UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| * ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-64641
Phibro Animal Health Corporation
(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)
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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |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, 2004.
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2004: 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.
PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39
Item 9A. Controls and Procedures 39
Item 9B. Other Information 40
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 52
Index to Financial Statements F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of June 30, 2004 and 2003 F-3
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended June 30, 2004, 2003 and 2002 F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended June 30, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows
for the years ended June 30, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
Signatures II-1
PART I
Item 1. Business
General
We are a leading diversified global manufacturer and marketer of a broad
range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which we sell throughout
the world predominantly to the poultry, swine and cattle markets. MFAs are used
preventively and therapeutically in animal feed to produce healthy livestock. We
believe we are the third largest manufacturer and marketer of MFAs in the world,
and we believe that certain of our MFA products have leading positions in the
marketplace. We are also a specialty chemicals manufacturer and marketer,
serving primarily the United States pressure-treated wood and chemical
industries. We have several proprietary products, and many of our products
provide critical performance attributes to our customers' products, while
representing a relatively small percentage of total end-product cost. We operate
in over 17 countries around the world and sell our animal health and nutrition
products and specialty chemicals products into over 40 countries. Approximately
76% of our fiscal 2004 net sales were from our Animal Health and Nutrition
business, and approximately 24% of our fiscal 2004 net sales were from our
Specialty Chemicals business.
Our Animal Health and Nutrition segment manufactures and markets more than
500 formulations and concentrations of medicated and nutritional feed additives,
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products, to the livestock and pet food industries. Our MFA products are
internationally recognized for quality and efficacy in the prevention and
treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in
swine and acidosis in cattle. We market our Animal Health and Nutrition products
under approximately 450 governmental product registrations, approving our MFA
products with respect to animal drug safety and effectiveness.
Our Specialty Chemicals business manufactures and markets a number of
specialty chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, aerospace and agricultural industries. We anticipate
that our proprietary manufacturing process to produce a copper-based solution
for one of the leading new products for manufacturing pressure-treated wood will
represent our largest growth opportunity in our Specialty Chemicals business.
Over 39% of our fiscal 2004 net sales in our Specialty Chemicals business was
derived from copper-based compounds, solutions or mixes.
We have in recent years focused our business on animal health and nutrition
products. As a result of the rapid decline of the printed circuit board industry
in the United States, we have substantially exited that business, including our
etchant recycling operations, and re-directed our productive capacity in niche
markets. We have also sold other non-strategic businesses, such as our Agtrol
copper fungicide business and our subsidiaries, Mineral Resource Technologies,
Inc. ("MRT") and The Prince Manufacturing Company ("PMC"). In addition, we
closed our operations in Odda, Norway ("Odda") and Bordeaux, France ("La
Cornubia").
In August 2003, the Company completed the sale of MRT for net proceeds after
transaction costs of approximately $13.8 million. MRT managed and sold coal
combustion by-products, including fly ash.
Effective December 26, 2003, the Company completed the divestiture of
substantially all of the business and assets of The Prince Manufacturing Company
("PMC") to a company formed by Palladium Equity Partners II, LP and certain of
its affiliates (the "Palladium Investors"), and the related reduction of the
Company's preferred stock held by the Palladium Investors. PMC manufactured and
marketed various mineral oxides, including iron compounds and manganese
compounds (see Item 7 "Prince Transactions"). Unless otherwise indicated, the
information in this Item 1 does not include PMC.
On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA
("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The
Company believes that as a result of the bankruptcy filing by La Cornubia, it is
possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding
company with no assets except for its investment in La Cornubia, may also file
for bankruptcy in France.
1
Our Animal Health and Nutrition Business -- Medicated Feed Additives
We manufacture and market a broad range of medicated feed additive products
to the global livestock industry, either directly to large integrated producers
or through a network of independent distributors. Feed additives provide both
therapeutic benefits and increased conversion efficiency -- key drivers of
profitability for livestock producers.
Our MFA products can be grouped into five principal categories: antibiotics,
antibacterials, anticoccidials, anthelmintics and other medicated feed
additives. In fiscal 2004, antibiotics and antibacterials generated sales for us
of approximately $79 million, anticoccidials generated sales for us of
approximately $44 million, and anthelmintics and other medicated feed additives
generated sales for us of approximately $9 million.
Our core MFA products are listed in the table below:
Brand Active/Antigen Market Entry Comment
- ----------------------------- -------------- ------------ -------
Terramycin(R)/Neo- oxytetracycline, 1951 Antibiotic with multiple
Terramycin(R)/Neo-TM(R) neomycin applications for a wide
number of species
CLTC(R) chlortetracycline 1954 Antibiotic with multiple
applications for a wide
number of species
Nicarb(R) nicarbazin 1955 Anticoccidial for poultry
Amprol(R) amprolium 1960 Anticoccidial for poultry
and cattle
Bloatguard(R) poloxalene 1966 Anti-bloat treatment for cattle
Banminth(R) pyrantel tartrate 1969 Anthelmintic for livestock
Mecadox(R) carbadox 1971 Antibacterial used in swine
feeds to control
salmonellosis and dysentery
Stafac(R)/Eskalin(R)/V-Max(R) virginiamycin 1972 Antibiotic with multiple
applications for a wide
number of species
Coxistac(R)/Posistac(R) salinomycin 1979 Anticoccidial for poultry;
disease preventative in swine
Rumatel(R) morantel tartrate 1981 Anthelmintic for livestock
Oxibendazole(R) oxibendazole 1982 Anthelmintic for livestock
Aviax(R) semduramicin 1995 Anticoccidial for poultry
Antibiotics
Antibiotics are natural products produced by fermentation and are used to
treat or to prevent diseases, thereby promoting more efficient growth. Several
factors contribute to limit the efficiency, the weight gain and feed conversions
of livestock production, including poor nutrition, environmental and management
problems, heat stress and subclinical disease.
Virginiamycin. Virginiamycin is an antibiotic marketed under our brand names
Stafac(R) for treating swine, cows, broilers and turkeys, Eskalin(R) for dairy
cows and V-Max(R) for feed lot cattle. We formulate virginiamycin to improve
health in poultry, swine and cattle and prevent necrotic enteritis in poultry,
dysentery in swine and liver abscesses in cattle. The product is sold to large
poultry and swine producers and feed companies in North America, Latin America
and Asia.
First discovered in Belgium in 1954, virginiamycin is an antimicrobial
produced from the streptomyces virginiae fungus. Virginiamycin has been
successful due to a number of strong product features. For example, no
withdrawal period is required since it is virtually unabsorbed from the
digestive tract. It is excreted in very low concentrations and rapidly degraded.
It alleviates some of the production limiting effects of certain diseases of
livestock and poultry. To date, no generic competition has been introduced due
to our proprietary virginiamycin manufacturing technology.
Terramycin and Neo-Terramycin. Terramycin(R) and Neo-Terramycin(R), which
are derived from the active ingredient oxytetracycline, are effective against a
range of diseases including:
o fowl cholera in chickens,
o airsacculitis in turkeys,
o pneumonia and enteritis in swine, and
o pneumonia, enteritis and liver abscesses in cattle.
2
We sell Terramycin(R) and Neo-Terramycin(R) feed additive products in
various concentrations. Terramycin(R) is approved for use for poultry, swine,
cattle and sheep. Neo-Terramycin(R) combines the active ingredients
oxytetracycline and neomycin to prevent and treat a wide range of diseases
caused by gram positive and gram negative organisms, including bacterial
enteritis in chickens and turkeys, baby pig diarrhea in swine and calf diarrhea.
These Terramycin products are sold mostly in the United States to livestock
producers, feed companies and distributors. Limited quantities are sold in
selected countries in Latin America and Asia.
Antibacterials
Antibacterials are produced through chemistry and are used to treat and
prevent diseases.
Carbadox. We market carbadox under the brand name Mecadox(R). Carbadox is an
antibacterial compound recommended for use in swine feeds to promote and to
control swine salmonellosis and swine dysentry. In swine production, the primary
objective of producers is the rapid and efficient development of swine at
minimal cost. Since 1970, Mecadox(R) has been a leader in reducing livestock
production costs through meaningful performance enhancement. Mecadox(R) is a
leading product for starter/grower swine in the United States. In addition to
its antimicrobial properties, it also improves nitrogen retention and increases
the efficiency of amino acid metabolism, two critical factors in the development
of young swine. Mecadox(R) is chemically unrelated to any other antibacterial
that is used in animals or humans. Mecadox(R) is sold primarily in North America
to feed companies and large integrated swine producers.
Anticoccidials
Anticoccidials are produced through fermentation and chemistry, and are
primarily used to prevent and control the disease coccidiosis in poultry and in
cattle. Coccidiosis is a disease of the digestive tract that is of great concern
to animal producers. Caused by protozoan parasites such as Eimeria spp.,
coccidiosis is one of the most destructive diseases facing the world's poultry
producers. Common effects of this disease (such as weight loss, wet droppings,
poor feed utilization and higher mortality rates) rapidly affect an entire flock
of poultry, resulting in annual losses of hundreds of millions of dollars for
the poultry industry.
Modern, large scale poultry production is based on intensive animal
management practices. This type of animal production requires routine preventive
medications in order to prevent health problems. Coccidiosis is one of the
critical disease challenges which poultry producers face globally. We sell our
anticoccidials globally, primarily to integrated poultry producers and feed
companies in North America, the Middle East, Latin America and Asia, and to
international animal health companies.
Nicarbazin and Amprolium. We produce nicarbazin and amprolium for
distribution to the world-wide poultry industry through major multinational life
science and veterinary companies. Nicarbazin is a broad-spectrum anticoccidial
which works by interfering with mitochondrial metabolism. It is classified as an
oxidative phosphorylation uncoupler and is used for coccidiosis prevention in
broiler chickens.
We believe that we are the largest volume world-wide producer of amprolium,
and the largest volume world-wide producer of nicarbazin. We are also the sole
Latin American producer of nicarbazin. Nicarbazin and amprolium, along with
salinomycin and semduramicin, are among the most effective medications for the
prevention of coccidiosis in chickens when used in rotation with other
anticoccidials. In the United States, we market nicarbazin under the trademark
Nicarb(R).
Other Anticoccidials. From a class of compounds known as ionophores, we
developed Aviax(R) and Coxistac(R) to combat coccidiosis. These two products
have demonstrated increased feed efficiency, the ability to suppress coccidial
lesions, and provide reliable reserve potency with minimal side-effects. Through
a third product, Posistac(R), we have extended the application of the active
ingredient in Coxistac(R) to swine.
Aviax(R) contains the ionophore semduramicin which provides protection for
poultry against all major coccidial parasites. The product can be incorporated
into virtually any type of feed, and provided to broilers of any production
stage. We have received regulatory approval to sell Aviax(R) in the EU and have
applied in the United States for the sale of Aviax(R) in mycelial dosage form.
This dosage form is significantly more cost-effective and may improve
profitability significantly.
Coxistac(R) contains the ionophore salinomycin. The product acts early in
the coccidial life cycle by killing sporozoites, trophozoites and early
developing schizonts before poultry can be severely damaged. Coxistac(R) has
proven to be effective and safe with minimal resistance development evident in
commercial studies. The recommended dosage provides a high level of protection
against coccidiosis even through temporary periods of low feed intake caused by
disease or adverse climatic conditions. No withdrawal period is required for
poultry before slaughter. Coxistac(R) is a leading anticoccidial in Asia, Latin
America, the Middle East and Canada.
3
Posistac(R) contains salinomycin which acts as a productivity enhancer for
grower/finisher swine. The compound increases the utilization and digestion of
feed ingredients by mature swine thereby allowing swine to reach market weight
earlier and at less cost than swine fed conventional feed additives. Posistac(R)
can be used up to the slaughter phase without the need for withdrawal.
Anthelmintics
Anthelmintics protect against internal parasites. Our anthelmintic products
are marketed under the Rumatel(R) and Banminth(R) brand names.
Rumatel(R). Rumatel(R) is a potent broad-spectrum anthelmintic that
effectively eliminates the major internal nematode parasites in cattle. Unlike
other single-dose dewormers, Rumatel(R) may be administered to lactating dairy
cattle with no milk withdrawal. Dairy cattle may be treated with Rumatel(R) at
any time during their production cycle, whether dry, pregnant or lactating.
Banminth(R). Banminth(R) is an anthelmintic compound, a member of the class
of synthetic compounds called tetra-hydropyrimidines. Banminth(R) has a mode of
action that works effectively in protecting swine against the two major internal
parasites, large roundworms (Ascaris suum) and nodular worms (Oesophagostomum
spp.). Banminth(R) kills adult parasites and prevents roundworm larval
migration, preventing damage to the liver and lungs of swine. When used
continuously in feeds, Banminth(R) prevents re-infection of swine raised on
dirt.
Other Medicated Feed Additives
Our other medicated feed additives include a range of products sold under
the Bloat Guard(R) brand name. Bloat Guard(R) controls legume or wheat pasture
bloat in cattle. The products control bloat for at least 12 hours after a single
dose with no adverse effect on reproduction, rumen function or milk production.
We manufacture bulk active ingredients for our MFA products primarily in
four modern facilities located in:
o Guarulhos, Brazil (salinomycin and semduramicin),
o Rixensart, Belgium (virginiamycin and semduramicin),
o Ramat Hovav, Israel (nicarbazin and amprolium), and
o Braganca Paulista, Brazil (nicarbazin).
Active ingredients are further processed in our facilities and in contract
premix facilities located in each major region of the world.
We have established sales and technical offices for our MFA products in 14
countries including: the United States, Canada, Mexico, Venezuela, Brazil,
Argentina, Chile, Australia, China, Thailand, Malaysia, South Africa, Belgium
and Israel. The business is not dependent on any one customer.
The use of MFAs is controlled by regulatory authorities that are specific to
each country (e.g., the Food and Drug Administration ("FDA") in the United
States, Health Canada in Canada, EFSA/EMEA authorities in Europe, etc.),
responsible for the safety and wholesomeness of the human food supply, including
feed additives for animals from which human foods are derived. Each product is
registered separately in each country where it is sold. The appropriate
registration files pertaining to such regulations and approvals are continuously
monitored, maintained and updated by us. In certain countries where we are
working with a third party distributor, local regulatory requirements may
require registration in the name of such distributor.
Animal Health and Nutrition -- Nutritional Feed Additives
We manufacture and market trace minerals, trace mineral premixes, vitamins
and other nutritional ingredients to the livestock feed and pet food industries,
predominantly in the United States and Israel. These products generally fortify,
enhance or make more nutritious or palatable the livestock feeds and pet foods
with which they are mixed. The majority of the other ingredients that we sell
are nutrients that are used as supplements for animal feed. We serve customers
in major feed segments, including swine, dairy, poultry and beef. We customize
trace mineral premixes at our blending facilities in Marion, Iowa, Bremen,
Indiana and Petach Tikva, Israel, and market a diverse line of other trace
minerals and macro-minerals. Our major customers for these products are
medium-to-large feed companies, co-ops, blenders, integrated poultry operations
and pet food companies. We sell other ingredients, such as buffers, yeast,
palatants, vitamin K and amino acids, including lysine, tryptophan and
threonine. We also market copper sulfate as an animal feed supplement.
4
Our Specialty Chemicals Business
We manufacture and market a number of specialty chemicals for use in the
wood treatment, chemical catalyst, semiconductor, automotive, aerospace and
agricultural industries. Our manufacturing customers incorporate our specialty
chemicals products into their finished products in various industrial markets.
We seek to take advantage of opportunistic niche markets where we believe that
our expertise and capabilities can be leveraged.
Copper Wood Treatment Products
For many years, we were a major supplier of an important ingredient (copper
oxide) used in the manufacture of CCA (chromated-copper-arsenic) wood treating
solutions for the pressure-treated wood industry. Pursuant to a United States
Environmental Protection Agency ("EPA") ruling, since December 31, 2003, all
pressure-treated wood for the residential and recreational markets can no longer
be treated using the standard chromated-copper-arsenic (CCA) solution. A leading
replacement solution for CCA pressure-treated wood is a copper carbonate
compound. We currently estimate that the total potential size of this copper
solution to the pressure-treated wood market is approximately $120 million
annually. We have already signed a multi-year, take-or-pay contract with a major
chemicals supplier to the pressure-treated wood industry to provide it with this
new product, which we estimate will increase our sales by approximately $30
million over the life of the contract, based on existing forecasts. A patent
with respect to the manufacturing process of our solution, and the claims in our
patent application was granted and issued on November 11, 2003. We believe that
our manufacturing process allows us to operate in this market with a lower cost
of capital and higher factory through-put than our competition. To take
advantage of this potential new market, we have constructed and are operating
commercial production facilities in Sumter, South Carolina and in Joliet,
Illinois. In addition, we have filed a provisional patent for a new, large
molecule pressure-treated wood copper compound product. We believe that this new
product may be the next generation in copper-based wood treatment products, with
the potential to substantially increase the duration of protection for treated
wood.
Other Copper Products
We manufacture on a contract basis copper compounds for use primarily in
agricultural fungicides from our Sumter, South Carolina facility. This contract
was part of the sale by us of our Agtrol business to Nufarm, Inc. in the fourth
quarter of fiscal 2001. Utilizing our over fifty-year history in producing
copper chemicals, we supply various metal-based chemicals to the catalyst and
electronics industries. We also manufacture copper compounds for a broad variety
of industrial customers.
Other Specialty Chemicals Products
We market and distribute fine and specialty chemicals to manufacturers of
health and personal care products and chemical coating products to customers in
the automotive, metal finishing and chemical intermediate markets. Among our
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.
Sales, Marketing and Distribution
We have approximately 2,800 customers. Sales to our top ten customers
represented approximately 22% of our fiscal 2004 net sales and no single
customer represented more than 5% of our fiscal 2004 net sales.
Our world-wide sales and marketing network consists of approximately 118
employees, 5 independent agents and 125 distributors who specialize in
particular markets.
Our products are often critical to the performance of our customers'
products, while representing a relatively small percentage of the total
end-product cost. We believe the three key factors to marketing our products
successfully are high quality products, a highly trained and technical sales
force, and customer service.
Most of our 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
our overall sales effort. We field Animal Health and Nutrition technical service
people throughout the world, with capabilities to interface with all key
customers on a marketing, sales training and technical (product) basis, and who
work directly with commercial feed manufacturers and integrated
5
poultry, swine and cattle producers to promote animal health. Our MFA and NFA
field personnel are skilled in the area of product differentiation and have
extensive application knowledge so as to work closely with customers in
determining optimum benefits from product usage. As agricultural food production
will continue to intensify and will adopt evolving technologies, our MFA and NFA
personnel are constantly working with customers to better understand their needs
in order to best utilize the products existing within our portfolio. This
commercial knowledge also plays a pivotal role within the research and
development function to ensure that research results are applicable to customer
needs and concerns.
Product Registrations, Patents and Trademarks
We own certain product registrations, patents, tradenames and trademarks,
and use know-how, trade secrets, formulae and manufacturing techniques which
assist in maintaining the competitive positions of certain of our 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 our specialty chemicals business. We believe
that no single patent or trademark is of material importance to our business
and, accordingly, that the expiration or termination thereof would not
materially affect our business. See "Government Regulation."
The following trademarks and service marks used throughout this Report
belong to, are licensed to, or are otherwise used by us in our medicated feed
additives business: Stafac(R); Eskalin(R); V-Max(R); Terramycin(R);
Neo-Terramycin(R); CLTC(R); Mecadox(R); Nicarb(R); Amprol(R); Bloatguard(R);
Aviax(R); Coxistac(R); Posistac(R); Banminth(R); Oxibendazole(R); Rumatel(R).
Raw Materials
The raw materials used in our business include certain active drug
ingredients, a wide variety of chemicals, mineral ores and copper metal that are
purchased from manufacturers and suppliers in the United States, Europe and
Asia. In fiscal 2004, no single raw material accounted for more than 5% of our
cost of goods sold. Total raw materials cost was approximately $133 million or
38% of net sales in fiscal 2004. We believe that for most of our raw materials,
alternate sources of supply are available to us at competitive prices.
Research and Development
Research, development and technical service efforts are conducted at our
various facilities. We operate research and development facilities in Rixensart,
Belgium, Sumter, South Carolina, Ramat Hovav, Israel and Stradishall, England.
These facilities provide research and development services relating to
fermentation development in the areas of micro-biological strain improvement as
well as: process scale-up; wood treatment products; and organic chemical
intermediates.
Technology is an important component of our competitive position, providing
us unique and low cost positions enabling us to produce high quality products.
Patents protect some of our technology, but a great deal of our competitive
advantage revolves around know-how built up over many years of commercial
operation.
Customers
We do not consider our business to be dependent on a single customer or a
few customers, and the loss of any of our customers would not have a material
adverse effect on our results. No single customer accounted for more than 5% of
our fiscal 2004 net sales. We typically do not enter into long-term contracts
with our customers.
Competition
We are engaged in highly competitive industries and, with respect to all of
our major products, we face competition from a substantial number of global and
regional competitors. Some of our competitors have greater financial, research
and development, production and other resources than we do. Our competitive
position is based principally on customer service and support, product quality,
manufacturing technology, facility location and price. We have competitors in
every market in which we participate. Many of our products face competition from
products that may be used as an alternative or substitute.
Employees
As of June 30, 2004, we had 1,051 employees worldwide. Of these, 210
employees were in management and administration, 118 were in sales and
marketing, 132 were chemists, technicians or quality control personnel, and 591
were in production. Certain
6
employees are covered by individual employment agreements. Our Israeli
operations continue to operate under the terms of Israel's national collective
bargaining agreement, portions of which expired in 1994. We consider our
relations with both our union and non-union employees to be good.
Environmental Matters
We and our 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, our subsidiaries 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, we or any of
our 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 we establish 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.
Our subsidiaries have, from time to time, implemented procedures at their
facilities designed to respond to obligations to comply with environmental laws.
