interest rates.
Other (Income) Expense, Net. Other (income) expense, net principally
reflects foreign currency transaction gains and losses of the Company's foreign
subsidiaries. The Company also recorded a loss of $1.2 million on a power
purchase derivative instrument at its Odda facility. In addition, the Company
recognized a gain of $.7 million resulting from a settlement of a class action
against European vitamin manufacturers.
Gain from Sale of Assets. During 2001, a gain from sale of assets ($1.5
million) resulted from the Company's sale of its Agtrol crop protection
business, a division of the Company's Phibro-Tech, Inc. subsidiary, to Nufarm
Inc. In addition, the Company's Odda subsidiary sold real estate resulting in a
gain ($1.0 million).
Income Taxes. An income tax provision of $13.7 million was reported on a
consolidated pre-tax loss of $38.1 million in fiscal 2002 primarily due to
income tax provisions in profitable foreign jurisdictions and an increase of
$25.8 million in the valuation allowance related to net deferred tax assets of
domestic and Norwegian operations. The Company has incurred domestic losses in
recent years and a reassessment of the likelihood of recovering net domestic
deferred tax assets resulted in the recording of a full domestic valuation
allowance of $15.4 million, including $12.2 million related to prior year
deferred tax asset balances. In addition, through fiscal 2001, the Company's
Odda subsidiary had a net deferred tax liability. However, significant losses in
fiscal 2002 have resulted in a net deferred tax asset and a full valuation
allowance has been provided due to the uncertainty of future profitability of
this operation. The Company's position with respect to the recoverability of
these deferred tax assets will continue to be evaluated each reporting period
based on actual and expected operating performance.
Comparison of Fiscal Year Ended June 30, 2001 to Fiscal Year Ended
June 30, 2000.
Net Sales. Net sales increased by $41.4 million, or 13%, to $364.4 million
in 2001, as compared to the prior year. The increase was primarily due to the
purchase of the PAH business offset in part by the sale of the Company's Agtrol
operations.
The Animal Health and Nutrition segment's net sales increased by $67.5
million, or 50%, to $202.6 million in 2001, as compared to the prior year. The
net sales increase was due to increased unit volume primarily as a result of the
PAH purchase. Excluding PAH, sales for the segment in 2001 were slightly above
the prior year. Increased volumes contributed to an increase in sales, but were
offset by lower average sales prices, including the impact of foreign exchange
in 2001.
The Industrial Chemicals segment's net sales decreased by $2.5 million, or
2%, to $97.2 million in 2001, as compared to the prior year. Sales of
Phibro-Tech, excluding recycling fees, were down by $2.8 million due to volume
declines related to the printed circuit board industry. Lower sales of Odda's
carbide and dicyandiamide products also accounted for the decrease. These
decreases were offset in part by higher recycling fees ($2.4 million) due to
increased demand.
Net sales for the Distribution segment decreased by $4.8 million, or 10%,
to $44.5 million in 2001, as compared to the prior year. The net sales decrease
was due to lower average sales prices, including foreign exchange, offset in
part by higher unit volume. The Company experienced sharp declines in selling
prices for carbide, dicyandiamide and copper cyanide products during fiscal
2001.
27
Net sales for the All Other segment decreased by $22.2 million, or 32%, to
$47.0 million in 2001, as compared to the prior year. The net sales decrease was
due to lower unit volume primarily as a result of the sale of the Agtrol crop
protection business, which was sold during the fourth quarter of 2001. The crop
protection business is highly seasonal and most of the sales are normally in the
Company's fourth quarter. Excluding Agtrol, sales for the segment in 2001 were
slightly above the prior year. Unit volume of the Company's fly ash business
increased approximately 36% and was offse