We believe that our operations are currently in material compliance with such
environmental laws, although at various sites our subsidiaries are engaged in
continuing investigation, remediation and/or monitoring efforts to address
contamination associated with their historic operations. As many environmental
laws impose a strict liability standard, however, we can provide no assurance
that future environmental liability will not arise.
In addition, we cannot predict the extent to which any future environmental
laws may affect any market for our products or services or our costs of doing
business. Alternatively, changes in environmental laws might increase the cost
of our products and services by imposing additional requirements on us. 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 EPA. We can
provide no assurance that such changes will not adversely affect our ability to
provide products and services at competitive prices and thereby reduce the
market for our products and services.
The nature of our and our subsidiaries' current and former operations
exposes us and our subsidiaries to the risk of claims with respect to
environmental matters and we can provide no assurance that we will not incur
material costs and liabilities in connection with such claims. Based upon our
experience to date, we believe 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 us. Based
upon information available, we estimate the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, (including the litigation referred to under
"-- Legal Proceedings") to be approximately $2.9 million, which is included in
current and long-term liabilities in our June 30, 2004 consolidated balance
sheet. 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 Item 3, Legal Proceedings and elsewhere in this Report, it
should be noted that we take and have taken the position that neither Phibro
Animal Health Corporation, nor any of our subsidiaries is liable for
environmental or other claims made against one or more of our other subsidiaries
or for which any of such other subsidiaries may ultimately be responsible.
Federal Regulation
The following summarizes the principal federal environmental laws affecting
our business:
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. Such facilities are also
subject to closure and post-closure requirements.
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
7
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,
we and our 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 us or a subsidiary and at third-party sites at
which our 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 us. 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. We have elected this citation option in the past and may use
the citation option in the future should we 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
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, and corresponding state laws regulate the
emissions of materials into the air. Such laws affect the coal industry both
directly and indirectly and, therefore, the operations of MRT, which was
divested in August 2003. 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.
Foreign Regulation
Our 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
We have substantially reduced our recycling activities at our Joliet,
Illinois; Garland, Texas; Sumter, South Carolina; and Sewaren, New Jersey sites.
Our recycling activities may be broken down into the following segments for
purposes of regulation under RCRA or
8
equivalent state programs: (i) transport of wastes to our facilities; (ii)
storage of wastes prior to processing; (iii) treatment and/or recycling of
wastes; (iv) corrective action at our RCRA facilities; and (v) management of
wastes and residues from the recycling process. Although all aspects of the
treatment and recycling of waste at our recycling facilities are not currently
the subject of federal RCRA regulation, our subsidiaries decided to permit our
recycling facilities as RCRA regulated facilities. Final RCRA "Part B" permits
to operate as hazardous waste treatment and storage facilities have been issued
at our facilities in Santa Fe Springs, California; Garland, Texas; Joliet,
Illinois; Sumter, South Carolina; and Sewaren, New Jersey (expired August 2003,
see "Particular Facilities - Sewaren, NJ" below). Part B renewal applications
have been submitted for the Santa Fe Springs, Garland and Joliet sites. The
applications are being reviewed.
In connection with RCRA Part B permits for the waste storage and treatment
units of various facilities, our 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, we have been, and in the future may be, required to
undertake additional capital improvements or corrective action.
Our subsidiaries involved in recycling activities 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, we
incur additional costs in connection with any such closure. These cost estimates
are updated annually for inflation, developments in available technology and
corrective actions already undertaken. We have, in most instances, chosen to
provide the regulatory guarantees required in connection with these matters by
means of our coverage under an environmental impairment liability insurance
policy. We can provide 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, we or our subsidiaries have
been and will be required to investigate and remediate certain environmental
contamination at shutdown plant sites. We or our 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.
Waste Byproducts
In connection with our subsidiaries' production of finished chemical
products, limited quantities of waste by-products are generated. Depending on
the composition of the by-product, our subsidiaries either sell it, send it to
smelters for metal recovery or send it for treatment or disposal to regulated
facilities.
Particular Facilities
The following is a description of certain environmental matters relating to
certain facilities of certain of our subsidiaries. References to "we" or "us"
throughout this section is intended to refer only to the applicable subsidiary
unless the context otherwise requires. These matters should be read in
conjunction with the description of Legal Proceedings in Item 3 below, certain
of which involve such facilities, and Note 15 to our 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, certain of our subsidiaries are in the process of developing or
completing various actions associated with these regulatory phases at certain of
their facilities.
Sumter, SC. In 2003, the South Carolina Department of Health and
Environmental Control ("DHEC") ordered Phibro-Tech, Inc., a subsidiary
("Phibro-Tech"), to prepare a RCRA Facility Investigation ("RFI") and to prepare
and propose Corrective Action Plans. Phibro-Tech has done so, and such proposed
investigatory activities and Corrective Action Plans are being reviewed by the
State. Additional Corrective Action is also being undertaken by Phibro-Tech
pursuant to prior agreements with DHEC to remedy certain deficiencies in the
plant's hazardous waste closure, storage and management system.
Santa Fe Springs, CA. Phibro-Tech submitted an application for renewal of
the Part B Permit for the Santa Fe Springs, California facility. Such
application is presently under review by the State of California and may require
certain corrective actions including, but not limited to, a pump and treat
system utilizing existing water treatment facilities. Phibro-Tech has submitted
a report to the State recommending that soil be remediated instead of
groundwater. This recommendation is also under review by the State.
9
Joliet, IL. Phibro-Tech has submitted an application for renewal of the Part
B Permit for the Joliet, Illinois facility. In connection with this application,
Phibro-Tech completed an initial investigation and determined that certain minor
corrective action was required. The application for renewal is presently pending
and the corrective action is being done.
Garland, TX. The renewal application for the Part B Permit at the Garland,
Texas facility has been granted effective September 12, 2003. As part of an
earlier site investigation, certain corrective action was required including
upgrading of pollution control equipment and additional site characterization.
Both of these are presently underway.
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 corrective action are required pursuant to a state-issued permit.
As required by the permit, corrective action for groundwater has begun, and
Phibro-Tech has submitted and received approval from the state for a remedial
investigation plan.
Sewaren, NJ. Operations at the Sewaren facility were curtailed on or about
September 30, 1999. In June, 2000, CP Chemicals, Inc., a subsidiary ("CP"),
transferred title to the Sewaren property to Woodbridge Township while, at the
same time, entering into a 10-year lease with the Township providing for lease
payments aggregating $2 million, and covering certain areas of the property,
including those areas of the property relating to the existing hazardous waste
storage, treatment and transfer permit, loading docks and pads, and a building,
as well as access, parking, scale use and office space.
The property is the subject of an Administrative Consent Order executed in
March 1991 between the New Jersey Department of Environmental Protection and CP.
CP has ongoing obligations under that Administrative Consent Order. CP is
required to complete the implementation of the Remedial Action Work Plan
approved by the Department of Environmental Protection. Although some of the
obligations have been assumed by the Township under the Lease, for example, the
maintenance of the groundwater recovery system, CP remains responsible to the
Department of Environmental Protection under the Administrative Consent Order.
CP has posted financial assurance, based on the estimated costs of
implementation, under the Administrative Consent Order.
The property is also regulated under the Corrective Action Program
administered by the United States Environmental Protection Agency pursuant to
the Resource Conservation and Recovery Act. The property has been designated as
a RCRA facility for which achieving the Environmental Indicators is a priority.
Currently, CP is interfacing with the Department of Environmental Protection and
the Environmental Protection Agency to coordinate its efforts under this program
and the Administrative Consent Order discussed above. Much of the effort
required by CP in this program is already being conducted as part of the
requirements of the Administrative Consent Order discussed above.
The hazardous waste facility permit issued to CP for this facility expired
in August 2003. CP has commenced the implementation of its approved closure
plan. Based on a formula established by the Department of Environmental
Protection, those closure costs were estimated at $292,823 and submitted to the
Department in April 2003. CP has also advised the New Jersey Division of Law of
its intent to withdraw from the licensing program governing facilities.
Union City, CA. Closure of the Union City, California facility has been
completed.
Union, IL. The facility in Union, Illinois, has been closed since 1986. A
revised remedial action plan ("RAP") has been submitted to the Illinois
Environmental Protection Agency (the "IEPA") and is presently under review. The
work contemplated in the RAP is the result of negotiations between the IEPA and
Phibro-Tech as part of a resolution of Phibro-Tech's appeal of the IEPA's
initial closure requirements. That appeal is currently pending before the
Illinois Pollution Control Board.
Ramat Hovav, Israel. Koffolk (1949) Ltd's ("Koffolk Israel") Ramat Hovav
plant produces a wide range of organic chemical intermediates for the animal
health, chemical, pharmaceutical 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, this legislation imposes criminal
liability on the officers and directors of a corporation that violates such
environmental 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 regulation 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.
Government Regulation
Most of our Animal Health and Nutrition Group products require licensing by
a governmental agency before marketing. In the
10
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 our business.
Should regulatory or other developments result in restrictions on the sale of
such products, it could have a material adverse impact on our 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.
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.
FDA approval is based on satisfactory demonstration of safety and efficacy.
Efficacy requirements are based on the desired label claim and encompass all
species for which label indication is desired. Safety requirements include
target animal safety and, in the case of food animals, drug residues and the
safety of those residues must be considered. In addition to the safety and
efficacy requirements for animal drugs used in food producing animals, the
environmental impact must be determined. Depending on the compound, the
environmental studies may be quite extensive and expensive. In many instances
the regulatory hurdles for a drug which will be used in food producing animals
are at least as stringent if not more so than those required for a drug used in
humans. For FDA approval of a new animal drug it is estimated the cost is $100
million to $150 million and time for approval could be 8 to 10 years.
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 procedures for licensing products by the
FDA 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 Current
Good Manufacturing Practice ("cGMP"). The plant must be inspected biannually by
the FDA for determination of compliance with cGMP after an initial preapproval
inspection. After FDA approval, any manufacturing changes that may have an
impact on the safety and/or efficacy must be approved by the FDA prior to
implementation. 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, we are
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 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 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
11
us, 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. We have subsequently completed the necessary data and
resubmitted its nicarbazin dossier. Feasibility and timetable for new
registration will depend on the nature of demands and remarks from the
Commission. Notwithstanding the Commission's actions with respect to our
nicarbazin dossier, we are able to sell, and do sell, nicarbazin as an active
ingredient for another MFA marketer's product which has obtained a BSA and is
sold in the EU.
Miscellaneous
Market Share, Ranking And Other Industry Data
The market share, ranking and other industry data contained in this Report,
including our position and the position of our competitors within these markets,
are based either on our management's knowledge of, and experience in, the
markets in which we operate, or derived from industry data or third-party
sources and, in each case, we believe these estimates are reasonable as of the
date of this Report or, if an earlier date is specified, as of such earlier
date. However, this information may prove to be inaccurate because of the method
by which we obtained some of the data for our estimates or because this
information is subject to change and cannot always be verified due to limits on
the availability and reliability of independent sources, the voluntary nature of
the data gathering process and other limitations and uncertainties inherent in
any statistical survey of market shares. In addition, purchasing patterns and
consumer preferences can and do change. As a result, market share, ranking and
other similar data set forth herein, and estimates and beliefs based on such
data, may not be reliable.
12
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that could
affect our Israeli subsidiary, Koffolk Israel. As of June 30, 2004 and for the
year then ended, Israeli operations (excluding Koffolk Israel's non-Israeli
subsidiaries) accounted for approximately 14% of our consolidated assets and
approximately 12% of our consolidated net sales. We are, 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. In April 2002, and from time to time thereafter,
Israel undertook military operations in several Palestinian cities and towns. We
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 our results of operations. We also cannot predict 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 our 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. We do not believe that the boycott has had a material adverse
effect on us, but we can not provide assurance that restrictive laws, policies
or practices directed toward Israel or Israeli businesses will not have an
adverse impact on our operations or expansion of the our business.
Generally, male adult citizens who are permanent residents of Israel under
the age of 45 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 April 2002 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, we cannot assess the full impact of such requirements on Koffolk Israel
and us in the future, particularly if emergency circumstances occur and
employees of Koffolk Israel are called to active duty.
Economic Conditions
Israel is currently experiencing the longest recession since the
establishment of Israel in 1948. Factors affecting Israel's economy include the
Intifada, which began in September 2000, the slowdown in world trade and the
global slump in the high-tech industry. In addition, 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 our
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. Dramatic changes in the
currency rates could have an adverse effect on Koffolk Israel's results of
operations.
Investment Incentives
Certain of our Israeli production facilities 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 our Israeli production facilities
further enjoyed accelerated depreciation under regulation extended from time to
time and other deductions. We cannot provide assurance that we will, in the
future, be eligible for or receive such or similar grants.
13
Item 2 Properties
We maintain our principal executive offices and a sales office in 23,500
square feet of leased space in Fort Lee, New Jersey. We operate company-owned
manufacturing facilities and utilize third party toll manufacturers. The chart
below sets forth the locations and sizes of the principal manufacturing and
other facilities operated by us and uses of such facilities, all of which are
owned, except as noted.
Approximate
Location Square Footage Uses
- -------------------------------------- -------------- ----------------------------------
Animal Health and Nutrition
Bangkok, Thailand(a).................. 500 Sales
Braganca Paulista, Brazil............. 35,000 Sales, Manufacturing and
Administrative
Bremen, Indiana....................... 50,000 Sales, Premixing and Warehouse
Buenos Aires, Argentina(a)............ 900 Sales and Administrative
Fairfield, New Jersey(a).............. 9,600 Administrative
Guarulhos, Brazil(b).................. 1,234,000 Sales, Premixing, Manufacturing and
Administrative
Hong Kong, China(a)................... 750 Sales and Administrative
Kuala Lumpur, Malaysia(a)............. 7,300 Sales, Premixing and Warehouse
Ladora, Iowa.......................... 9,500 Warehouse
Lee's Summit, Missouri(a)............. 1,500 Sales
Marion, Iowa.......................... 32,500 Premixing and Warehouse
Petach Tikva, Israel.................. 60,000 Sales, Premixing, Warehouse and
Administrative
Pretoria, South Africa(a)............. 3,200 Sales and Administrative
Quincy, Illinois(c)................... 50,000 Sales, Warehouse, Research and
Administrative
Rixensart, Belgium(d)................. 865,000 Sales, Manufacturing, Research and
Administrative
Ramat Hovav, Israel................... 140,000 Manufacturing and Research
Regina, Canada(a)..................... 1,000 Sales and Administrative
Queretaro, Mexico(a).................. 3,500 Sales and Administrative
Santiago, Chile(a).................... 6,500 Sales and Administrative
Sydney, Australia(a).................. 3,500 Sales and Administrative
Valencia, Venezuela(a)................ 1,100 Sales and Administrative
Specialty Chemicals
Garland, Texas........................ 20,000 Manufacturing
Joliet, Illinois...................... 34,500 Manufacturing
Reading, United Kingdom(a)............ 3,100 Sales and Administrative
Santa Fe Springs, California(e)....... 90,000 Manufacturing
Stradishall, United Kingdom........... 20,000 Sales, Manufacturing and Administrative
Sumter, South Carolina................ 123,000 Manufacturing and Research
- ----------
(a) This facility is leased. Our leases expire through 2027. For information
concerning our rental obligations, see Note 15 to our Consolidated Financial
Statements included herein.
(b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the
active ingredients semduramicin-mycelial and salinomycin. The plant also
produces Aviax(R), Terramycin(R), Stafac(R) and Coxistac(R) Granular
formulations. The plant is cGMP compliant and is FDA approved.
(c) Comprises three facilities, including a warehouse, laboratory and office
facility.
(d) Our Rixensart, Belgium plant utilizes fermentation processes to produce the
active ingredients semduramicin-crystalline and virginiamycin. The plant
also produces Stafac(R) formulations and is responsible for all of our
fermentation development activities. The plant has been approved by the FDA
and is cGMP compliant.
(e) We lease the land under this facility from a partnership owned by Jack
Bendheim, Marvin Sussman and James Herlands. See "Certain Relationships and
Related Transactions."
Our subsidiary, CP Chemicals, Inc., leases portions of a previously owned
inactive, former manufacturing facility in Sewaren, New Jersey, and another of
our subsidiaries owns inactive, former manufacturing facilities in Powder
Springs, Georgia, Union, Illinois, Union City, California and Wilmington,
Illinois.
14
We believe that our existing and planned facilities are and will be adequate
for the conduct of our business as currently conducted and as currently
contemplated to be conducted.
We and our 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. Our
manufacturing facilities in Ramat Hovav, Israel, Rixensart, Belgium and
Guarulhos, Brazil manufacture products that conform to the FDA's cGMP
regulations. Three domestic facilities involved with recycling have final RCRA
Part B hazardous waste storage and treatment permits. Our 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. Our plant in Petach Tikva, Israel has
achieved ISO 9000 certification. We do not believe that adoption of the ISO 9000
standards by the FDA will have a material effect on our financial condition,
results of operations or cash flows.
Item 3. Legal Proceedings
Reference is made to the discussion above under "Item 1. Business -
Environmental Matters" for information as to various environmental investigation
and remediation obligations of our subsidiaries associated principally with
their recycling and production facilities and to certain legal proceedings
associated with such facilities.
In addition to such matters, we or certain of our subsidiaries are subject
to certain litigation described below.
On or about April 17, 1997, CP and we were served with a complaint filed by
Chevron U.S.A. Inc. ("Chevron") in the United States District Court for the
District of New Jersey, alleging that the operations of CP at its Sewaren plant
affected adjoining property owned by Chevron and alleging that we, as the parent
of CP, are also responsible to Chevron. In July 2002, a phased settlement
agreement was reached and a Consent Order entered by the Court. That settlement
is in the process of being implemented. Our portion of the settlement for past
costs and expenses through the entry of the Consent Order was $495,000 and is
included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income. Such amount was paid in July
2002. The Consent Order then provides for a period of due diligence
investigation of the property owned by Chevron. The investigation has been
conducted and the results are under review. The investigation costs are being
split with one other defendant, Vulcan Materials Company. Upon completion of the
review of the results of the investigation, a decision will be made whether to
opt out of the settlement or proceed. If no party opts out of the settlement,
Phibro Animal Health Corporation and CP will take title to the adjoining Chevron
property, probably through the use of a three-member New Jersey limited
liability company. In preparation to move forward, a limited liability company
has been formed, with Vulcan Materials Company as the third member. We also have
commenced negotiations with Chevron regarding its allocation of responsibility
and associated costs under the Consent Order. While the costs cannot be
estimated with any degree of certainty at this time, we believe that 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 we have
agreed to contribute up to $900,000 of which $634,596 has been paid as of June
30, 2004. Some recovery from insurance and other sources is expected. We have
also accrued our best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substance Control ("DTSC") and has
reached an agreement to pay $425,000 over six (6) years as a result. The annual
payments required under this agreement are not expected to have any material
adverse impact on us.
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 ours in 1984. A settlement has been reached in this matter and we have paid
$171,103 in full settlement.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company is investigating the
matter, which relates to events in the 1950's and 1960's, but management does
not believe that the Company has any liability in this matter.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes that,
because its Sumter, South Carolina facility is distant from Turkey Creek and
does not discharge into Turkey Creek, there is a low probability of liability
associated with this matter.
15
We and our 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. We believe that
none of the claims or pending lawsuits, either individually or in the aggregate,
will have a material adverse effect on our financial position or results of
operations.
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, 2004.
16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Repurchases of Equity Securities
(a) Market Information. There is no public trading market for our common
equity securities.
(b) Holders. As of June 30, 2004, there was one holder of our Class A
Common Stock and two holders of our Class B Common Stock.
(c) Dividends. We did not declare dividends on any of our common stock
during the two years ended June 30, 2004.
Item 6. Selected Financial Data
The following selected consolidated financial data as of and for fiscal
years ended June 30, 2000, 2001, 2002, 2003 and 2004 have been derived from our
audited consolidated financial statements. The selected consolidated financial
data reflect our Odda, Carbide, MRT and La Cornubia businesses as discontinued
operations for all periods presented. You should read the information set forth
below in conjunction with our "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this Report.
Fiscal Years Ended June 30,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(Dollars in thousands, except ratios)
Results of Operations:
Net sales $ 261,769 $ 302,328 $ 328,676 $ 341,746 $ 358,274
Cost of goods sold 201,320 234,784 247,411 251,200 267,871
--------- --------- --------- --------- ---------
Gross profit 60,449 67,544 81,265 90,546 90,403
Selling, general and administrative
expenses 47,528 61,624 70,636 65,050 66,128
Curtailment of operations at manufacturing
facility (1,481) -- -- -- --
Costs of non-completed transaction -- -- -- -- 5,261
--------- --------- --------- --------- ---------
Operating income 14,402 5,920 10,629 25,496 19,014
Interest expense 14,520 17,919 18,070 16,281 18,618
Interest (income) (600) (566) (346) (85) (130)
Other expense (income), net (1,452) (1,463) 3,349 1,539 (781)
Net (gain) on extinguishment of debt -- -- -- -- (23,226)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 1,934 (9,970) (10,444) 7,761 24,533
Provision (benefit) for income taxes 1,143 (24) 14,767 10,060 7,969
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 791 (9,946) (25,211) (2,299) 16,564
Income (loss) from discontinued operations 9,262 (4,949) (26,559) (14,577) (1,625)
(Loss) on disposal of discontinued
operations -- -- -- (683) (2,089)
--------- --------- --------- --------- ---------
Net income (loss) 10,053 (14,895) (51,770) (17,559) 12,850
Change in derivative instruments -- -- 1,062 (981) (72)
Change in foreign currency translation
adjustment 55 (5,146) (6,125) 7,377 (776)
--------- --------- --------- --------- ---------
Comprehensive income (loss) $ 10,108 $ (20,041) $ (56,833) $ (11,163) $ 12,002
========= ========= ========= ========= =========
17
Fiscal Years Ended June 30,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
Net income (loss) $ 10,053 $ (14,895) $ (51,770) $ (17,559) $ 12,850
Excess of the reduction of redeemable
preferred stock over total assets
divested and costs and liabilities
incurred on the Prince Transactions -- -- -- -- 20,138
Dividends and equity value accreted on Series
B and C redeemable preferred stock -- (8,172) (7,623) (12,278) (11,463)
--------- --------- --------- --------- ---------
Net income (loss) available to common shareholders $ 10,053 $ (23,067) $ (59,393) $ (29,837) $ 21,525
========= ========= ========= ========= =========
Balance Sheet Data:
Cash and cash equivalents $ 2,403 $ 14,845 $ 6,419 $ 11,179 $ 5,568
Total assets 258,450 330,019 296,444 274,347 241,369
Long-term debt 139,685 139,455 136,641 102,263 158,018
Series B and C redeemable preferred stock -- 48,980 56,602 68,881 24,678
Total stockholders' equity (deficit) 31,618 3,405 (61,189) (84,510) (63,833)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information should be read in conjunction with the consolidated
financial statements and related notes contained in this Report. The Company's
Odda, Carbide, MRT and LaCornubia businesses have been classified as
discontinued operations. This discussion presents information only for
continuing operations, unless otherwise indicated. The Company presents its
consolidated financial statements on the basis of its fiscal year ending June
30. All references to years 2004, 2003, and 2002 in this discussion refer to the
fiscal year ended June 30 of that year.
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which are sold
throughout the world predominantly to the poultry, swine and cattle markets.
MFAs are used preventatively and therapeutically in animal feeds to produce
healthy livestock. The Company believes it is the third largest manufacturer and
marketer of MFAs in the world, and that certain of its MFA products have leading
positions in the marketplace. The Company is also a specialty chemicals
manufacturer and marketer, serving primarily the United States pressure-treated
wood and chemical industries. The Company has several proprietary products, and
many of the Company's products provide critical performance attributes to
customers' products, while representing a relatively small percentage of total
end-product cost.
In August 2003, the Company completed the sale of MRT for net proceeds after
transaction costs of approximately $13.8 million. In December 2003, the Company
completed the divestiture of substantially all of the assets of The Prince
Manufacturing Company (see discussion below under "Prince Transactions").
On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA
("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The
Company believes that, as a result of the bankruptcy filing by La Cornubia, it
is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding
Company with no assets except for its investment in La Cornubia, may also file
for bankruptcy in France. The Company does not believe that La Cornubia's
bankruptcy filing, nor the possible bankruptcy filing by LC Holding, will have a
material adverse effect on its financial condition or results of operations.
During 2004, the Company incurred $5.3 million of costs in connection with a
potential acquisition transaction that was not completed. The Company has
charged the costs to expense in its 2004 results. The costs primarily consisted
of professional fees for services in connection with the transaction.
The Company's ability to fund its operating plan relies upon the continued
availability of borrowing under the senior credit facility. The Company believes
that it will be able to comply with the terms of its covenants under the amended
senior credit facility based on its forecasted operating plan. In the event of
adverse operating results and/or violation of covenants under this facility,
there can be no assurance that the Company would be able to obtain waivers or
amendments on favorable terms, if at all. The Company's 2005 operating plan
projects adequate liquidity throughout the year, with periods of reduced
availability around the dates of the semi-annual interest payments due November
1, 2004 and June 1, 2005. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that would be available as needed. The Company also has undertaken
a strategic review of its manufacturing capabilities, and is currently
increasing inventory levels of certain products to enhance future flexibility
and reduce cost. There can be no assurance the Company will be successful in any
of the above-noted actions.
18
Refinancing
On October 21, 2003, the Company issued 105,000 units consisting of $85.0
million of its 13% Senior Secured Notes due 2007 (the "US Senior Notes") and
$20.0 million 13% of Senior Secured Notes due 2007 of Philipp Brothers
Netherlands III B.V. (the "Dutch Senior Notes" and, together with the US Senior
Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiary of the
Company (the "Dutch issuer"). The Company used the proceeds from the issuance
to: (i) repurchase $52.0 million of its 9 7/8% Senior Subordinated Notes due
2008 at a price equal to 60% of the principal amount thereof, plus accrued and
unpaid interest; (ii) repay its senior credit facility of $34.9 million
outstanding at the repayment date; (iii) satisfy, for a payment of approximately
$29.3 million certain of its outstanding obligations to Pfizer Inc., including:
(a) $20.1 million aggregate principal amount of its promissory note plus accrued
and unpaid interest, (b) $9.7 million of accounts payable, (c) $9.0 million of
accrued expenses, and (d) future contingent purchase price obligations under its
agreements with Pfizer Inc. by which the Company acquired Pfizer's medicated
feed additive business; and (iv) pay fees and expenses relating to the above
transactions.
A net gain on extinguishment of debt is included in the Company's condensed
consolidated statement of operations, calculated as follows (amounts in
thousands):
Net Gain on Repurchase of 9 7/8% Senior Subordinated Notes due 2008:
Principal amount of repurchased notes $ 51,971
Repurchased at 60% of principal amount (31,183)
Transaction costs (4,107)
--------
Net gain on repurchase of notes 16,681
--------
Loss on repayment of senior credit facility (1,018)
--------
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note 20,075
-accrued interest on promissory note 1,015
-accounts payable and accrued expenses 18,788
--------
Total obligations paid 39,878
Cash payment to Pfizer (29,315)
Transaction costs (3,000)
--------
Net gain on payment of Pfizer obligations 7,563
--------
Net gain on extinguishment of debt $ 23,226
========
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of the Company (the "US Issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all the US Issuer's domestic restricted subsidiaries,
and the Dutch Senior Notes are guaranteed on a senior secured basis by the US
Issuer and by the restricted subsidiaries of the Dutch issuer, presently
consisting of Phibro Animal Health SA. The US Senior Notes and related
guarantees are collateralized by substantially all of the US Issuer's assets and
the assets of its domestic restricted subsidiaries, other than real property and
interests therein, including a pledge of all the capital stock of such domestic
restricted subsidiaries. The Dutch Senior Notes and related guarantees are
collateralized by a pledge of all the accounts receivable, a security interest
or floating charge on the inventory to the extent permitted by applicable law,
and a mortgage on substantially all of the real property of the Dutch issuer and
each of its restricted subsidiaries, a pledge of 100% of the capital stock of
each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by
the Dutch issuer to its restricted subsidiaries and substantially all of the
assets of the U.S. guarantors, other than real property and interests therein.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires the Company to make certain offers to
purchase Senior Secured Notes upon a change of control, upon certain asset sales
and from fifty percent (50%) of excess cash flow (as such terms are defined in
the indenture).
The Company timely filed a registration statement with the SEC on Form S-4
with respect to an exchange offer for the Senior Secured Notes, but due to
pending confidential acquisition negotiations, such registration statement has
not become effective.
19
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("senior credit facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities initially could not exceed $25.0 million including
aggregate borrowings under the working capital facility up to $15.0 million. On
April 29, 2004, the Company amended the senior credit facility to increase the
aggregate amount of borrowings available under such working capital and letter
of credit facilities from $25.0 million to $27.5 million and to increase the
amount of aggregate borrowings available under the working capital facility from
$15.0 million to $17.5 million. As of September 24, 2004, the Company amended
the senior credit facility to: (i) increase the aggregate amount of borrowings
available under such working capital and letter of credit facilities from $27.5
million to $32.5 million; the amount of aggregate borrowings available under the
working capital facility remained unchanged at $17.5 million; (ii) amend the
EBITDA definition to exclude charges and expenses related to unsuccessful
acquisitions and related financings in an aggregate amount not to exceed $5.3
million for the period beginning January 1, 2004 and ending June 30, 2004; (iii)
amend the definition of Additional Indebtedness to exclude advances under the
working capital facility; (iv) amend the definition of Permitted Investments to
allow other investments made during the period from January 1, 2004 through June
30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish
covenant EBITDA levels for the periods ending after June 30, 2004. The amendment
was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1,
2004 for item (iv); and effective September 24, 2004 for all other items.
Borrowings under the senior credit facility are subject to a borrowing base
formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
Pursuant to the terms of an intercreditor agreement, the security interest
securing the Senior Secured Notes and the guarantees made by the Company's
domestic restricted subsidiaries is subordinated to a lien securing the senior
credit facility.
Prince Transactions
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72.2 million to $16.5 million (accreted
through the Closing Date) by means of the redemption of all of its shares of
Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii)
the termination of $2.2 million in annual management advisory fees payable by
the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium
Investors in respect of the portion of the Company's Preferred Stock not
exchanged in consideration of the business and assets of PMC; (v) the agreement
of the Buyer to pay the Company for advisory fees for the next three years of
$1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid
at closing by the Buyer and satisfied for $1.3 million, the net present value of
such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron
oxide products and to provide certain mineral blending services to the Company's
Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue
to provide the Buyer with certain laboratory, MIS and telephone services, all on
terms substantially consistent with the historic relationship between Prince
Agri and PMC, and to lease to Buyer office space used by PMC in Quincy,
Illinois. The Company has an agreement to receive certain treasury services from
Palladium for $0.1 million per year. Pursuant to definitive agreements, the
Company made customary representations, warranties and environmental and other
indemnities, agreed to a post-closing working capital adjustment, paid $4.0
million in full satisfaction of all intercompany debt owed to PMC, paid a
closing fee to Palladium of $0.5 million, made certain capital expenditure
adjustments included as part of the intercompany settlement amount, and agreed
to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million
of its accounts receivable. The Company established a $1.0 million letter of
credit escrow for two years to secure its working capital adjustment and certain
indemnification obligations. The Company agreed to indemnify the Palladium
Investors for a portion, at the rate of $0.65 for every dollar, of the amount
they receive in respect of the disposition of Buyer for less than $21.0 million
up to a maximum payment by the Company of $4.0 million (the "Backstop
Indemnification Amount"). The Backstop Indemnification Amount would be payable
on the earlier to occur of July 1, 2008 or six months after the redemption date
of all of the Company's Senior Secured Notes due 2007 if such a disposition
closes prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
20
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5. The
amount of consideration paid and payable in connection with the Prince
Transactions and all matters in connection therewith were determined pursuant to
arm's length negotiations.
The excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions was
recorded as a decrease to accumulated deficit on the Company's condensed
consolidated balance sheet at December 31, 2003, and was calculated as follows
(amounts in thousands):
Series B & C Redeemable Preferred Stock:
Accreted value pre-transaction $72,184
Accreted value post-transaction 16,517
-------
Reduction in redeemable preferred stock 55,667
-------
Assets Divested and Costs Incurred:
PMC net assets divested 7,430
Cash paid to Palladium Investors for:
-reduction of redeemable preferred stock 10,000
-settlement of PMC intercompany debt 3,958
-working capital adjustment 1,331
-closing fee 500
Transaction costs 8,310
Contingent Backstop Indemnification Amount accrued 4,000
-------
Total assets divested and costs and liabilities incurred 35,529
-------
Excess amount recorded as a decrease to accumulated deficit $20,138
=======
PMC is included in the Company's Industrial Chemicals segment. The divestiture
of PMC has not been reflected as a discontinued operation due to the existence
of the Backstop Indemnification and continuing supply and service agreements.
Other Risks and Uncertainties
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of 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
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and 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 remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters.
21
Summary Consolidated Results of Continuing Operations
Year Ended June 30,
------------------------------
2004 2003 2002
---- ---- ----
(Thousands)
Net sales $ 358,274 $ 341,746 $ 328,676
Gross margin 90,403 90,546 81,265
Selling, general and administrative expenses 66,128 65,050 70,636
Costs of non-completed transaction 5,261 -- --
Operating income 19,014 25,496 10,629
Interest expense, net 18,488 16,196 17,724
Other expense (income), net (781) 1,539 3,349
Net (gain) on extinguishment of debt (23,226) -- --
Income (loss) from continuing operations $ 24,533 $ 7,761 $ (10,444)
2004 Compared with 2003
Net Sales of $358.3 million increased $16.5 million, or 5%. Animal Health
and Nutrition sales of $265.4 million grew $14.7 million, or 6%, due to volume
increases. Specialty Chemical group sales (comprised of the Industrial
Chemicals, Distribution and All Other segments) of $92.9 million increased $1.8
million, or 2%, primarily due to volume increases in all segments, offset by a
decrease in PMC sales. The Specialty Chemical group included PMC sales of $11.1
million and $22.3 million for 2004 and 2003, respectively.
Gross Profit of $90.4 million decreased $0.1 million to 25.2% of net sales,
compared with 26.5% in 2003. Animal Health and Nutrition gross profit decreased
due to lower average selling prices and unfavorable currency related to the
effect of the Euro on Belgium manufacturing costs. Improvements in the Specialty
Chemical group partially offset the Animal Health and Nutrition decline. The
Specialty Chemical group included PMC gross profit of $3.6 million and $6.2
million, respectively, for the fiscal 2004 and 2003 periods.
Gross profit increased $2.0 million in the fourth quarter of 2004 due to an
agreement related to the production and sale of amprolium, an anticoccidial MFA.
The Company acquired the rights to sell amprolium in most international markets.
In payment for the acquired rights, the Company relinquished its claims against
the seller for certain purchase order commitments, and will make $2.1
22
million of cash payments to the seller over the next five years. The present
value of these payments is $1.9 million and was recorded as a liability. The
$2.4 million value of the purchase order commitments was recorded as a reduction
in cost of goods sold and inventory, and an intangible asset of $4.3 million was
recorded representing the fair value of the acquired rights and is included on
the Company's balance sheet at June 30, 2004. The Company will amortize this
intangible over a 10 year period. No amortization was recorded in 2004.
Amortization expense for each of the next five years from 2005 to 2009 is
expected to be $0.4 million per year.
Selling, General and Administrative Expenses of $66.1 million increased $1.1
million. Expenses in the operating segments, excluding PMC, approximated the
prior year primarily due to lower environmental and severance accruals offset in
part by unfavorable foreign exchange rates. Corporate expenses in the current
fiscal year reflect the elimination of the Palladium annual management fee of
$2.25 million as of December 31, 2003 and income of $0.5 million from the PMC
Advisory fee. Corporate expenses increased in fiscal 2004 due to higher
depreciation and amortization charges and insurance costs offset by lower
benefit charges. Corporate expenses in fiscal 2003 included vitamin settlement
income of $3.0 million. PMC expenses were $1.3 million and $2.6 million for 2004
and 2003, respectively.
Costs of non-completed transaction. During 2004, the Company incurred $5.3
million of costs in connection with a potential acquisition transaction that was
not completed. The Company has charged the costs to expense in its 2004 results.
The costs primarily consisted of professional fees for services in connection
with the transaction.
Net gain on extinguishment of debt. The Company recorded a net gain on the
extinguishment of debt of $23.2 million due to the repurchase of senior
subordinated notes ($16.7 million), and the repayment of Pfizer obligations
($7.6 million) offset in part by a loss on repayment of the senior credit
facility ($1.0 million).
Operating Income of $19.0 million decreased $6.5 million to 5.3% of sales.
The decrease was primarily due to the non-completed transaction costs described
above. In addition, gross profit declined in the Animal Health and Nutrition
segment but was offset in part by improved operating performance of the
Specialty Chemical group. PMC contributed $2.3 million and $3.6 million for 2004
and 2003, respectively.
Interest Expense, Net of $18.5 million increased $2.3 million from the prior
year, primarily due to higher borrowing levels and also higher average interest
rates associated with the issuance of the Company's Senior Secured Notes.
Other (Income) Expense, Net of ($0.8) million improved in comparison with
$1.5 million of expense last year. During 2004, the Company's Phibro-Tech
subsidiary received $1.0 million in exchange for the sale of certain assets
related to the manufacture and sale of ferric chloride from its plant in Joliet,
Illinois and recognized a net gain of $0.7 million. The balance of other
(income) expense principally reflects foreign currency transaction net (gains)
losses related to short-term inter-company balances and foreign currency
translation (gains) losses.
Income Taxes of $8.0 million were 32% of consolidated pre-tax income of
$24.5 million. The tax rate reflects income tax provisions in profitable foreign
jurisdictions and for state income taxes. A provision for U.S. federal income
taxes has not been recorded due to the utilization of net operating loss
carryforwards. The Company has recorded valuation allowances related to
substantially all deferred tax assets. The Company will continue to evaluate the
likelihood of recoverability of these deferred tax assets based upon actual and
expected operating performance.
2003 Compared with 2002
Net Sales of $341.7 million increased $13.1 million, or 4%. Animal Health
and Nutrition sales of $250.7 million grew $11.1 million, or 5%, due to volume
increases. Specialty Chemical sales of $91.0 million increased $2.0 million, or
2%, primarily due to volume increases in the Distribution and All Other
businesses.
Gross Profit of $90.5 million improved $9.3 million to 26.5% of net sales,
compared with 24.7% in 2002. Animal Health and Nutrition gross profit
improvements were responsible for the overall increase. Purchase accounting
adjustments related to the MFA acquisition resulted in a $3.3 million increase
to cost of goods sold in 2002. Excluding the purchase accounting adjustment, the
gross profit ratio would have been 25.7% in 2002.
Selling, General and Administrative Expenses of $65.1 million decreased $5.6
million, or 8%. Expenses declined $6.5 million in the Specialty Chemicals
businesses due to downsizing and restructuring of the Industrial Chemicals
segment, reflecting the decline in the printed circuit board market. Industrial
Chemicals included expense for additional environmental reserves and write-offs
of unamortized permit fees at closed facilities of $1.0 million and $1.6 million
for 2003 and 2002, respectively. Animal Health and Nutrition expenses decreased
by approximately $0.4 million. Corporate expenses increased $1.3 million,
primarily due to increased staff levels. Corporate expenses included a vitamin
settlement income of $3.0 million and $0.7 million in 2003 and 2002,
respectively, from the settlement of class action litigation against European
vitamin manufacturers. Debt restructuring costs of $0.8 million,
23
severance of $0.4 million, and expense related to a divested business of $0.2
million were also recorded in 2003. Included in 2002 was $0.4 million non-cash
income to reflect the decrease in value of redeemable common stock; no amount
was recorded in 2003.
Operating Income of $25.5 million increased $14.9 million to 7.5% of sales.
The improvement was due to sales growth, gross margin improvements in Animal
Health and Nutrition, and operating expense reductions.
Interest Expense, Net of $16.2 million decreased $1.5 million, compared with
$17.7 million in 2002, primarily due to lower average interest rates and reduced
average borrowing levels.
Other Expense, Net of $1.5 million in fiscal 2003 improved in comparison
with $3.4 million in the prior year. The expense principally reflects foreign
currency transaction and translation net losses related to short-term
inter-company balances.
Income Taxes of $10.1 million were primarily due to a $5.6 million increase
in valuation allowances for deferred tax assets in foreign jurisdictions where
future profitability is not currently considered more likely than not, and
income tax provisions in profitable foreign jurisdictions. The Company has
recorded valuation allowances related to substantially all deferred tax assets.
The Company will continue to evaluate the likelihood of recoverability of these
deferred tax assets based upon actual and expected operating performance.
Operating Segments
The Animal Health and Nutrition segment manufactures and markets MFAs and
NFAs to the poultry, swine and cattle markets, and includes the operations of
the Phibro Animal Health business unit, Prince AgriProducts, Koffolk Israel, and
Planalquimica, Brazil. The Industrial Chemicals segment manufacturers and market
specialty chemicals for use in the pressure treated wood, brick, glass, and
chemical industries, and includes Phibro-Tech and PMC. The Distribution segment
markets a variety of specialty chemicals, and includes PhibroChem and Ferro
operations. The All Other segment includes contract manufacturing of crop
protection chemicals, Wychem and all other operations. Due to the divestiture of
PMC in December 2003, PMC's results are shown separately for comparability.
Year Ended June 30,
------------------------------------
2004 2003 2002
--------- --------- ---------
(Thousands)
Net Sales
Animal Health & Nutrition $ 265,421 $ 250,706 $ 239,602
Industrial Chemicals - ex PMC 31,135 26,465 29,403
Industrial Chemicals - PMC 11,118 22,332 21,451
Distribution 30,861 30,072 27,852
All other 19,739 12,171 10,368
--------- --------- ---------
$ 358,274 $ 341,746 $ 328,676
========= ========= =========
Year Ended June 30,
------------------------------------
2004 2003 2002
--------- --------- ---------
(Thousands)
Operating Income
Animal Health & Nutrition $ 33,307 $ 38,472 $ 28,298
Industrial Chemicals - ex PMC 621 (5,434) (10,964)
Industrial Chemicals - PMC 2,278 3,579 3,640
Distribution 2,900 3,207 2,345
All other 2,301 620 1,164
Corporate expenses and adjustments (22,393) (14,948) (13,854)
--------- --------- ---------
$ 19,014 $ 25,496 $ 10,629
========= ========= =========
24
Operating Segments 2004 Compared to 2003
Animal Health and Nutrition
Net Sales of $265.4 million increased $14.7 million, or 6%. Medicated Feed
Additives net sales decreased by $7.8 million. Revenues were lower primarily for
anticoccidials but were offset in part by higher sales of other medicated feed
additives. Sales of anticcoccidial products were $7.1 million lower due to
contract negotiations with a major customer that were completed in the fourth
quarter of 2004. The decrease in MFA revenues also was due to lower average
selling prices offset in part by favorable currency effect on international
sales. Nutritional Feed Additives net sales increased by $22.5 million,
principally due to volume increases in core inorganic minerals, trace mineral
premixes and other ingredients.
Operating Income of $33.3 million decreased $5.2 million, or 13%. Operating
income declined due to product mix, higher cost of goods reflecting the stronger
Euro's effect on Belgian manufacturing cost and unfavorable currency effects on
international selling, general and administrative expense. Lower average selling
prices also contributed to the decrease. Operating income increased $2.0 million
in the fourth quarter of 2004 due to an agreement related to the production and
sale of amprolium, an anticoccidial MFA.
Specialty Chemicals
Industrial Chemicals net sales of $31.1 million, excluding PMC, increased
$4.7 million, or 18%. Sales of copper related products to the wood treatment
markets increased due to the introduction of new copper based wood treatment
chemicals which offset the divestiture of the Company's Eastern United States
etchant business in mid 2003. The Company continues its existing etchant
business at one remaining facility. PMC, divested in December 2003, generated
revenues of $11.1 million and $22.3 million for 2004 and 2003, respectively.
Operating income of $0.6 million improved by $6.1 million from the prior year.
This improvement was due to new product introductions and savings from headcount
reductions and facility restructurings in Phibro-Tech operations. PMC provided
operating income of $2.3 million and $3.6 million for 2004 and 2003,
respectively.
Distribution net sales of $30.9 million increased $0.8 million, or 3%.
Higher sales volumes in Europe were offset in part by lower domestic unit
volumes and lower average selling prices. Distribution operating income of $2.9
million decreased $0.3 million from the prior year. As a percentage of sales,
operating income was 9% and 11% in 2004 and 2003, respectively.
All Other net sales of $19.7 million increased $7.6 million, or 62%.
Revenues for contract manufacturing increased $7.6 million due to increased
volumes and average selling prices. Specialized lab projects and formulations
approximated the prior year. Operating income of $2.3 million improved by $1.7
million from the prior year due to higher revenues and increased margins on
contract manufacturing.
Operating Segments 2003 Compared to 2002
Animal Health and Nutrition
Net Sales of $250.7 million increased $11.1 million, or 5%. Medicated Feed
Additives net sales increased by $6.7 million. Revenues were higher for
antibacterials, antibiotics and anticoccidials but were offset in part by lower
sales of anthelmintics and other medicated feed additives. The increased
revenues were due to volume increases offset in part by lower average selling
prices, including the effect of currency devaluations in Latin America.
Nutritional Feed Additives net sales increased by $4.4 million, principally due
to volume increases in core inorganic minerals, trace mineral premixes and other
ingredients.
Operating Income of $38.5 million increased $10.2 million, or 36%. Purchase
accounting adjustments relating to inventory in the MFA acquisition resulted in
a $3.3 million increase to 2002 cost of goods sold. The operating income ratio
increased to 15% in 2003 from 13% in 2002 (excluding the purchase accounting
adjustments). The improvement in operating income resulted from increased sales
of higher margin products and close control of operating expenses.
Specialty Chemicals
Industrial Chemicals net sales of $26.5 million, excluding PMC, decreased
$2.9 million, or 10%. Industrial Chemicals net sales decreased due to the
divestiture of the Company's Eastern United States etchant business in
mid-fiscal 2003 and reduced sales of etchants to the printed circuit board
market. PMC, divested in December 2003, generated revenues of $22.3 million and
$21.5 million for fiscal periods 2003 and 2002, respectively. Industrial
Chemicals operating loss of $5.4 million improved by $5.5 million from the year
earlier loss. The improvement principally was due to the partial disposal during
2003 of the ammoniacal etchant business and savings from headcount reductions
and facility restructurings. The gain on the transaction was not material. PMC
provided operating income of $3.6 million in each of the 2003 and 2002 fiscal
periods.
25
Distribution net sales of $30.1 million increased $2.2 million, or 8%.
Higher sales volumes in Europe and improved product mix in domestic operations
accounted for the increase. Distribution operating income of $3.2 million
increased $0.9 million, or 37%. As a percentage of sales, operating income
increased to 11% in 2003 from 8% in 2002. The improvement in operating income
margins resulted principally from increased sales of higher margin products.
All Other net sales of $12.2 million increased $1.8 million, or 17%.
Revenues for contract manufacturing increased $2.4 million due to increased
volumes. Revenues from specialized lab projects and formulations declined $0.6
million. Operating income of $0.6 million decreased primarily due to specialized
lab projects and formulations.
Discontinued Operations
During 2004, the Company shutdown its operations at La Cornubia. During
2003, the Company shutdown or divested Odda Smelteverk (Norway), Carbide
Industries (U.K.), and Mineral Resource Technologies, Inc. These businesses have
been classified as discontinued operations. The Company's consolidated financial
statements have been reclassified to report separately the operating results,
financial position, and cash flows of the discontinued operations. Prior year
financial statements have been reclassified to conform to the 2004 presentation.
Year Ended June 30, 2004
---------------------------------------------
La Cornubia Odda/Carbide MRT Total
----------- ------------ --- -----
Net Sales $ 13,918 $ -- $ 3,327 $ 17,245
======== ======== ======== ========
Operating Loss $ (1,491) $ -- $ (124) $ (1,615)
Interest Expense, net 94 94
Other Expense (Income), net (102) -- -- (102)
Provision (benefit) for income tax 18 -- -- 18
-------- -------- -------- --------
Net Income (loss) from discontinued operations $ (1,501) $ -- $ (124) $ (1,625)
======== ======== ======== ========
Depreciation and Amortization $ 400 $ -- $ -- $ 400
======== ======== ======== ========
Year Ended June 30, 2003
---------------------------------------------
La Cornubia Odda/Carbide MRT Total
----------- ------------ --- -----
Net Sales $ 13,479 $ 11,217 $ 18,671 $ 43,367
======== ======== ======== ========
Operating Loss $ (359) $(13,462) $ (3,454) $(17,275)
Interest Expense, net 60 60
Other Expense (Income), net (389) (2,327) -- (2,716)
Provision (benefit) for income tax 16 (58) -- (42)
-------- -------- -------- --------
Net Income (loss) from discontinued operations $ (46) $(11,077) $ (3,454) $(14,577)
======== ======== ======== ========
Depreciation and Amortization $ 359 $ 894 $ 1,309 $ 2,562
======== ======== ======== ========
Year Ended June 30, 2002
---------------------------------------------
La Cornubia Odda/Carbide MRT Total
----------- ------------ --- -----
Net Sales $ 11,873 $ 31,219 $ 17,045 $ 60,137
======== ======== ======== ========
Interest Expense, net
Operating Loss (912) $(27,709) $ (2,930) $(31,551)
Interest Expense, net 78 78
Other Expense (Income), net (263) (3,699) (3,962)
Provision (benefit) for income tax 62 (1,170) -- (1,108)
-------- -------- -------- --------
Net Income (loss) from discontinued operations $ (789) $(22,840) $ (2,930) $(26,559)
======== ======== ======== ========
Depreciation and Amortization $ 325 $ 17,676 $ 1,192 $ 19,193
======== ======== ======== ========
26
Odda and Carbide. During 2003, the Company determined that it would
permanently shutdown and no longer fund the operations of Odda. On February 28,
2003, Odda filed for bankruptcy in Norway. The bankruptcy is proceeding in
accordance with Norwegian law. The Company removed all assets, liabilities
(except as noted below), and cumulative translation adjustments related to Odda
from the Company's consolidated balance sheet as of June 30, 2003, and recorded
the net result as a loss on disposal of discontinued operations. The Company has
been advised that, as a result of the bankruptcy, the creditors of Odda have
recourse only to the assets of Odda, except in the case of certain debt
guaranteed by the Company. During 2004, the Company paid the remaining
guaranteed debt of $5.7 million. The Company has been advised by Norwegian
counsel that it has obtained the benefit of the banks' position as a secured
creditor upon payment pursuant to the guarantees. During 2003, the Company sold
Carbide, previously a distributor for one of Odda's product lines. Proceeds from
the divestiture were not material. Odda was included in the Company's Industrial
Chemicals segment and Carbide was included in the Company's Distribution
segment.
The Company recorded a $0.7 million loss on disposal of Odda and Carbide.
The loss primarily related to the write-off of Odda's remaining net assets,
including the related cumulative currency translation adjustment.
Mineral Resource Technologies, Inc. ("MRT"). During 2003, the Company
decided to pursue a sale of MRT. MRT provides management and recycling of coal
combustion residues, principally fly ash. The sale was completed in August 2003
for net proceeds, after transaction costs, of approximately $13.8 million. MRT
was included in the Company's All Other segment.
La Cornubia. On June 30, 2004, one of the Company's French subsidiaries, La
Cornubia SA ("La Cornubia"), filed for bankruptcy under the insolvency laws of
France. The Company believes that, as a result of the bankruptcy filing by La
Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's
parent, a holding Company with no assets except for its investment in La
Cornubia, may also file for bankruptcy in France. The Company does not believe
that La Cornubia's bankruptcy filing, nor the possible bankruptcy filing by LC
Holding, will have a material adverse effect on its financial condition or
results of operations.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Cash provided by operations for
2004 and 2003 was $2.9 million and $34.7 million, respectively. Cash provided in
2004 was due to income from continuing operations offset in part by working
capital requirements. In addition, payment of the Pfizer obligations (shown in
financing activities) eliminated additional working capital requirements that
otherwise would have been necessary. Cash provided in 2003 was due to improved
income from continuing operations and aggressive working capital management. The
Company incurred $5.3 million of costs for a non-completed acquisition
transaction and paid approximately $1.4 million of these charges in 2004.
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for 2004 and 2003 was $9.1 million and ($4.0) million,
respectively. Discontinued operations, primarily from the sale of MRT, provided
funds of $14.9 million in 2004. Discontinued operations provided $1.4 million in
2003. Capital expenditures of $6.2 million and $8.6 million for 2004 and 2003,
respectively, were for new product capacity, for maintaining the Company's
existing asset base and for environmental, health and safety projects. Proceeds
from sales of fixed assets and other investing activities accounted for the
remainder of cash provided by investing activities in 2004.
Net Cash Provided (Used) by Financing Activities. Net cash (used) by
financing activities for 2004 and 2003 was ($17.8) million and ($26.4) million,
respectively. Short-term debt decreased due to the reduction of the senior
credit facility of $21.2 million, debt payments related to Odda of $5.7 million
and by other increases of $0.1 million. Proceeds from long-term debt reflect the
issuance of $105.0 million Senior Secured Notes and an increase of $4.6 million
in foreign bank loans. Payments of long-term debt primarily reflect the
retirement of Senior Subordinated Notes. Payments of the Pfizer obligations, the
Prince transactions and costs related to the refinancing account for the
remainder of funds used by financing activities.
Working Capital and Capital Expenditures. Working capital as of June 30,
2004 was $54.4 million compared to $9.1 million at fiscal year end June 30,
2003, an increase of $45.3 million. The increase in working capital was due to
reduced current debt, accounts payable and accrued expense levels, principally
as a result of the Company's refinancing and satisfaction of its obligations due
Pfizer.
The Company anticipates spending approximately $8.0 million for capital
expenditures in 2005, primarily to cover the Company's asset replacement needs,
to improve processes, and for environmental and regulatory compliance, subject
to the availability of funds.
27
Liquidity. At June 30, 2004, the amount of credit extended under the
Company's senior credit facility totaled $11.0 million under the revolving
credit facility and $9.3 million under the letter of credit facility, and the
Company had $6.5 million available under the borrowing base formula in effect.
In addition, certain of the Company's foreign subsidiaries also had availability
totaling $4.8 million under their respective loan agreements. On April 29, 2004,
the Company amended the senior credit facility to increase the aggregate amount
of borrowings available under such working capital and letter of credit
facilities from $25.0 million to $27.5 million and to increase the amount of
aggregate borrowings available under the working capital facility from $15.0
million to $17.5 million. As of September 24, 2004, the Company amended the
senior credit facility to: (i) increase the aggregate amount of borrowings
available under such working capital and letter of credit facilities from $27.5
million to $32.5 million; the amount of aggregate borrowings available under the
working capital facility remained unchanged at $17.5 million; (ii) amend the
EBITDA definition to exclude charges and expenses related to unsuccessful
acquisitions and related financings in an aggregate amount not to exceed $5.3
million for the period beginning January 1, 2004 and ending June 30, 2004; (iii)
amend the definition of Additional Indebtedness to exclude advances under the
working capital facility; (iv) amend the definition of Permitted Investments to
allow other investments made during the period from January 1, 2004 through June
30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish
covenant EBITDA levels for the periods ending after June 30, 2004. The amendment
was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1,
2004 for item (iv); and effective September 24, 2004 for all other items.
The senior credit facility contains a lock-box requirement and a material
adverse change clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the condensed consolidated balance
sheet.
The Company's ability to fund its operating plan relies upon the continued
availability of borrowing under the senior credit facility. The Company believes
that it will be able to comply with the terms of its covenants under the amended
senior credit facility based on its forecasted operating plan. In the event of
adverse operating results and/or violation of covenants under this facility,
there can be no assurance that the Company would be able to obtain waivers or
amendments on favorable terms, if at all. The Company's 2005 operating plan
projects adequate liquidity throughout the year, with periods of reduced
availability around the dates of the semi-annual interest payments due November
1, 2004 and June 1, 2005. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that would be available as needed. The Company also has undertaken
a strategic review of its manufacturing capabilities, and is currently
increasing inventory levels of certain products to enhance future flexibility
and reduce cost. There can be no assurance the Company will be successful in any
of the above-noted actions.
The Company anticipates taxable gains on extinguishment of debt and other
aspects of the refinancing structure will be substantially offset by existing
net operating loss carry forwards, and that the Company will not incur
significant cash income tax payments related to these gains.
The Company's contractual obligations (in millions) at June 30, 2004 mature
as follows:
Years
------------------------------------------------
Within 1 Over 1 to 3 Over 3 to 5 Total
-------- ----------- ----------- -----
(Dollars in thousands)
Loans payable to banks $ 11.0 $ -- $ -- $ 11.0
Lease commitments 1.6 1.4 0.6 3.6
Long-term debt (including current portion) 1.4 4.1 153.9 159.4
Interest payments 19.2 38.4 11.8 69.4
Acquisition of rights 0.7 1.2 0.2 2.1
------ ------- ------ ------
Total contractual obligations $ 33.9 $ 45.1 $166.5 $245.5
====== ======= ====== ======
Supplemental Information (Unaudited)
The Company shutdown Odda and divested Carbide during 2003, sold MRT in
August 2003, and shutdown La Cornubia in June 2004. These businesses have been
classified as discontinued operations. The Company's consolidated financial
statements have been reclassified to report separately the operating results,
financial position, and cash flows of the discontinued operations. In addition,
the Company completed the Prince Transactions in December 2003, including the
divestiture of PMC and the termination of management fees to the Palladium
Investors.
28
To facilitate quarterly comparisons, the following unaudited statements
present the quarterly operating results of continuing operations, for the years
ended June 30, 2004, 2003 and 2002. Amounts are in thousands.
29
Quarters ended
----------------------------------------------- Year ended
Sept 30, Dec 31, March 31, June 30, June 30,
2003 2003 2004 2004 2004
--------- --------- --------- --------- ----------
Net sales:
Animal Health & Nutrition $ 59,841 $ 68,687 $ 64,819 $ 72,074 $ 265,421
Industrial Chemicals - ex PMC 6,299 6,244 10,000 8,592 31,135
Industrial Chemicals - PMC 5,683 5,435 -- -- 11,118
Distribution 7,939 7,656 7,916 7,350 30,861
All Other 5,188 4,518 4,302 5,731 19,739
--------- --------- --------- --------- ---------
Total net sales 84,950 92,540 87,037 93,747 358,274
Cost of goods sold 63,790 69,991 63,843 70,247 267,871
--------- --------- --------- --------- ---------
Gross profit 21,160 22,549 23,194 23,500 90,403
Selling, general and administrative expenses 15,785 16,824 16,165 17,354 66,128
Costs of non-completed transaction -- -- -- 5,261 5,261
--------- --------- --------- --------- ---------
Operating income (loss):
Animal Health & Nutrition 6,900 7,655 8,370 10,382 33,307
Industrial Chemicals - ex PMC (391) (287) 1,136 163 621
Industrial Chemicals - PMC 1,213 1,065 -- -- 2,278
Distribution 841 692 789 578 2,900
All Other 669 657 557 418 2,301
Corporate Expenses (3,377) (4,132) (4,116) (9,729) (21,354)
Eliminations 82 638 293 (927) 86
Palladium management fee (562) (563) -- -- (1,125)
--------- --------- --------- --------- ---------
Total operating income (loss) 5,375 5,725 7,029 885 19,014
Other:
Interest expense 3,933 4,549 4,918 5,218 18,618
Interest (income) (242) 168 (43) (13) (130)
Other expense, net (585) 127 (131) (192) (781)
Net (gain) on extinguishment of debt -- (23,226) -- -- (23,226)
Income (loss) from continuing operations
before income taxes 2,269 24,107 2,285 (4,128) 24,533
Provision for income taxes 783 2,880 2,209 2,097 7,969
--------- --------- --------- --------- ---------
Income/(loss) from continuing operations 1,486 21,227 76 (6,225) 16,564
Discontinued operations:
Income (loss) from operations (462) 59 (471) (751) (1,625)
Gain (loss) on disposal 231 -- -- (2,320) (2,089)
--------- --------- --------- --------- ---------
Net income/(loss) $ 1,255 $ 21,286 $ (395) $ (9,296) $ 12,850
========= ========= ========= ========= =========
Depreciation and amortization from
continuing operations:
Animal Health & Nutrition $ 2,029 $ 2,059 $ 2,086 $ 2,089 $ 8,263
Industrial Chemicals - ex PMC 406 395 403 432 1,636
Industrial Chemicals - PMC 243 244 -- -- 487
Distribution 3 4 3 1 11
All Other 115 98 105 101 419
Corporate Expenses 372 576 660 759 2,367
--------- --------- --------- --------- ---------
Total depreciation and amortization $ 3,168 $ 3,376 $ 3,257 $ 3,382 $ 13,183
========= ========= ========= ========= =========
30
Quarters ended
----------------------------------------------- Year ended
Sept 30, Dec 31, March 31, June 30, June 30,
2002 2002 2003 2003 2003
--------- --------- --------- --------- ---------
Net sales:
Animal Health & Nutrition $ 59,976 $ 66,650 $ 62,675 $ 61,405 $ 250,706
Industrial Chemicals - ex PMC 8,138 5,946 6,449 5,932 26,465
Industrial Chemicals - PMC 5,756 5,285 5,743 5,548 22,332
Distribution 8,096 7,197 7,612 7,167 30,072
All Other 1,711 2,190 3,793 4,477 12,171
--------- --------- --------- --------- ---------
Total net sales 83,677 87,268 86,272 84,529 341,746
Cost of goods sold 61,638 63,366 63,306 62,890 251,200
--------- --------- --------- --------- ---------
Gross profit 22,039 23,902 22,966 21,639 90,546
Selling, general and administrative expenses 15,544 15,874 17,496 16,136 65,050
Operating income (loss):
Animal Health & Nutrition 9,420 11,593 8,902 8,557 38,472
Industrial Chemicals - ex PMC (1,035) (1,815) (1,555) (1,029) (5,434)
Industrial Chemicals - PMC 1,127 901 839 712 3,579
Distribution 750 802 900 755 3,207
All Other 13 245 356 6 620
Corporate Expenses (3,051) (3,440) (3,324) (2,905) (12,720)
Eliminations (167) 305 (86) (30) 22
Palladium management fee (562) (563) (562) (563) (2,250)
--------- --------- --------- --------- ---------
Total operating income (loss) 6,495 8,028 5,470 5,503 25,496
Other:
Interest expense 4,489 3,641 3,958 4,193 16,281
Interest (income) (126) 31 (39) 49 (85)
Other expense, net 1,155 235 201 (52) 1,539
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 977 4,121 1,350 1,313 7,761
Provision for income taxes 432 1,409 599 7,620 10,060
--------- --------- --------- --------- ---------
Income/(loss) from continuing operations 545 2,712 751 (6,307) (2,299)
Discontinued operations:
Income (loss) from operations (702) (10,547) (1,681) (1,647) (14,577)
Gain (loss) on disposal -- -- (1,342) 659 (683)
--------- --------- --------- --------- ---------
Net income/(loss) $ (157) $ (7,835) $ (2,272) $ (7,295) $ (17,559)
========= ========= ========= ========= =========
Depreciation and amortization from
continuing operations:
Animal Health & Nutrition $ 1,892 $ 1,920 $ 1,890 $ 1,988 $ 7,690
Industrial Chemicals - ex PMC 587 699 498 164 1,948
Industrial Chemicals - PMC 232 239 240 245 956
Distribution 3 3 2 4 12
All Other 87 90 94 93 364
Corporate Expenses 355 395 405 399 1,554
--------- --------- --------- --------- ---------
Total depreciation and amortization $ 3,156 $ 3,346 $ 3,129 $ 2,893 $ 12,524
========= ========= ========= ========= =========
31
Quarters ended
------------------------------------------------ Year ended
Sept 30, Dec 31, March 31, June 30, June 30,
2001 2001 2002 2002 2002
--------- --------- --------- --------- ---------
Net sales:
Animal Health & Nutrition $ 57,943 $ 63,156 $ 59,378 $ 59,125 $ 239,602
Industrial Chemicals - ex PMC 6,591 6,253 7,258 9,301 29,403
Industrial Chemicals - PMC 5,062 5,218 5,418 5,753 21,451
Distribution 7,590 6,640 6,753 6,869 27,852
All Other 2,377 2,448 2,595 2,948 10,368
--------- --------- --------- --------- ---------
Total net sales 79,563 83,715 81,402 83,996 328,676
Cost of goods sold 59,592 60,128 60,885 66,806 247,411
--------- --------- --------- --------- ---------
Gross profit 19,971 23,587 20,517 17,190 81,265
Selling, general and administrative expenses 16,431 17,614 17,577 19,014 70,636
--------- --------- --------- --------- ---------
Operating income (loss):
Animal Health & Nutrition 7,365 10,259 6,246 4,428 28,298
Industrial Chemicals - ex PMC (2,759) (2,160) (1,175) (4,870) (10,964)
Industrial Chemicals - PMC 821 588 1,058 1,173 3,640
Distribution 612 544 496 693 2,345
All Other 214 367 108 475 1,164
Corporate Expenses (2,204) (2,708) (2,733) (3,746) (11,391)
Eliminations 53 (354) (498) 586 (213)
Palladium management fee (562) (563) (562) (563) (2,250)
--------- --------- --------- --------- ---------
Total operating income (loss) 3,540 5,973 2,940 (1,824) 10,629
Other:
Interest expense 4,596 4,660 4,590 4,224 18,070
Interest (income) (65) (231) (6) (44) (346)
Other expense, net 1,263 753 368 965 3,349
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes (2,254) 791 (2,012) (6,969) (10,444)
Provision for income taxes (197) 1,203 1,264 12,497 14,767
--------- --------- --------- --------- ---------
Income/(loss) from continuing operations (2,057) (412) (3,276) (19,466) (25,211)
Discontinued operations:
Income (loss) from operations (308) (1,287) (5,796) (19,168) (26,559)
Gain (loss) on disposal -- -- --
--------- --------- --------- --------- ---------
Net income/(loss) $ (2,365) $ (1,699) $ (9,072) $ (38,634) $ (51,770)
========= ========= ========= ========= =========
Depreciation and amortization from
continuing operations:
Animal Health & Nutrition $ 1,810 $ 1,589 $ 1,996 $ 2,043 $ 7,438
Industrial Chemicals - ex PMC 633 579 609 748 2,569
Industrial Chemicals - PMC 242 240 242 242 966
Distribution 7 (1) 3 3 12
All Other 81 78 80 82 321
Corporate Expenses 264 268 263 254 1,049
--------- --------- --------- --------- ---------
Total depreciation and amortization $ 3,037 $ 2,753 $ 3,193 $ 3,372 $ 12,355
========= ========= ========= ========= =========
32
Critical Accounting Policies
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, management of the Company is required to make certain
estimates and assumptions during the preparation of consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America. These estimates and assumptions impact the reported
amount of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements. Estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the period they are determined to be necessary. Actual results
could differ from those estimates. Following are some of the Company's critical
accounting policies impacted by judgments, assumptions and estimates.
Revenue Recognition
Revenues are recognized when title to products and risk of loss are
transferred to customers. Additional conditions for recognition of revenue are
that collection of sales proceeds is reasonably assured and the Company has no
further performance obligations. Net sales are comprised of total sales billed,
less reductions for returned goods, trade discounts and customer allowances.
Litigation
The Company is subject to legal proceedings and claims arising out of the
normal course of business. The Company routinely assesses the likelihood of any
adverse judgments or outcomes to these matters as well as ranges of probable
losses. A determination of the amount of the reserves required for these
contingencies is based on an analysis of the various issues, historical
experience, other third party judgments and outside specialists, where required.
The required reserves may change in the future due to new developments in each
matter. For further discussion, see Note 15 to the Consolidated Financial
Statements.
Environmental Matters
The Company determines the costs of environmental remediation of its
facilities and formerly owned properties on the basis of current law and
existing technologies. Uncertainties exist in these evaluations primarily due to
unknown conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies. The liabilities are adjusted
periodically as remediation efforts progress or as additional information
becomes available. The Company has recorded liabilities of $2.9 million at June
30, 2004 for such activities.
Long Lived Assets
Long-lived assets, including plant and equipment, and other intangible
assets are reviewed for impairment when events or circumstances indicate that a
diminution in value may have occurred, based on a comparison of undiscounted
future cash flows to the carrying amount of the long-lived asset. If the
carrying amount exceeds undiscounted future cash flows, an impairment charge is
recorded based on the difference between the carrying amount of the asset and
its fair value.
The assessment of potential impairment for a particular asset or set of
assets requires certain judgments and estimates by the Company, including the
determination of an event indicating impairment; the future cash flows to be
generated by the asset, including the estimated life of the asset and likelihood
of alternative courses of action; the risk associated with those cash flows; and
the Company's cost of capital or discount rate to be utilized.
Useful Lives of Long-Lived Assets
Useful lives of long-lived assets, including plant and equipment and other
intangible assets are based on management's estimates of the periods that the
assets will be productively utilized in the revenue-generation process. Factors
that affect the determination of lives include prior experience with similar
assets and product life expectations and management's estimate of the period
that the assets will generate revenue.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on
a first-in, first-out (FIFO) and average methods for most inventories. The
determination of market value to compare to cost involves assessment of numerous
factors, including costs to
33
dispose of inventory and estimated selling prices. Reserves are recorded for
inventory determined to be damaged, obsolete, or otherwise unsaleable.
Income Taxes
Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets when appropriate to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation allowance,
certain judgments are made relating to recoverability of deferred tax assets,
use of tax loss carryforwards, level of expected future taxable income and
available tax planning strategies. These judgments are routinely reviewed by
management. For further discussion, see Note 14 to the Consolidated Financial
Statements.
New Accounting Pronouncements
The Company adopted the following new and revised accounting pronouncements
in fiscal 2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not
result in a material impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a financial
instrument, that is within its scope, as a liability (or an asset in some
circumstances). SFAS No. 150 also revises the definition of liabilities to
encompass certain obligations that can, or must, be settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 did not result in a material
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits, an amendment to FASB
Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This revision
to SFAS No. 132 relates to employers' disclosures about pension plans and other
postretirement benefit plans. SFAS No. 132 now requires additional disclosures
to describe the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows, and components of net periodic benefit cost
recognized during interim periods of defined pension plans and other defined
postretirement plans. The additional disclosures required by this revision to
SFAS No. 132 have been provided.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
Effect of Inflation; Foreign Currency Exchange Rates
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. The Company does not believe that inflation has had
any material effect on the Company's business over the last two years.
The Company's substantial foreign operations expose it to risk of exchange
rate fluctuations. Financial position and results of operations of the Company's
international subsidiaries generally are measured using local currencies as the
functional currency. Assets and liabilities of these operations are translated
at the exchange rates in effect at each fiscal year end. The translation
adjustments related to assets and liabilities that arise from the use of
differing exchange rates from period to period are included in accumulated other
comprehensive loss in shareholders' equity. Income statement accounts are
translated at the average rates of exchange prevailing during the year.
A business unit of Koffolk and all of Planalquimica operate primarily in
U.S. dollars. The U.S. dollar is designated as the functional currency for these
businesses and translation gains and losses are included in determining net
income or loss.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction and
translation (gains) losses were ($116), $789 and $3,385 for 2004, 2003 and 2002,
respectively, and were included in other expense, net in the consolidated
statements of operations.
34
Quantitative and Qualitative Disclosure About Market Risk
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates, foreign currency exchange rates,
and commodity prices. As a result, future earnings, cash flows and fair values
of assets and liabilities are subject to uncertainty. The Company uses, from
time to time, foreign currency forward contracts as a means of hedging exposure
to foreign currency risks. The Company also utilizes, on a limited basis,
certain commodity derivatives, primarily on copper used in its manufacturing
processes, to hedge the cost of its anticipated purchase requirements. The
Company does not utilize derivative instruments for trading purposes. The
Company does not hedge its exposure to market risks in a manner that completely
eliminates the effects of changing market conditions on earnings, cash flows and
fair values. The Company monitors the financial stability and credit standing of
its major counterparties.
Interest Rate Risk
The Company uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined for
these purposes as the potential change in the fair value resulting from an
adverse movement in interest rates.
The Company's debt portfolio is comprised of fixed rate and variable rate
debt of approximately $170.4 million as of June 30, 2004. Approximately 10% of
the debt is variable and would be interest rate sensitive. For further details,
see Note 9, to the Consolidated Financial Statements of the Company appearing
elsewhere herein.
For the purposes of the sensitivity analysis, an immediate 10% change in
interest rates would not have a material impact on the Company's cash flows and
earnings over a one year period.
As of June 30, 2004, the fair value of the Company's senior secured and
subordinated notes are estimated based on quoted market rates at $158 million
and the related carrying amount is $153 million.
Foreign Currency Exchange Rate Risk
A significant portion of the financial results of the Company is derived
from activities conducted outside the U.S. and denominated in currencies other
than the U.S. dollar. Because the financial results of the Company are reported
in U.S. dollars, they are affected by changes in the value of the various
foreign currencies in relation to the U.S. dollar. Exchange rate risks are
reduced, however, by the diversity of the Company's foreign operations and the
fact that international activities are not concentrated in any single non-U.S.
currency. Short-term exposures to changing foreign currency exchange rates are
primarily due to operating cash flows denominated in foreign currencies. From
time to time, the Company may cover known and anticipated operating exposures by
using purchased foreign currency exchange option and forward contracts. The
primary currencies for which the Company has foreign currency exchange rate
exposure are the Euro, the Brazilian Real, and Japanese yen.
The Company uses sensitivity analysis to assess the market risk associated
with its foreign currency transactions. Market risk is defined for these
purposes as the potential change in fair value resulting from an adverse
movement in foreign currency exchange rates. The fair value associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date. Based on the limited amount of foreign currency contracts at June 30,
2004, the Company does not believe that an instantaneous 10% adverse movement in
foreign currency rates from their levels at June 30, 2004, with all other
variables held constant, would have a material effect on the Company's results
of operations, financial position or cash flows.
Commodity Price Risk
The Company purchases certain raw materials, such as copper, under
short-term supply contracts. The purchase prices thereunder are generally
determined based on prevailing market conditions. The Company uses commodity
derivative instruments to modify some of the commodity price risks. Assuming a
10% change in the underlying commodity price, the potential change in the fair
value of commodity derivative contracts held at June 30, 2004 would not be
material when compared to the Company's operating results and financial
position.
The foregoing market risk discussion and the estimated amounts presented are
Forward-Looking Statements that assume certain market conditions. Actual results
in the future may differ materially from these projected results due to
developments in relevant financial markets and commodity markets. The methods
used above to assess risk should not be considered projections of expected
future events or results.
35
Certain Factors Affecting Future Operating Results
Forward-Looking Statements
This Report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Statements that are not
historical facts, including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words "may," "could," "would,"
"should," "believe," "expect," "anticipate," "plan," "estimate," "target,"
"project," "intend," or similar expressions. These statements include, among
others, statements regarding our expected business outlook, anticipated
financial and operating results, our business strategy and means to implement
the strategy, our objectives, the amount and timing of capital expenditures, the
likelihood of our success in expanding our business, financing plans, budgets,
working capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding demand for our products, the expansion of product
offerings geographically or through new applications, the timing and cost of
planned capital expenditures, competitive conditions and general economic
conditions. These assumptions could prove inaccurate. Forward-looking statements
also involve risks and uncertainties, which could cause actual results that
differ materially from those contained in any forward-looking statement. Many of
these factors are beyond our ability to control or predict. Such factors
include, but are not limited to, the following:
o our substantial leverage and potential inability to service our debt
o our dependence on distributions from our subsidiaries
o risks associated with our international operations and significant
foreign assets
o our dependence on our Israeli operations
o competition in each of our markets
o potential environmental liability
o potential legislation affecting the use of medicated feed additives
o extensive regulation by numerous government authorities in the United
States and other countries
o our reliance on the continued operation and sufficiency of our
manufacturing facilities
o our reliance upon unpatented trade secrets
o the risks of legal proceedings and general litigation expenses
o potential operating hazards and uninsured risks
o the risk of work stoppages
o our dependence on key personnel
See also the discussion under "Other Risks and Uncertainties" in Note 2 of
our Consolidated Financial Statements included in this Report.
In addition, the issue of the potential for increased bacterial resistance
to certain antibiotics used in certain food producing animals is the subject of
discussions on a worldwide basis and, in certain instances, has led to
government restrictions on the use of antibiotics in these food producing
animals. The sale of feed additives containing antibiotics is a material portion
of our business. Should regulatory or other developments result in further
restrictions on the sale of such products, it could have a material adverse
impact on our financial position, results of operations and cash flows.
We believe the forward-looking statements in this Report are reasonable;
however, no undue reliance should be placed on any forward-looking statements,
as they are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events.
36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding quantitative and qualitative disclosures about market
risk is set forth in Item 7 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
The financial statements are set forth commencing on page F-1 hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No response required.
Item 9A. Controls and Procedures
(a) Based upon an evaluation, under the supervision and with the
participation of our Principal Executive Officers and our Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, they have concluded that, as of the end of the period
covered by this Report, our disclosure controls and procedures, as defined in
Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, are not
effective for gathering, analyzing and disclosing information we are required to
disclose in periodic reports that we furnish to the Securities and Exchange
Commission, for the specific reasons noted in paragraph (b) below. The
corrective actions we are taking are also noted in paragraph (b).
(b) As of the end of the period covered by this report, there have been no
significant changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. During September 2004, as part of the audit of
the financial statements for the year ended June 30, 2004, the Company's
auditors determined and communicated to the Company's management significant
deficiencies in internal control that, when viewed collectively, constituted a
material weakness in the Company's internal control. A material weakness is
defined as a significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented or detected.
The significant deficiencies noted related to the failure to perform timely
review, substantiation and evaluation of certain general ledger account
balances, principally related to bank account reconciliations and accrued
pension liabilities. The Company is addressing the material weakness by
completing a review of significant balance sheet accounts and enhancing the
review process by requiring supervisory review and sign-off on bank account
reconciliations and other balance sheet account analyses. Additionally, the
Company plans to remediate the matters discussed above through further
improvements in processes and procedures related to the review, substantiation
and evaluation of general ledger account balances.
It should be noted that any system of internal controls, however well
designed and operated, can provide only reasonable, but not absolute, assurance
that the objectives of the system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its
stated goals under all potential conditions, regardless of how remote.
Item 9B. Other Information
No response required.
37
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information regarding our executive officers
and directors:
Name Age Position
- ---------------------------- --- ------------------------------------------
Jack C. Bendheim............ 57 Chairman of the Board of Directors;
President
Gerald K. Carlson........... 61 Chief Executive Officer
Marvin S. Sussman........... 57 Vice Chairman of the Board of Directors
and President, Prince Agri
James O. Herlands........... 62 Director and Executive Vice President
Richard G. Johnson.......... 55 Chief Financial Officer
Daniel M. Bendheim.......... 32 President, Specialty Chemicals Group*
Steven L. Cohen............. 60 Vice President, General Counsel and
Assistant Secretary
David G. McBeath............ 57 President, Animal Health Group
Daniel A. Welch............. 54 Senior Vice President, Human Resources
Sam Gejdenson .............. 56 Director, Noteholder Representative
Peter A. Joseph............. 52 Director
Mary Lou Malanoski.......... 47 Director
Marcos Rodriguez............ 43 Director
* William A. Mathison, the former President, Specialty Chemicals Group,
retired in August 2004.
Jack C. Bendheim Chairman of the Board of Directors and President. Mr.
Bendheim has been President since 1988. He was Chief Operating Officer from 1988
to 1998, and was Chief Executive Officer from 1998 to May 2002. He has been a
director since 1984. Mr. Bendheim joined us in 1969 and served as Executive Vice
President and Treasurer from 1983 to 1988 and as Vice President and Treasurer
from 1975 to 1983. Mr. Bendheim is also a director of The Berkshire Bank in New
York, New York, and Empire Resources, Inc., a metals trading company in Fort
Lee, New Jersey.
Gerald K. Carlson Chief Executive Officer. Mr. Carlson joined us in May 2002
and has served as our Chief Executive Officer since then. Prior to joining us,
Mr. Carlson served as the Commissioner of Trade and Development for the State of
Minnesota from January 1999 to March 2001. Mr. Carlson served as Senior Vice
President-- Corporate Planning and Development from June 1996 to his retirement
in October 1998 from Ecolab, Inc. During his thirty-two year career at Ecolab,
Mr. Carlson also served as Senior Vice President of International as well as
Senior Vice President and General Manager-- Institutional North America.
Marvin S. Sussman Vice Chairman of the Board of Directors and President of
our Prince Agri subsidiary. He has been a director since 1988 and was Chief
Operating Officer from 1998 to 2002. Mr. Sussman joined us in 1971. Since then,
he has served in various executive positions with us. Mr. Sussman was President
of our Prince Group from 1988 to 2002. Mr. Sussman is the brother-in-law of Jack
Bendheim.
James O. Herlands Director; Executive Vice President. Mr. Herlands joined us
in 1964. Since then, he has served in various capacities in sales/marketing and
purchasing. He has been a director since 1988 and served as President of our
CP/PhibroChem division since 1992. In addition, Mr. Herlands has served as our
Executive Vice President since 1988. Mr. Herlands is the first cousin of Jack
Bendheim.
Richard G. Johnson Chief Financial Officer. Mr. Johnson joined us in
September 2002 and has served as our Chief Financial Officer since then. Prior
to joining us, Mr. Johnson served as Director of Financial Management for
Laserdyne Prima, Inc. from 2001 to 2002 and as Vice President-- Planning and
Control, Latin America for Ecolab, Inc. from 1992 to 1999. In addition, Mr.
Johnson served in various senior financial positions at Ecolab over a fifteen
year period.
Daniel M. Bendheim President, Specialty Chemicals Group. Mr. Bendheim joined
the Company in 1998. In 2001 he was appointed Vice President of Business
Development, and was appointed to his current position of President, Specialty
Chemicals Group in September, 2004. Prior to joining the Company Mr. Bendheim
worked as an analyst at SouthCoast Capital. Mr. Bendheim received a JD from
Harvard Law School in 1996 and a BA from Yeshiva University in 1993. Mr.
Bendheim is a son of Jack Bendheim.
Steven L. Cohen Vice President and General Counsel. Mr. Cohen joined us in
October 2000 and has served as our Vice President-- Regulatory and General
Counsel since then. Prior to joining us, Mr. Cohen was, from 1997 to 2000,
General Counsel of Troy Corporation, a multi-national chemical company. From
1994 to 1997, Mr. Cohen was in the private practice of law.
38
David G. McBeath President Animal Health Group. Dr. McBeath joined us on
August 1, 2003. Prior to joining us, he was CEO of Scottish Health Innovations
Ltd., a company created to identify and exploit intellectual property arising
from research carried out within the National Health Service in Scotland. From
March 2001 to December 2002, he served on the Management Committee of Merial as
Head of the Production Animal business; and prior to this was on the Board of
Hoechst Roussel Vet GmbH, with direct responsibility for R&D and Regulatory
Affairs.
Daniel A. Welch Senior Vice President Human Resources. Mr. Welch joined us
on August 9, 2004. Prior to joining us, he was Director of Human Resources of
Pfizer Inc. since 2001. From 1998 to 2001, Mr. Welch was the President of Value
Growth Dynamics, LLC, a consulting firm focused on strategic change.
Sam Gejdenson Director, From 1981 to 2000, Congressman Sam Gejdenson served
eastern Connecticut in the U.S. House of Representatives. Mr. Gejdenson was the
senior Democrat on the House International Relations Committee. He received an
A.S. degree from Mitchell College in New London, Connecticut in 1968 and a B.A.
from the University of Connecticut in Storrs, Connecticut in 1970. In 1974, he
was elected to the Connecticut House of Representatives, serving two terms
before accepting a post in the administration of Connecticut Governor Ella T.
Grasso. Mr. Gejdenson is now involved in international trade in his own company
Sam Gejdenson International.
Peter A. Joseph Director. Mr. Joseph has served as one of our Directors
since February 2001. From 1998 to present, he has been a member of Palladium
Equity Partners, LLC. From 1986 to 1997, Mr. Joseph was a general partner of
Joseph Littlejohn & Levy, a buyout firm.
Mary Lou Malanoski Director. Ms. Malanoski currently serves as a managing
director at Morgan Joseph, Inc. From 1994 until June 2001, Ms. Malanoski served
as Managing Director and Chief Financial Officer of New Street Advisors LP, a
private equity firm that she co-founded. Ms.Malanoski began her career at Drexel
Burnham Lambert in 1980 in the Corporate Finance Department. She subsequently
served in various positions, finally serving as Managing Director in the Mergers
and Acquisitions Department and Chair of the Corporate Finance Underwriting
Commitment Committee. Following Drexel's bankruptcy filing in 1990, Ms.
Malanoski was responsible for formulating the firm's plan of reorganization,
which was successfully consummated in 1992. She remained at the reorganized
firm, which was renamed New Street Capital Corp., as a Managing Director
responsible for many of the firm's merchant banking investments. Following New
Street Capital's sale in 1994, Ms. Malanoski co-founded New Street Advisors. She
is a Trustee of Rosemont College, from which she received a B.A. degree in
Mathematics, and she also received an MBA from the Johnson School of Cornell
University.
Marcos A. Rodriguez Director. Mr. Rodriguez founded Palladium Equity
Partners in 1997 and serves as Managing Member. Prior to forming Palladium, Mr.
Rodriguez was a partner of Joseph Littlejohn & Levy (JLL), a buyout firm which
he joined in 1989. He was responsible for spearheading a number of JLL's major
investments. Before launching his private equity career 14 years ago, Mr.
Rodriguez worked in operations for General Electric Company in the U.S., Mexico
and France and graduated from GE's Manufacturing Management Program. Mr.
Rodriguez serves on the Board of Directors of portfolio companies Haden
International, The Hilsinger Company and Wise Foods. In addition, Mr. Rodriguez
serves as Chairman of the Development Committee and Treasurer of the Board of
Directors of The Robert Toigo Foundation, a not-for-profit organization that
supports the advancement of exceptional minority business degree students and
alumni within the finance industry through scholarships, mentoring, internships
and job placement. He is also a member of the New America Alliance. Mr.
Rodriguez earned a B.S. in Mechanical Engineering from Columbia University, an
M.B.A from the Wharton School and an M.A. in International Studies from the
Lauder Institute of the University of Pennsylvania.
Board Composition
Our entire Board of Directors consists of 7 members, all of whom are
currently designated and serving as directors. Our board of directors is elected
annually, and our directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. Each officer
serves at the discretion of the Board of Directors.
Compensation of Directors
Except for the payment of $50,000 annually to Mr. Sam Gejdenson, the
director designated by the holders of the Senior Secured Notes, our directors do
not receive any cash compensation for service on our Board of Directors.
Directors may be reimbursed for certain expenses in connection with attendance
at board meetings, however. We have entered into certain transactions with
certain of the directors. See "Certain Relationships and Related Transactions."
39
Code of Ethics
Our Board of Directors has not adopted a code of ethics applicable to our
principal executive, financial or accounting officers. The Board of Directors
believes that our current internal control procedures and business practices are
adequate to promote honest and ethical conduct and to deter wrongdoing by these
executives.
Committees of the Board of Directors
Audit Committee
We are not a "listed issuer" as defined under Section 10A-3 of the Exchange
Act and are therefore not required to have an audit committee comprised of
independent directors. We currently do not have an audit committee and our Board
of Directors has determined that we do not have an audit committee financial
expert. The Board of Directors believes that each of its members has the
requisite financial background, experience, and knowledge to fulfill the duties
and obligations that an audit committee would have, and therefore does not
believe that it is necessary at this time to search for a person who would
qualify as an audit committee financial expert.
Our Board of Directors has not created any committees other than the
compensation committee.
The duties of the Compensation Committee are to recommend to the Board of
Directors a compensation program, including incentives, for the Chief Executive
Officer and other senior officers of the Company, for approval by the full Board
of Directors.
The current members of the Compensation Committee are Mr. Jack C. Bendheim,
Mr. Joseph and Mr. Gejdenson.
Item 11. Executive Compensation
The following table sets forth the cash compensation paid by us and our
subsidiaries for services during fiscal 2004, 2003, and 2002 to our Chief
Executive Officer and to the next four most highly compensated executive
officers:
Annual Compensation
---------------------------------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation(1)
- ------------------------------- ----- ------ ----- ------------ ---------------
Jack C. Bendheim 2004 $ 1,650,000 $ -- $ -- $ 2,050
Chairman of the Board; President 2003 1,650,000 -- 150,000(2) 6,500
2002 1,500,000 265,000 -- 6,000
Gerald K. Carlson(3) 2004 500,000 575,000 24,000 1,458
Chief Executive Officer 2003 500,000 -- 24,000 --
2002 49,350 -- -- --
Marvin S. Sussman(4) 2004 1,000,000 101,372 -- 24,581(6)
Vice Chairman of the Board; 2003 1,000,000 -- -- 24,500(6)
President of Prince Agri 2002 1,000,000 -- -- 6,000
James O. Herlands 2004 400,000 95,519 -- 6,581
Executive Vice President 2003 400,000 150,000 -- 6,500
2002 400,000 150,000 -- 6,000
Richard G. Johnson(5) 2004 268,750 200,000 13,500 6,703
Chief Financial Officer 2003 192,308 -- 39,000 --
- ----------
(1) Represents contributions by us under our 401(k) Retirement and Savings Plan.
See "Compensation Pursuant to Plans."
(2) In fiscal 2003, Mr. Bendheim was paid $150,000 for temporary deferral of
fiscal 2002 compensation.
(3) 2002 salary is for a partial year commencing May 2002. In fiscal 2004 and
2003, Mr. Carlson received $24,000 for relocation and housing assistance.
(4) Pursuant to a Stockholders Agreement between us and Mr. Sussman, we are
required to purchase, at book value, all shares of our Class B Common Stock
owned by Mr. Sussman in the event of his retirement, death, disability or
the termination of his employment by us. Should Mr. Sussman elect to sell
his shares, we have a right of first offer and an option to purchase the
shares.
40
See "Certain Relationships and Related Transactions." As a result, each
year, we are required to record as compensation expense (income) in our
results of operations the change in our book value attributable to Mr.
Sussman's shares. For 2004, 2003 and 2002, the expense (income) attributable
to Mr. Sussman's shares was $0, $0 and ($378,000), respectively. No
distributions have been made to Mr. Sussman under this agreement.
(5) Salary is since date of employment for 2003. In fiscal 2004 and 2003, Mr.
Johnson received $13,500 and $39,000, respectively, for relocation and
housing assistance.
(6) Of such amount, $18,000 represents the cost of the term portion of a life
insurance policy purchased by the Company in the face amount of $10 million
on the life of Mr. Sussman, with a required premium of $252,000 per year.
The policy commenced in April 2002.
In fiscal 2004, no options were granted to the named executive officers and
no options were held or exercised by any of the named executive officers.
Employment and Severance Agreements
We entered into an employment agreement with Gerald K. Carlson in May 2002,
whereby Mr. Carlson will serve as our Chief Executive Officer. The agreement
provides for a base salary of $500,000 during the first year of its term. Mr.
Carlson is eligible to receive an annual bonus of up to 150% of his base salary
based on our achievement of certain specified EBITDA growth targets. If Mr.
Carlson is terminated without Cause (as defined) or he voluntarily terminates
the agreement with Good Reason (as defined), he is entitled to receive the
accrued portion of the target annual bonus, as well as an amount ranging from
two to eight months of base salary depending on when such termination occurs.
If, within six months after a Change of Control (as defined), Mr. Carlson is
terminated without cause or he voluntarily terminates the agreement with Good
Reason, he will be entitled to receive a lump sum payment equal to the amount of
annual target bonus accrued to the date of termination, plus 100% of base salary
and 50% of annual target bonus. We are obligated under the agreement to provide
separate indemnification insurance to Mr. Carlson in the amount of the current
coverage provided to our current board of directors.
We entered into an employment agreement with Marvin S. Sussman in December
1987. The term of employment is from year-to-year, unless terminated by us at
any time or by his death or permanent disability.
Our UK subsidiary, PAH Management Company Ltd., entered into an employment
agreement with David McBeath in May 2003, commencing August 1, 2003, whereby Mr.
McBeath will serve as President of our Animal Health Group. The agreement
provides for a base salary of $250,000. The agreement also provides for
additional payments to Mr. McBeath of $100,000 upon commencement of his
employment and $130,000 upon completion of his term of employment (the
"Completion Fee"). If Mr. McBeath dies during the term of the agreement or the
agreement is terminated because of his disability or Mr. McBeath is terminated
other than for cause, he, or his estate, as the case may be, would be entitled
to receive, in lieu of severance, a prorated portion of the Completion Fee.
In 1995, James O. Herlands purchased stock in Phibro-Tech. In connection
therewith, we entered into a severance agreement with him. The agreement
provides that, upon his Actual or Constructive Termination or a Change in
Control Event (as such terms are defined), he is entitled to receive a cash
Severance Amount (as defined therein), based upon a multiple of Phibro-Tech's
pre-tax earnings (as defined therein). In addition, if an Extraordinary Event
(as defined) occurs within 12 months after the occurrence of an Actual or
Constructive Termination, the executive is entitled to receive an additional
Catch-up Payment (as defined). At June 30, 2004, no severance payments would
have been due to Mr. Herlands if he were terminated. See "Certain Relationships
and Related Transactions."
Compensation Pursuant to Plans
401(k) Plan. We maintain for the benefit of our employees a 401(k)
Retirement and Savings Plan (the "Plan"), which is a defined contribution,
profit sharing plan qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code"). Our employees are eligible for participation
in the Plan once they have attained age 21 and completed a year of service (in
which the employee completed 1,000 hours of service). Up to $200,000 (indexed
for inflation) of an employee's base salary may be taken into account for Plan
purposes. Under the Plan, employees may make pre-tax contributions of up to
60.0% of such employee's base salary, and we will make non-matching
contributions equal to 1% of an employee's base salary and matching contribution
equal to 50.0% of an employee's pre-tax contribution up to 3.0% of such
employee's base salary and 25.0% of such employee's pre-tax contribution from
3.0% to 6.0% of base salary. Participants are vested in employer contributions
in 20% increments beginning after completion of the second year of service and
become fully vested after five years of service. Distributions are generally
payable in a lump sum after termination of employment, retirement, death,
disability, plan termination, attainment of age 59 1/2, disposition of
substantially all of our assets or upon financial hardship. The Plan also
provides for Plan loans to participants.
41
The accounts of Messrs. Bendheim, Carlson, Sussman, Herlands, and Johnson
were credited with employer contributions of $2,050, $1,458, $6,581, $6,581, and
$6,703, respectively, for fiscal 2004.
Retirement Plan. We have adopted The Retirement Plan of Phibro Animal Health
Corporation and Subsidiaries and Affiliates, which is a defined benefit pension
plan (the "Retirement Plan"). Our employees are eligible for participation in
the Retirement Plan once they have attained age 21 and completed a year of
service (which is a Plan Year in which the employee completes 1,000 hours of
service). The Retirement Plan provides benefits equal to the sum of (a) 1.0% of
an employee's "average salary" plus 0.5% of the employee's "average salary" in
excess of the average of the employee's social security taxable wage base, times
years of service after July 1, 1989, plus (b) the employee's frozen accrued
benefit, if any, as of June 30, 1989 calculated under the Retirement Plan
formula in effect at that time. For purposes of calculating the portion of the
benefit based on "average salary" in excess of the average wage base, years of
service shall not exceed 35. "Average salary" for these purposes means the
employee's salary over the consecutive five year period in the last ten years
preceding retirement or other termination of employment which produces the
highest average; or, if an employee has fewer than five years of service, all
such years of service. An employee becomes vested in his plan benefit once he
completes five years of service with us. In general, benefits are payable after
retirement or disability in the form of a 50%, 75% or 100% joint or survivor
annuity, life annuity or life annuity with a five or ten year term. In some
cases benefits may also be payable under the Retirement Plan in the event of an
employee's death.
The following table shows estimated annual benefits payable upon retirement
in specified compensation and years of service classifications, assuming a life
annuity with a ten year term.
Years of Service
Average ------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
$ 25,000 ..... $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
$ 50,000 ..... $ 7,500 $ 10,000 $ 12,500 $ 15,000 $ 17,500
$ 75,000 ..... $ 11,420 $ 15,000 $ 18,750 $ 22,500 $ 26,250
$ 100,000 ..... $ 17,040 $ 22,000 $ 26,980 $ 31,990 $ 37,280
$ 150,000 ..... $ 28,290 $ 37,000 $ 45,730 $ 54,490 $ 63,530
$ 200,000 ..... $ 39,540 $ 52,000 $ 64,480 $ 76,990 $ 89,780
As of June 30, 2004, Messrs. Bendheim, Carlson, Sussman, Herlands, and
Johnson had 35, 2, 33, 40 and 2 estimated credited years of service,
respectively, under the Retirement Plan. The compensation covered by the
Retirement Plan for each of these officers as of June 30, 2004 is $205,000. Such
individuals, at normal retirement age 65, will have 43, 6, 41, 43 and 12
credited years of service, respectively. The annual expected benefit after
normal retirement at age 65 for each of these individuals, based on the
compensation taken into account as of June 30, 2004, is $118,200, $16,580,
$134,110, $129,240, and $32,000, respectively.
Most of our foreign subsidiaries have retirement plans covering
substantially all employees. Contributions to these plans are generally
deposited under fiduciary-type arrangements. Benefits under these plans are
primarily based on levels of compensation. Funding policies are based on
applicable legal requirements and local practices.
Deferred Compensation Plan. In 1994, we adopted a non-qualified Deferred
Compensation Plan and Trust, as an incentive for certain executives. The plan
provides for (i) a Retirement Income Benefit (as defined), (ii) a Survivor's
Income Benefit (as defined), and (iii) Deferred Compensation Benefit (as
defined). Three employees currently participate in this plan. A trust has been
established to provide the benefits described above.
The following table shows the estimated benefits from this plan as of June
30, 2004.
Annual Survivor's Deferred
Retirement Income Compensation
Income Benefit Benefit Benefit
-------------- ------- -------
Jack C. Bendheim.................. $35,309 $1,500,000 $386,368
Marvin S. Sussman................. $35,309 $1,000,000 $128,451
James O. Herlands................. $35,085 $ 400,000 $347,104
We determine the Retirement Income Benefit based upon the employee's salary,
years of service and age at retirement. At present, it is contemplated that a
benefit of 1% of each participant's eligible compensation will be accrued each
year. The benefit is payable upon retirement (after age 65 with at least 10
years of service) in monthly installments over a 15 year period to the
participant or his named beneficiary. The Survivor's Income Benefit for the
current participants is one times annualized compensation at the time of death,
capped at $1,500,000, payable in 24 equal monthly installments. The Deferred
Compensation Benefit is substantially funded by compensation deferred by the
participants. Such benefit is based upon a participant making an election to
defer no less than $3,000 and no more than $20,000 of his compensation in excess
of $150,000, payable in a lump sum or in monthly installments for up to 15
years. We make a matching contribution of $3,000. Participants have no claim
against us other than as unsecured creditors. We intend to fund the payments
using the cash value or the death benefit from the life insurance policies
insuring each Executive's life.
42
Executive Income Program. On March 1, 1990, we entered into an Executive
Income Program to provide a pre-retirement death benefit and a retirement
benefit to certain of our executives. The Program consists of a Split-Dollar
Agreement and a Deferred Compensation Agreement with Jack Bendheim, Marvin S.
Sussman and James O. Herlands (the "Executives"). The Split Dollar Agreement
provides for us to own a whole life insurance policy in the amount of $1,000,000
(plus additions) on the life of each Executive.
Each policy also contains additional paid-up insurance and extended term
insurance. On the death of the Executive prior to his 60th birthday or his
actual retirement date, whichever is later: (i) the first $1,000,000 of the
death benefit is payable to the Executive's spouse, or issue; (ii) the excess is
payable to us up to the aggregate amount of premiums paid by us; and (iii) any
balance is payable to the Executive's spouse or issue. The Split-Dollar
Agreement terminates and no benefit is payable if the Executive dies after his
retirement. The Deferred Compensation Agreement provides that upon the
Executive's retirement, at or after attaining age 65, we will make retirement
payments to the Executive during his life for 10 years or until he or his
beneficiaries have received a total of 120 monthly payments. Participants have
no claim against us other than as unsecured creditors. We intend to fund the
payments using the cash value or the death benefit from the life insurance
policies insuring each Executive's life. The retirement benefits are as follows:
Jack Bendheim $30,000; Marvin S. Sussman $30,000; and James O. Herlands $20,000.
1993 Split Dollar Agreement. On August 12, 1993, we entered into a Split
Dollar Agreement with David Butler and Gail Bendheim, as trustees under an
Indenture of Trust dated August 12, 1993 (the "Trust"). This Agreement provides
for the Trust to purchase and own life insurance policies on the life of Jack C.
Bendheim in the aggregate face amount of $5,000,000 (plus additions). The
premiums for such insurance are paid in part by the Trust (to the extent of the
lesser of the P.S. 58 rates, or the insurers' current published premium rate for
annually renewable term insurance for standard risks) and in part by us (we pay
the balance of the premiums not paid by the Trust). Upon the death of Jack C.
Bendheim or upon the cancellation of the policies or the termination of the
Agreement, we have the right to be repaid the total amount we advanced toward
payment of premiums. To secure our right to be repaid, the Trust has assigned
each policy to us as collateral. After repayment of the amount due to us, the
remaining cash surrender value or the remaining death benefit is payable to the
Trust, the beneficiaries of which are the wife and issue of Jack C. Bendheim.
Meetings of Directors
During fiscal 2004, the Board of Directors took certain actions by both
written consent and at regular meetings. Directors are elected annually and
serve until the next annual meeting of Shareholders or until their successors
are elected and qualified.
Report of the Compensation Committee
The compensation committee was established during fiscal 2004. The
responsibility of the compensation committee is to recommend to the Board of
Directors a compensation program, including incentives, for the Chief Executive
Officer and other senior officers, for approval by the full Board of Directors.
The compensation committee will prepare recommendations to the Board of
Directors for the 2005 fiscal year. Executive compensation for the 2004 fiscal
year was determined by the Board as a whole. During fiscal 2004 the directors
participated in deliberations regarding compensation of our officers.
Compensation Committee Interlocks and Insider Participation
Jack Bendheim, Marvin S. Sussman and James O. Herlands are members of our
Board of Directors and are executive officers. Jack Bendheim, Peter Joseph and
Sam Gejdenson are members of the compensation committee. None of our executive
officers serve as a member of the Board of Directors of any other non-Company
entity which has one or more members serving as a member of our Board of
Directors, except that Jack Bendheim and Peter Joseph serve as directors of
Penick Holding Company. Messrs. Bendheim, Sussman, Herlands, Joseph and
Rodriguez have participated in certain transactions with us and our subsidiaries
and affiliates. See Item 13, Certain Relationships and Related Transactions.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The table sets forth certain information as of June 30, 2004 regarding
beneficial ownership of our capital stock by each of our directors and named
executive officers, each beneficial owner of 5% or more of the outstanding
shares of capital stock and all directors and officers as a group.
43
Number of Common Shares
(Percentage of Class)
---------------------------------------
Name Class A Voting(1) Class B Voting(2)
- --------------------------------------- ------------------ -----------------
Jack Bendheim(3)....................... 12,600 (100)% 10,699.65(90%)(4)
Marvin S. Sussman...................... -- 1,188.85(10%)
All other officers and directors(5).... -- --
All officers and directors as a group.. 12,600 (100)% 11,888.50(100%)
- ----------
(1) The entire voting power is exercised by the holders of Class A Common Stock,
except that the holders of Class A Common Stock currently are entitled to
elect all but three of the directors. The holders of Class B Common Stock
are entitled to elect one and the holders of Series C Preferred Stock are
entitled to elect two directors but do not vote on any other matters. In
addition, the holders of the units of senior secured notes have the right to
designate one member of the Board of Directors.
(2) Class B Common shareholders will receive the entire equity upon our
liquidation, after payment of preferences to holders of all classes of
preferred stock and Class A Common Stock.
(3) Jack Bendheim also owns 5,207 (100%) shares of Series A Preferred Stock.
(4) Includes 6,308.527 shares owned by trusts for the benefit of Jack Bendheim,
his spouse, his children and their spouses and his grandchildren.
(5) Peter A. Joseph and Marcos Rodriguez have been designated as directors of
the Company by Palladium Equity Partners II, LP ("Palladium") which
beneficially owns 10,591 shares of our Series C Preferred Stock. Palladium
has the right to designate two directors to the Board of Directors. See
"Certain Relationships and Related Transactions."
Item 13. Certain Relationships and Related Transactions
Our Phibro-Tech subsidiary leases the property underlying its Santa Fe
Springs, California facility from First Dice Road Company, a California limited
partnership ("First Dice"), in which Jack Bendheim, our President and principal
stockholder, Marvin S. Sussman and James O. Herlands, directors, own 39.0%,
40.0% and 20.0% limited partnership interests, respectively. The general
partner, having a 1% interest in the partnership, is Western Magnesium Corp., a
wholly-owned subsidiary of ours, of which Jack Bendheim is the president. The
lease expires on June 30, 2008. The annual rent is $250,000. Phibro-Tech is also
required to pay all real property taxes, personal property taxes and liability
and property insurance premiums. In June 2001, Jack Bendheim entered into a
secured $1.4 million revolving credit arrangement with First Union National
Bank, which replaced a prior loan from Fleet Bank. Mr. Bendheim reloans
borrowings under the First Union credit line to First Dice on the same terms as
his borrowing from First Union. We believe that the terms of such lease and loan
are on terms no less favorable to Phibro-Tech than those that reasonably could
be obtained at such time in a comparable arm's-length transaction from an
unrelated third-party.
Pursuant to a Shareholders Agreement dated December 29, 1987 between Marvin
S. Sussman and us, we are required to purchase, at book value, all shares of our
Class B Common Stock owned by Mr. Sussman, in the event of his retirement,
death, permanent disability or the termination of his employment by us. Should
Mr. Sussman elect to sell his shares, we have a right of first offer and an
option to purchase the shares.
A Shareholders Agreement initially entered into by Phibro-Tech and three
executives of Phibro-Tech, including James O. Herlands (the "Executives")
provides, among other things, for restrictions on their shares as to voting,
dividends, liquidation and transfer rights. The Shareholders Agreement also
provides that upon the death of an Executive or termination of an Executive's
employment, Phibro-Tech must purchase the Executive's shares at their fair
market value, as determined by a qualified appraiser. In the event of a Change
of Control (as defined), the Executive has the option to sell his shares to
Phibro-Tech at such value. The Shareholders Agreement provides, that, upon the
consent of Phibro-Tech, the Executives and us, the Executives' shares of
Phibro-Tech Common Stock may be exchanged for a number of shares of our Common
Stock, which may be non-voting Common Stock, having an equivalent value, and
upon any such exchange such shares of our Common Stock will become subject to
the Shareholders Agreement. We and Phibro-Tech also entered into Severance
Agreements with the Executives which provide, among other things, for certain
severance payments. See Item 11, Executive Compensation -- Employment and
Severance Agreements.
We advanced $200,000 to Marvin Sussman and his wife in 1987, pursuant to a
secured promissory note that is payable on demand and bears interest at the
annual rate of 9%.
Certain relatives of Jack Bendheim, other than Mr. Sussman and Mr. Herlands
named above, provide services to us, in one case through a consulting firm
controlled by a relative, and in other cases as employees, and received directly
or through such consulting firm annual aggregate payments of approximately
$650,000 for the fiscal year ended June 30, 2004.
44
On January 5, 2000, the United States Bankruptcy Court for the Eastern
District of New York confirmed a Plan of Reorganization for Penick Corporation
and Penick Pharmaceutical, Inc. (collectively, "Penick") which prior to such
confirmation were debtors in proceedings in such Court for reorganization under
Chapter 11 of the Bankruptcy Code, and awarded Penick to Penick Holding Company
("PHC"). PHC is a corporation formed to effect such acquisition by the Company,
PBCI LLC, a limited liability company controlled by Mr. Bendheim, and several
other investors, including Peter A. Joseph, a director of the Company. Pursuant
to a Shareholders' Agreement among the shareholders of PHC, Messrs. Bendheim and
Joseph have been designated as two of three directors of PHC, and Mr.
Katzenstein, our Secretary, has been designated as Secretary and Treasurer of
PHC. The Company has invested approximately $2,300,000 for shares of Series A
Preferred Stock of PHC bearing an 8.5 percent annual cumulative dividend, and
PBCI LLC invested approximately $500,000 for approximately 15 percent of the
Common Stock of PHC. Mr. Joseph owns or controls approximately 12 percent of the
Common Stock of PHC.
In connection with the sale of our Series B and Series C Preferred Stock to
the Palladium Investors, we and Jack Bendheim entered into a Stockholders
Agreement (the "Palladium Stockholders Agreement") dated November 30, 2000 with
the Palladium Investors. The Palladium Stockholders Agreement provides for our
Board to include two directors to be designated by the Palladium Investors.
Peter A. Joseph and Marcos Rodriguez are currently the two designees of the
Palladium Investors serving as directors. If and for so long as we fail to
redeem any share of Series B or Series C Preferred Stock requested for
redemption by a Palladium Investor after the earliest to occur of June 1, 2008
(the maturity date of our 9 7/8% Senior Subordinated Notes due 2008), the
redemption of such Notes in full prior thereto or a change in control of us,
then (x) the Palladium Investors may take control of our Board of Directors, and
(y) Jack C. Bendheim has agreed to cause all equity securities owned by him to
be voted in the manner directed by the Palladium Investors; provided, that, we
must pay Jack Bendheim and Marvin Sussman, whether or not employed by us, an
amount not less than their respective annual base salaries in effect immediately
prior to such assumption of control, until the earlier to occur of the
expiration of control by the Palladium Investors and the fifth anniversary of
their assumption of control.
The Palladium Stockholders Agreement contains covenants which restrict,
without the consent of at least one director designated by the Palladium
Investors (or, if no such director is then serving on the Board, at least one
Palladium Investor), among other things, certain (a) issuances of any equity
securities, unless the purchaser agrees to be bound by the Palladium
Stockholders Agreement, (b) sales of assets in excess of $10 million, (c)
purchases of businesses and other investments in excess of $10 million, (d) the
incurrence of indebtedness for borrowed money, including guarantees, in excess
of $12.5 million, (e) redemptions, acquisitions or other purchases of equity
securities, (f) transactions with officers, directors, stockholders or employees
or any family member or affiliate thereof in excess of $500,000, (g)
compensation and benefits of certain officers, and (h) transactions involving a
change of control. The Palladium Stockholders Agreement also provides that we
shall furnish the Palladium Investors certain financial reporting and
environmental information each year and grant to the Palladium Investors
registration rights comparable to any such rights granted to any third party,
and requires us to maintain certain key man life insurance on Jack C. Bendheim
for the benefit of the Palladium Investors. The Palladium Stockholders Agreement
provides certain limitations on the ability of Jack C. Bendheim to transfer
voting shares, and certain limitations on the ability of the Palladium Investors
to transfer their shares, including a right of first refusal in favor of us and
Mr. Bendheim.
Pursuant to the Management and Advisory Services Agreement dated November
30, 2000 between us and the Palladium Investors, we agreed to pay, on a
quarterly basis, the Palladium Investors an annual management advisory fee of
$2.25 million until such time as all shares of Series B and Series C Preferred
Stock are redeemed. Pursuant to the sale of PMC described below, our obligations
for this fee have been terminated.
Our policy with respect to the sale, lease or purchase of assets or
property of any related party is that such transaction should be on terms that
are no less favorable to us or our subsidiary, as the case may be, than those
that could reasonably be obtainable at such time in a comparable arm's length
transaction from an unrelated third party. The indenture and the new domestic
senior credit facility both include a similar restriction on us and our domestic
subsidiaries with respect to the sale, purchase, exchange or lease of assets,
property or services, subject to certain limitations as to the applicability
thereof.
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72.2 million to $16.5 million (accreted
through the Closing Date) by means of the redemption of all of its shares of
Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii)
the termination of $2.2 million in annual management advisory fees payable by
the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium
Investors in respect of the portion of the Company's Preferred Stock not
exchanged in consideration of the business and assets of PMC; (v) the agreement
of the Buyer to pay the Company for advisory fees for the next
45
three years of $1.0 million, $0.5 million, and $0.2 million, respectively (which
were pre-paid at closing by the Buyer and satisfied for $1.3 million, the net
present value of such payments); and (vi) the Buyer agreed to supply manganous
oxide and red iron oxide products and to provide certain mineral blending
services to the Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince
Agri agreed to continue to provide the Buyer with certain laboratory, MIS and
telephone services, all on terms substantially consistent with the historic
relationship between Prince Agri and PMC, and to lease to Buyer office space
used by PMC in Quincy, Illinois. The Company has an agreement to receive certain
treasury services from Palladium for $0.1 million per year. Pursuant to
definitive agreements, the Company made customary representations, warranties
and environmental and other indemnities, agreed to a post-closing working
capital adjustment, paid $4.0 million in full satisfaction of all intercompany
debt owed to PMC, paid a closing fee to Palladium of $0.5 million, made certain
capital expenditure adjustments included as part of the intercompany settlement
amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC
retained $0.4 million of its accounts receivable. The Company established a $1.0
million letter of credit escrow for two years to secure its working capital
adjustment and certain indemnification obligations. The Company agreed to
indemnify the Palladium Investors for a portion, at the rate of $0.65 for every
dollar, of the amount they receive in respect of the disposition of Buyer for
less than $21.0 million up to a maximum payment by the Company of $4.0 million
(the "Backstop Indemnification Amount"). The Backstop Indemnification Amount
would be payable on the earlier to occur of July 1, 2008 or six months after the
redemption date of all of the Company's Senior Secured Notes due 2007 if such a
disposition closes prior to such redemption and six months after the closing of
any such disposition if the disposition closes after any such redemption. The
Company's obligations with respect to the Backstop Indemnification Amount will
cease if the Palladium Investors do not close the disposition of Buyer by
January 1, 2009. The definition of "Equity Value" in the Company's Certificate
of Incorporation was amended to reduce the multiple of trailing EBITDA payable
in connection with any future redemption of Series C Preferred to 6.0 from 7.5.
The amount of consideration paid and payable in connection with the Prince
Transactions and all matters in connection therewith were determined pursuant to
arm's length negotiations.
46
Item 14. Principal Accountant Fees and Services
Aggregate fees for professional services rendered for us by
PricewaterhouseCoopers LLP ("PwC"), our independent registered public accounting
firm, for the fiscal years ended June 30, 2004 and 2003 were:
2004 2003
---- ----
Audit $1,629,000 $ 795,000
Audit Related 1,328,000 --
Tax
Tax Planning
180,000 123,000
Tax Compliance and Other
29,000
---------- ----------
Total Tax 180,000 152,000
All Other -- --
---------- ----------
Total $3,137,000 $ 947,000
========== ==========
Our Board of Directors pre-approves audit and non-audit services performed
for us by PwC.
Our Board of Directors has considered whether the provision of non-audit
services by PwC to us is compatible with maintaining PwC's independence. PwC
advised our Board of Directors that PwC was and continues to be independent with
respect to us.
47
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
3.1 Composite Certificate of Incorporation of Registrant (15)
3.2 By-laws of Registrant (1)
4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors
named therein and The Chase Manhattan Bank, as trustee, relating to the
9 7/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits
thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of
Company (1)
4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among
Registrant, the Guarantors named therein and The Chase Manhattan Bank,
as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of
Registrant (10)
4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among
Registrant, the Guarantors named therein and JPMorgan Chase Bank, as
trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of
Registrant (10)
4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among
Registrant, the Guarantors named therein and JPMorgan Chase Bank, as
trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of
Registrant (10)
4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among Phibro
Animal Health Corporation, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes
due 2008 of Registrant. (11)
4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Phibro
Animal Health Corporation, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes
due 2008 of Registrant. (12)
4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Phibro
Animal Health Corporation, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes
due 2008 of Registrant. (16)
4.2 Indenture, dated as of October 21, 2003, by and among Phibro Animal
Health Corporation and Philipp Brothers Netherlands III B.V., as
Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and
Collateral Agent. (13)
4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among
Phibro Animal Health Corporation and Philipp Brothers Netherlands III
B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as
Trustee and Collateral Agent. (16)
Certain instruments which define the rights of holders of long-term debt
of Registrant and its consolidated subsidiaries have not been filed as
Exhibits to this Report since the total amount of securities authorized
under any such instrument does not exceed 10% of the total assets of
Registrant and its subsidiaries on a consolidated basis, as of June 30,
2004. For a description of such indebtedness, see Note 9 of Notes to
Consolidated Financial Statements. Registrant hereby agrees to furnish
copies of such instruments to the Securities and Exchange Commission
upon its request.
10.1 [Reserved]
10.2 Manufacturing Agreement, dated May 15, 1994, by and between Merck & Co.,
Inc., Koffolk, Ltd., and Registrant (1)+
10.3 Lease, dated July 25, 1986, between Registrant and 400 Kelby Associates,
as amended December 1, 1986 and December 30, 1994 (1)
10.4 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech,
Inc., as amended May 1998 (1)
10.5 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel
Land Administration (1)
48
10.6 Master Lease Agreement, dated February 27, 1998, between General
Electric Capital Corp., Registrant and Phibro-Tech, Inc. (1)
10.7 Stockholders Agreement, dated December 29, 1987, by and between
Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman
(1)
10.8 Employment Agreement, dated December 29, 1987, by and between Registrant
and Marvin S. Sussman (1)++
10.9 Stockholders Agreement, dated February 21, 1995, between James O.
Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1)
10.10 Form of Severance Agreement, dated as of February 21, 1995, between
Registrant and James O. Herlands (1)++
10.11 Agreement of Limited Partnership of First Dice Road Company, dated June
1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S.
Sussman and James O. Herlands, as amended November 1985 (1)
10.12 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred
Compensation Plan Trust, dated as of January 1, 1994, by and between
Registrant on its own behalf and on behalf of C.P. Chemicals, Inc.,
Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers
Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated
March 18, 1994 ("Retirement Income and Deferred Compensation Plan")
(1)++
10.12.1 First, Second and Third Amendments to Retirement Income and Deferred
Compensation Plan. (2)++
10.13 Form of Executive Income Deferred Compensation Agreement, each dated
March 11, 1990, by and between Registrant and each of Jack Bendheim,
James Herlands and Marvin Sussman (1)++
10.14 Form of Executive Income Split Dollar Agreement, each dated March 1,
1990, by and between Registrant and each of Jack Bendheim, James
Herlands and Marvin Sussman (1)++
10.15 [Reserved]
10.16 Administrative Consent Order, dated March 11, 1991, issued by the State
of New Jersey Department of Environmental Protection, Division of
Hazardous Waste Management, to C.P. Chemicals, Inc. (1)
10.17 Agreement for Transfer of Ownership, dated as of June 8, 2000, between
C. P. Chemicals, Inc. ("CP") and the Township of Woodbridge
("Township"), and related Environmental Indemnification Agreement,
between CP and Township, and Lease, between Township and CP (2)
10.18 Stockholders' Agreement, dated as of January 5, 2000, among shareholders
of Penick Holding Company ("PHC"), and Certificate of Incorporation of
PHC and Certificate of Designation, Preferences and Rights of Series A
Redeemable Cumulative Preferred Stock of PHC (2)
10.19 [Reserved]
10.20 [Reserved]
10.21 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer,
Inc., the Asset Selling Corporations (named therein) and Registrant, and
various exhibits and certain Schedules thereto (3)+
10.21.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as
of September 28, 2000, among Pfizer, Inc., the Asset Selling
Corporations (named therein) and Registrant (10)
10.22 Stock Purchase Agreement, dated as of November 30, 2000, between
Registrant and the Purchasers (as defined therein) (4)
10.23 Stockholders' Agreement, dated as of November 30, 2000, among
Registrant, the Investor Stockholders (as defined therein) and Jack C.
Bendheim (4)
10.24 United States Asset Purchase Agreement between Phibro-Tech, Inc. and
Nufarm, Inc. dated as of May 1, 2001 (5)
49
10.24.1 Amendment No. 1 to United States Asset Purchase Agreement between
Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001 (6)
10.25 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of
May 1, 2001 (5)
10.26 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of
May 1, 2001 (5)
10.27 Management and Advisory Services Agreement dated November 30, 2000
between Registrant and Palladium Equity Partners, L.L.C. (7)++
10.27.1 Amended and Restated Management Services Agreement dated as of October
21, 2003 between Registrant and Palladium Capital Management, L.L.C.
(15)++
10.28 Employment Agreement, dated May 28, 2002, by and between Registrant and
Gerald K. Carlson (8)++
10.29 Agreement dated as of May 2, 2003, by and between PAH Management
Company, Ltd. and David McBeath (10) ++
10.30 Stock Purchase Agreement, dated August 14, 2003, by and between
Registrant and Cemex, Inc. (9)
10.31 Loan and Security Agreement, dated October 21, 2003, by and among, the
lenders identified on the signature pages thereto, Wells Fargo Foothill,
Inc., and Phibro Animal Health Corporation ("Parent"), and each of
Parent's Subsidiaries identified on the signature pages thereto. (12)
10.31.1 Amendment Number One to Loan and Security Agreement dated November 14,
2003. (12)
10.31.2 Amendment Number Two to Loan and Security Agreement dated April 29,
2004. (14)
10.31.3 Amendment Number Three to Loan and Security Agreement dated as of
September 24, 2004. (16)
10.32 Intercreditor and Lien Subordination Agreement, dated as of October 21,
2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA,
Phibro Animal Health Corporation ("Parent") and those certain
subsidiaries of the Parent party thereto. (12)
10.33 Purchase and Sale Agreement dated as of December 26, 2003 by and among
Phibro Animal Health Corporation ("PAHC"), Prince MFG, LLC, ("Prince
MFG"), The Prince Manufacturing Company ("Prince" and together with PAHC
and Prince MFG, the "Phibro Parties"), Palladium Equity Partners II,
L.P. ("PEP II"), Palladium Equity Partners II-A, L.P., ("PEP II-A"),
Palladium Equity Investors II, L.P., ("PEI II", and together with PEP II
and PEP II-A, the "Investor Stockholders"), and Prince Mineral Company,
Inc. ("Buyer"). (15)
10.34 Environmental Indemnification Agreement dated as of December 26, 2003
between the Phibro Parties (as defined therein) and Buyer. (15)
10.35 Amendment to Stockholders Agreement dated as of December 26, 2003
between PAHC, the Investor Stockholders and Jack Bendheim (15)
10.36 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and
PAHC(15)++
21 List of Subsidiaries (16)
31.1 Certification of Gerald K. Carlson, Chief Executive Officer required by
Rule 15d-14(a) of the Act (16)
31.2 Certification of Jack C. Bendheim, Chairman of the Board required by
Rule 15d-14(a) of the Act (16)
31.3 Certification of Richard G. Johnson, Chief Financial Officer required by
Rule 15d-14(a) of the Act (16)
- ----------
1 Filed as an Exhibit to the Registrant's Registration Statement on Form S-4,
No. 333-64641.
2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
50
3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2000.
4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2001.
6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
8 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
9 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2,
2004.
10 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003.
11 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 2, 2003.
12 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2003.
13 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 31, 2003.
14 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2004.
15 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
January 12, 2004.
16 Filed herewith.
+ A request for confidential treatment has been granted for portions of such
document. Confidential portions have been omitted and furnished separately
to the SEC in accordance with Rule 406(b).
++ This Exhibit is a management compensatory plan or arrangement.
Since the Company does not have securities registered under Section 12 of the
Securities Exchange Act of 1934 and is not required to file periodic reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company is not filing the written certification statement pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. The Company submits periodic reports with
the Securities and Exchange Commission because it is required to do so by the
terms of the indenture governing its senior subordinated notes.
(b) Financial Statement Schedules
All supplemental schedules are omitted because of the absence of conditions
under which they are required or because the information is shown in the
financial statements or notes thereto or in other supplemental schedules.
(c) Reports on Form 8-K.
The Company filed a Form 8-K/A on June 2, 2004 reporting Item 7 to withdraw its
application for confidential treatment of certain portions of a Stock Purchase
Agreement. The Company did furnish reports on Form 8-K since then. On July 2,
2004 the Company furnished a report on Form 8-K reporting items 5 to disclose
the filing of bankruptcy for La Cornubia.
51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets
as of June 30, 2004 and 2003 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended June 30, 2004, 2003 and 2002 F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended June 30, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows
for the years ended June 30, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Phibro Animal Health Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), changes
in stockholders' deficit and cash flows present fairly, in all material
respects, the financial position of Phibro Animal Health Corporation and its
subsidiaries at June 30, 2004 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2004,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 27, 2004
F-2
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2004 and 2003
(In Thousands)
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,568 $ 11,179
Trade receivables, less allowance for
doubtful accounts of $1,358 and $1,437
at June 30, 2004 and 2003, respectively 57,658 52,714
Other receivables 2,766 3,503
Inventories 79,910 87,849
Prepaid expenses and other current assets 8,688 9,868
Current assets from discontinued operations -- 9,276
--------- ---------
TOTAL CURRENT ASSETS 154,590 174,389
PROPERTY, PLANT AND EQUIPMENT, net 58,786 63,905
INTANGIBLES 11,695 8,669
OTHER ASSETS 16,298 14,059
OTHER ASSETS FROM DISCONTINUED OPERATIONS -- 13,325
--------- ---------
$ 241,369 $ 274,347
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 891 $ 1,686
Loans payable to banks 10,996 37,878
Current portion of long-term debt 1,351 24,124
Accounts payable 46,972 55,355
Accrued expenses and other current liabilities 40,010 40,699
Current liabilities from discontinued operations -- 5,557
--------- ---------
TOTAL CURRENT LIABILITIES 100,220 165,299
LONG-TERM DEBT 158,018 102,263
OTHER LIABILITIES 22,286 21,241
OTHER LIABILITIES FROM DISCONTINUED OPERATIONS -- 1,173
--------- ---------
TOTAL LIABILITIES 280,524 289,976
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 24,678 68,881
--------- ---------
STOCKHOLDERS' DEFICIT:
Preferred stock - $100 par value, 150,543
shares authorized, none issued 521 521
at June 30, 2004 and 2003; Series A
preferred stock - $100 par value,
6% non-cumulative, 5,207 shares
authorized, issued and outstanding
at June 30, 2004 and 2003
Common stock - $0.10 par value, 30,300
authorized and 24,488 shares issued 2 2
and outstanding at June 30, 2004 and 2003
Paid-in capital 860 860
Accumulated deficit (57,964) (79,489)
Accumulated other comprehensive income (loss):
Gain on derivative instruments, net of tax 9 81
Cumulative foreign currency translation adjustment (7,261) (6,485)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (63,833) (84,510)
--------- ---------
$ 241,369 $ 274,347
========= =========
The accompanying notes are an integral part of the
consolidated financial statements
F-3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended June 30, 2004, 2003 and 2002
(In Thousands)
2004 2003 2002
--------- --------- ---------
NET SALES $ 358,274 $ 341,746 $ 328,676
COST OF GOODS SOLD 267,871 251,200 247,411
--------- --------- ---------
GROSS PROFIT 90,403 90,546 81,265
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (includes
litigation income of $3,040 in 2003 and $742 in 2002) 66,128 65,050 70,636
COSTS OF NON-COMPLETED TRANSACTION 5,261 -- --
--------- --------- ---------
OPERATING INCOME 19,014 25,496 10,629
OTHER:
Interest expense 18,618 16,281 18,070
Interest (income) (130) (85) (346)
Other (income) expense, net (781) 1,539 3,349
Net (gain) on extinguishment of debt (23,226) -- --
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 24,533 7,761 (10,444)
PROVISION FOR INCOME TAXES 7,969 10,060 14,767
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 16,564 (2,299) (25,211)
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations (net of income taxes) (1,625) (14,577) (26,559)
(Loss) on disposal of discontinued operations (net of income taxes) (2,089) (683) --
--------- --------- ---------
NET INCOME (LOSS) 12,850 (17,559) (51,770)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in derivative instruments, net of tax (72) (981) 1,062
Change in currency translation adjustment (776) 7,377 (6,125)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 12,002 $ (11,163) $ (56,833)
========= ========= =========
NET INCOME (LOSS) 12,850 (17,559) (51,770)
Excess of the reduction of redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions 20,138 -- --
Dividends and equity value accreted on Series B and C redeemable
preferred stock (11,463) (12,278) (7,623)
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 21,525 $ (29,837) $ (59,393)
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements
F-4
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended June 30, 2004, 2003 and 2002
(In Thousands)
Common Retained
Preferred Stock Earnings Accumulated Other
Stock ----------------- Paid-in (Accumulated Comprehensive
Series A Class A Class B Capital Deficit) (Loss) income Total
-------- ------- ------- ------- -------- ------------- -----
BALANCE, JUNE 30, 2001 $ 521 $ 1 $ 1 $ 878 $ 9,741 $ (7,737) $ 3,405
Dividends on Series B and C
redeemable preferred stock (7,623) (7,623)
Change in derivative
instruments, net of tax 1,062 1,062
Foreign currency translation
adjustment (6,125) (6,125)
Receivable from principal
shareholder (138) (138)
Net (loss) (51,770) (51,770)
----- --- --- ----- --------- --------- ---------
BALANCE, JUNE 30, 2002 $ 521 $ 1 $ 1 $ 740 $ (49,652) $ (12,800) $ (61,189)
===== === === ===== ========= ========= =========
Dividends on Series B and C
redeemable preferred stock (8,808) (8,808)
Equity value accreted on
Series B and C redeemable
preferred stock (3,470) (3,470)
Change in derivative
instruments, net of tax (981) (981)
Foreign currency translation
adjustment 7,377 7,377
Payable to principal
shareholder 120 120
Net (loss) (17,559) (17,559)
----- --- --- ----- --------- --------- ---------
BALANCE, JUNE 30, 2003 $ 521 $ 1 $ 1 $ 860 $ (79,489) $ (6,404) $ (84,510)
===== === === ===== ========= ========= =========
Excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on
the Prince Transactions 20,138 20,138
Dividends on Series B and C
redeemable preferred stock (6,042) (6,042)
Equity value accreted on
Series B and C redeemable
preferred stock (5,421) (5,421)
Change in derivative
instruments, net of tax (72) (72)
Foreign currency translation
adjustment (776) (776)
Net income 12,850 12,850
----- --- --- ----- --------- --------- ---------
BALANCE, JUNE 30, 2004 $ 521 $ 1 $ 1 $ 860 $ (57,964) $ (7,252) $ (63,833)
===== === === ===== ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements
F-5
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2004, 2003 and 2002
(In Thousands)
2004 2003 2002
--------- --------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 12,850 $ (17,559) $ (51,770)
Adjustment for discontinued operations 3,714 15,260 26,559
--------- --------- ---------
Income (loss) from continuing operations 16,564 (2,299) (25,211)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided (used) by
operating activities:
Depreciation and amortization 13,183 12,524 12,355
Deferred income taxes 326 6,460 11,238
Net gain from sales of assets (692) (127) (5)
Net gain on extinguishment of debt (23,226) -- --
Change in redemption amount of redeemable common stock -- -- (378)
Effects of changes in foreign currency (548) 390 2,120
Other 1,114 387 2,416
Changes in operating assets and liabilities:
Accounts receivable (7,222) 3,810 6,046
Inventories 3,660 (1,598) (13,991)
Prepaid expenses and other current assets (314) (3,122) (2,819)
Other assets (3,079) (2,632) 2,667
Accounts payable (5,650) 20,503 (6,606)
Accrued expenses and other liabilities 6,965 (355) 8,511
Accrued costs of non-completed transaction 3,970 -- --
Cash provided (used) by discontinued operations (2,189) 716 (1,088)
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,862 34,657 (4,745)
--------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures (6,244) (8,636) (8,518)
Acquisition of a business, net of cash acquired -- -- (7,182)
Proceeds from property damage claim -- -- 411
Proceeds from sale of assets 1,094 2,565 19
Other investing (655) 737 580
Discontinued operations 14,875 1,363 (2,671)
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 9,070 (3,971) (17,361)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in cash overdraft (795) (6,081) 3,438
Net increase (decrease) in short-term debt (26,954) (6,660) 14,237
Proceeds from long-term debt 109,661 2,000 2,322
Payments of long-term debt (35,453) (16,014) (4,730)
Payment of Pfizer obligations (28,300) -- --
Payments relating to the Prince Transactions and
related costs (21,393) -- --
Debt refinancing costs (15,548) -- --
Discontinued operations 1,005 377 (1,590)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (17,777) (26,378) 13,677
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 234 452 3
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,611) 4,760 (8,426)
CASH AND CASH EQUIVALENTS at beginning of period 11,179 6,419 14,845
--------- --------- ---------
CASH AND CASH EQUIVALENTS at end of period $ 5,568 $ 11,179 $ 6,419
========= ========= =========
Supplemental Cash Flow Information:
Interest paid $ 17,578 $ 16,104 $ 17,003
Income taxes paid 4,755 3,046 2,629
The accompanying notes are an integral part of the
consolidated financial statements
F-6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Description of Business
Phibro Animal Health Corporation (the "Company" or "PAHC") is a leading
diversified global manufacturer and marketer of a broad range of animal health
and nutrition products, specifically medicated feed additives ("MFA") and
nutritional feed additives ("NFA"), which the Company sells throughout the world
predominately to the poultry, swine and cattle markets. The Company is also a
specialty chemicals manufacturer and marketer, serving numerous markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
The Company consolidates the financial statements of Koffolk (1949) Ltd.
(Israel) ("Koffolk") and Planalquimica Industrial Ltda. (Brazil)
("Planalquimica") on the basis of their March 31 fiscal year-ends to facilitate
the timely inclusion of such entities in the Company's consolidated financial
reporting.
The Company's Odda Smelteverk (Norway) ("Odda"), Carbide Industries (U.K.)
("Carbide"), Mineral Resource Technologies, Inc. ("MRT"), and La Cornubia S.A.
(France) ("La Cornubia") businesses have been classified as discontinued
operations as discussed in Note 5. The Company's consolidated financial
statements have been reclassified to report separately the operating results,
financial position and cash flows of the discontinued operations. These
footnotes present information only for continuing operations, unless otherwise
indicated.
The Company presents its consolidated financial statements on the basis of
its fiscal year ending June 30. All references to years 2004, 2003, and 2002 in
these financial statements refer to the fiscal year ended June 30 of that year.
Risks, Uncertainties and Liquidity:
The Company's ability to fund its operating plan relies upon the continued
availability of borrowing under the senior credit facility. The Company believes
that it will be able to comply with the terms of its covenants under the amended
senior credit facility based on its forecasted operating plan. In the event of
adverse operating results and/or violation of covenants under this facility,
there can be no assurance that the Company would be able to obtain waivers or
amendments on favorable terms, if at all. The Company's 2005 operating plan
projects adequate liquidity throughout the year, with periods of reduced
availability around the dates of the semi-annual interest payments due November
1, 2004 and June 1, 2005. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that would be available as needed. The Company has also undertaken
a strategic review of its manufacturing capabilities, and is currently
increasing inventory levels of certain products to enhance future flexibility
and reduce costs. There can be no assurance the Company will be successful in
any of the above-noted actions.
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of 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
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
F-7
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and 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 remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters.
Use of Estimates:
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. Actual results could differ from these estimates. Significant
estimates include reserves for bad debts, inventory obsolescence, environmental
matters, depreciation and amortization periods of long-lived assets,
recoverability of long-lived assets, realizability of deferred tax assets and
actuarial assumptions related to the Company's pension plans.
Revenue Recognition:
Revenue is recognized upon transfer of title and when risk of loss passes
to the customer, generally at the time of shipment. Net sales reflect total
sales billed, less reductions for goods returned, trade discounts and customer
allowances.
Cash and Cash Equivalents:
Cash equivalents include highly liquid investments with maturities of three
months or less when purchased.
Accounts Receivable and Allowance for Doubtful Accounts:
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the probable credit losses in its existing accounts receivable. The
allowance is based on historical write-off experience and is reviewed
periodically. Past due balances are reviewed individually for collectibility.
Account balances are charged against the allowance when the Company feels that
it is probable that the receivable will not be recovered. Receivables consist of
the following:
As of
----------------------------------
June 30, 2004 June 30, 2003
------------- -------------
Trade receivables $57,658 $52,714
Employee receivables 256 267
Other receivables 2,510 3,236
------- -------
Total receivables $60,424 $56,217
======= =======
The allowance for doubtful accounts was:
2004 2003 2002
------- ------- -------
Balance at beginning of period $ 1,437 $ 1,461 $ 1,760
Provision for bad debts 565 347 979
Bad debt write-offs (644) (371) (1,278)
------- ------- -------
Balance at end of period $ 1,358 $ 1,437 $ 1,461
======= ======= =======
F-8
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average methods; cost for
certain inventories is determined under the last-in, first-out (LIFO) method.
Inventories valued at LIFO amounted to $0 and $3,805 at June 30, 2004 and 2003,
respectively. Obsolete and unsaleable inventories are reflected at estimated net
realizable value. Inventory costs include materials, direct labor and
manufacturing overhead. Inventories are comprised of:
As of
-------------------------------
June 30, 2004 June 30, 2003
------------- -------------
Raw materials $ 16,313 $ 21,668
Work-in-process 1,764 1,565
Finished goods 61,833 65,248
Excess of FIFO cost over LIFO cost -- (632)
-------- --------
Total inventory $ 79,910 $ 87,849
======== ========
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. The Company capitalizes
interest expense as part of the cost of construction of facilities and
equipment. Interest expense capitalized was $0, $0 and $106 in 2004, 2003 and
2002, respectively.
Depreciation is charged to results of operations using the straight-line
method based upon the assets' estimated useful lives ranging from 8 to 20 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
The Company capitalizes costs that extend the useful life or productive
capacity of an asset. Repair and maintenance costs are expensed as incurred. In
the case of disposals, the assets and related accumulated depreciation are
removed from the accounts, and the net amounts, less proceeds from disposal, are
included in the statements of operations and comprehensive income (loss).
Deferred Financing Costs:
Deferred financing costs related to the senior secured notes and senior
subordinated notes are amortized over the respective lives of the notes.
Deferred financing costs related to the senior credit facility are amortized
over the life of the agreement.
Intangibles:
Product intangibles cost arising from the MFA acquisition was $10,673 and
$10,449 at June 30, 2004 and 2003, respectively, and accumulated amortization of
$3,230 and $1,780 at June 30, 2004 and 2003, respectively. Amortization expense
was $1,229, $964 and $816 for 2004, 2003 and 2002, respectively. Amortization
expense from the MFA acquisition for each of the next five years from 2005 to
2009 is expected to be $1,145 per year.
In May 2004 the Company acquired the rights to sell amprolium, an
anticoccidial MFA, in most international markets. In payment for the acquired
rights, the Company relinquished its claims against the seller for certain
purchase order commitments, and will make $2,100 of cash payments to the seller
over the next five years. The present value of these payments is $1,898 and was
recorded as a liability. The $2,354 value of the purchase order commitments was
recorded as a reduction in cost of goods sold and inventory, and an intangible
asset of $4,252 was recorded representing the fair value of the acquired rights
and is included on the Company's balance sheet at June 30, 2004. The Company
will amortize this intangible over a 10 year period. No amortization was
recorded in 2004. Amortization expense for each of the next five years from 2005
to 2009 is expected to be $425 per year.
F-9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Foreign Currency Translation:
Financial position and results of operations of the Company's international
subsidiaries generally are measured using local currencies as the functional
currency. Assets and liabilities of these operations are translated at the
exchange rates in effect at each fiscal year end. The translation adjustments
related to assets and liabilities that arise from the use of differing exchange
rates from period to period are included in accumulated other comprehensive loss
in stockholders' deficit. Income statement accounts are translated at the
average rates of exchange prevailing during the year.
A business unit of Koffolk and all of Planalquimica operate primarily in
U.S. dollars. The U.S. dollar is designated as the functional currency for these
businesses and translation gains and losses are included in determining net
income or loss.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction and
translation (gains) losses were $(116), $789 and $3,385 for 2004, 2003 and 2002,
respectively, and were included in other expense, net in the consolidated
statements of operations, and comprehensive income (loss).
Derivative Financial Instruments:
The Company records all derivative financial instruments on the
consolidated balance sheet at fair value. Changes in the fair value of
derivatives are recorded in results of operations or accumulated other
comprehensive income, depending on whether a derivative is designated and
effective as part of a hedge transaction and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in accumulated
other comprehensive income are included in operations in the periods in which
operations are affected by the hedged item.
Recoverability of Long-Lived Assets:
The Company evaluates the recoverability of long-lived assets, including
intangible assets, when events or circumstances indicate that a diminution in
value may have occurred, using financial indicators such as historical and
future ability to generate cash flows from operations. The Company's policy is
to record an impairment loss in the period it is determined the carrying amount
of the asset may not be recoverable. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future net cash flows (undiscounted and without interest or income
taxes) are less than the carrying amount of the assets.
Environmental Liabilities:
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate. The
Company capitalizes expenditures made to improve the condition of property,
compared with the condition of that property when constructed or acquired. The
Company also capitalizes expenditures that prevent future environmental
contamination. Other expenditures are expensed as incurred. The Company records
the expense and related liability in the period an environmental assessment
indicates remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability are based upon currently available facts,
existing technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered, including prior experience in
remediation of contaminated sites, other companies' experience, and data
released by the U.S. Environmental Protection Agency or other organizations.
When such costs will be incurred over a long-term period and can be reliably
estimated as to timing, the liabilities are included in the consolidated balance
sheet at their discounted amounts.
Income Taxes:
Income tax expense includes U.S. federal, state, and foreign income taxes.
The tax effect of certain temporary differences between amounts recognized for
financial reporting purposes and amounts recognized for tax purposes are
reported as deferred income taxes. Deferred tax balances are adjusted to reflect
tax rates, based on current tax laws, which will be in effect in the years in
which the temporary differences are expected to reverse. Valuation allowances
are established as necessary to reduce deferred tax assets to amounts more
likely than not to be realized.
F-10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Research and Development Expenditures:
Research and development expenditures are expensed as incurred, recorded in
selling, general and administrative expenses and were $5,076, $4,634 and $4,251
for 2004, 2003 and 2002, respectively.
New Accounting Pronouncements:
The Company adopted the following new and revised accounting pronouncements
in fiscal 2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not
result in a material impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a
financial instrument, that is within its scope, as a liability (or an asset in
some circumstances). SFAS No. 150 also revises the definition of liabilities to
encompass certain obligations that can, or must, be settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 did not result in a material
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment to
FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This
revision to SFAS No. 132 relates to employers' disclosures about pension plans
and other postretirement benefit plans. SFAS No. 132 now requires additional
disclosures to describe the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods of defined pension plans
and other defined postretirement plans. The additional disclosures required by
this revision to SFAS No. 132 have been provided in the notes to consolidated
financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
3. Refinancing
On October 21, 2003, the Company issued 105,000 units consisting of $85,000
of 13% Senior Secured Notes due 2007 (the "US Senior Notes") and $20,000 13%
Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the
"Dutch Senior Notes" and, together with the US Senior Notes, the "Senior Secured
Notes"), an indirect wholly-owned subsidiary of the Company (the "Dutch
issuer"). The Company used the proceeds from the issuance to: (i) repurchase
$51,971 of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal to 60%
of the principal amount thereof, plus accrued and unpaid interest; (ii) repay
its senior credit facility of $34,888 outstanding at the repayment date; (iii)
satisfy, for a payment of approximately $29,315, certain of its outstanding
obligations to Pfizer Inc., including: (a) $20,075 aggregate principal amount of
its promissory note plus accrued and unpaid interest, (b) $9,748 of accounts
payable, (c) $9,040 of accrued expenses, and (d) future contingent purchase
price obligations under its agreements with Pfizer Inc. by which the Company
acquired Pfizer's medicated feed additive business; and (iv) pay fees and
expenses relating to the above transactions.
F-11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
A net gain on extinguishment of debt is included in the Company's condensed
consolidated statement of operations, calculated as follows:
Net Gain on Repurchase of 9 7/8% Senior Subordinated
Notes due 2008:
Principal amount of repurchased notes $ 51,971
Repurchased at 60% of principal amount (31,183)
Transaction costs (4,107)
--------
Net gain on repurchase of notes 16,681
--------
Loss on repayment of senior credit facility (1,018)
--------
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note 20,075
-accrued interest on promissory note 1,015
-accounts payable and accrued expenses 18,788
--------
Total obligations paid 39,878
Cash payment to Pfizer (29,315)
Transaction costs (3,000)
--------
Net gain on payment of Pfizer obligations 7,563
--------
Net gain on extinguishment of debt $ 23,226
========
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of the Company (the "US Issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all the US Issuer's domestic restricted subsidiaries,
and the Dutch Senior Notes are guaranteed on a senior secured basis by the US
Issuer and by the restricted subsidiaries of the Dutch issuer, presently
consisting of Phibro Animal Health SA. The US Senior Notes and related
guarantees are collateralized by substantially all of the US Issuer's assets and
the assets of its domestic restricted subsidiaries, other than real property and
interests therein, including a pledge of all the capital stock of such domestic
restricted subsidiaries. The Dutch Senior Notes and related guarantees are
collateralized by a pledge of all the accounts receivable, a security interest
or floating charge on the inventory to the extent permitted by applicable law,
and a mortgage on substantially all of the real property of the Dutch issuer and
each of its restricted subsidiaries, a pledge of 100% of the capital stock of
each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by
the Dutch issuer to its restricted subsidiaries and substantially all of the
assets of the U.S. guarantors, other than real property and interests therein.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires the Company to make certain offers to
purchase Senior Secured Notes upon a change of control, upon certain asset sales
and from fifty percent (50%) of excess cash flow (as such terms are defined in
the indenture).
F-12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("senior credit facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities initially could not exceed $25,000, including
aggregate borrowings under the working capital facility up to $15,000. On April
29, 2004, the Company amended the senior credit facility to increase the
aggregate amount of borrowings available under such working capital and letter
of credit facilities from $25,000 to $27,500 and to increase the amount of
aggregate borrowings available under the working capital facility from $15,000
to $17,500. As of September 24, 2004, the Company amended the senior credit
facility to: (i) increase the aggregate amount of borrowings available under
such working capital and letter of credit facilities from $27,500 to $32,500;
the amount of aggregate borrowings available under the working capital facility
remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude
charges and expenses related to unsuccessful acquisitions and related financings
in an aggregate amount not to exceed $5,300 for the period beginning January 1,
2004 and ending June 30, 2004; (iii) amend the definition of Additional
Indebtedness to exclude advances under the working capital facility; (iv) amend
the definition of Permitted Investments to allow other investments made during
the period from January 1, 2004 through June 30, 2004 in an aggregate amount not
to exceed $336; and (v) establish covenant EBITDA levels for the periods ending
after June 30, 2004. The amendment was effective June 30, 2004 for items (i),
(ii) and (iii); effective January 1, 2004 for item (iv); and effective September
24, 2004 for all other items.
Borrowings under the senior credit facility are subject to a borrowing base
formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
Pursuant to the terms of an intercreditor agreement, the security interest
securing the Senior Secured Notes and the guarantees made by the Company's
domestic restricted subsidiaries are subordinated to a lien securing the senior
credit facility.
4. Prince Transactions
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72,184 to $16,517 (accreted through the
Closing Date) by means of the redemption of all of its shares of Series B
Preferred Stock and a portion of its Series C Preferred Stock; (iii) the
termination of $2,250 in annual management advisory fees payable by the Company
to Palladium; (iv) a cash payment of $10,000 to the Palladium Investors in
respect of the portion of the Company's Preferred Stock not exchanged in
consideration of the business and assets of PMC; (v) the agreement of the Buyer
to pay the Company for advisory fees for the next three years of $1,000, $500,
and $200, respectively (which were pre-paid at closing by the Buyer and
satisfied for $1,300, the net present value of such payments); and (vi) the
Buyer agreed to supply manganous oxide and red iron oxide products and to
provide certain mineral blending services to the Company's Prince Agriproducts
subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer
with certain laboratory, MIS and telephone services, all on terms substantially
consistent with the historic relationship between Prince Agri and PMC, and to
lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an
agreement to receive certain treasury services from Palladium for $100 per year.
Pursuant to definitive agreements, the Company made customary representations,
warranties and environmental and other
F-13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
indemnities, agreed to a post-closing working capital adjustment, paid $3,958 in
full satisfaction of all intercompany debt owed to PMC, paid a closing fee to
Palladium of $500, made certain capital expenditure adjustments included as part
of the intercompany settlement amount, and agreed to pay for certain
out-of-pocket transaction expenses. PMC retained $414 of its accounts
receivable. The Company established a $1,000 letter of credit escrow for two
years to secure its working capital adjustment and certain indemnification
obligations. The Company agreed to indemnify the Palladium Investors for a
portion, at the rate of $0.65 for every dollar, of the amount they receive in
respect of the disposition of Buyer for less than $21,000, up to a maximum
payment by the Company of $4,000 (the "Backstop Indemnification Amount"). The
Backstop Indemnification Amount would be payable on the earlier to occur of July
1, 2008 or six months after the redemption date of all of the Company's Senior
Secured Notes due 2007 if such a disposition closes prior to such redemption and
six months after the closing of any such disposition if the disposition closes
after any such redemption. The Company's obligations with respect to the
Backstop Indemnification Amount will cease if the Palladium Investors do not
close the disposition of Buyer by January 1, 2009. The definition of "Equity
Value" in the Company's Certificate of Incorporation was amended to reduce the
multiple of trailing EBITDA payable in connection with any future redemption of
Series C Preferred to 6.0 from 7.5
The excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions was
recorded as a decrease to accumulated deficit on the Company's consolidated
balance sheet at December 31, 2003, and was calculated as follows:
Series B & C Redeemable Preferred Stock:
Accreted value pre-transaction $72,184
Accreted value post-transaction 16,517
-------
Reduction in redeemable preferred stock 55,667
-------
Assets Divested and Costs Incurred:
PMC net assets divested 7,430
Cash paid to Palladium Investors for:
-reduction of redeemable preferred stock 10,000
-settlement of PMC intercompany debt 3,958
-working capital adjustment 1,331
-closing fee 500
Transaction costs 8,310
Contingent Backstop Indemnification Amount accrued 4,000
-------
Total assets divested and costs and liabilities incurred 35,529
-------
Excess amount recorded as a decrease to accumulated deficit $20,138
=======
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC were:
For the Years Ended June 30,
----------------------------------
2004 2003 2002
---- ---- ----
Net sales $11,118 $22,332 $21,451
Operating income 2,278 3,579 3,640
Depreciation and amortization 487 956 966
The divestiture of PMC has not been reflected as a discontinued operation
due to the existence of the Backstop Indemnification and continuing supply and
service agreements.
F-14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
5. Discontinued Operations
The Company shutdown Odda and divested Carbide during 2003, and sold MRT and
shutdown La Cornubia during 2004. These businesses have been classified as
discontinued operations.
Odda and Carbide
Operating results and loss on disposal of Odda and Carbide were:
For the Years Ended June 30,
----------------------------
2003 2002
-------- --------
OPERATING RESULTS:
Net sales $ 11,217 $ 31,219
Cost of goods sold 13,723 46,116
Selling, general and
administrative expenses 3,175 12,812
Asset writedowns 7,781 --
Other income 2,327 3,699
-------- --------
(Loss) before income taxes (11,135) (24,010)
(Benefit) for income taxes (58) (1,170)
-------- --------
(Loss) from operations $(11,077) $(22,840)
======== ========
Depreciation and amortization $ 894 $ 17,676
======== ========
LOSS ON DISPOSAL:
Assets $ (3,359)
Liabilities 6,432
Unsecured debt 2,488
Currency translation adjustment (6,244)
--------
(Loss) on disposal $ (683)
========
F-15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Mineral Resource Technologies, Inc.
The Company sold MRT on August 28, 2003. Net proceeds, after transaction
costs, were approximately $13,836. Operating results, gain on sale and balance
sheet items of MRT were:
For the Years Ended June 30,
------------------------------------
2004 2003 2002
-------- -------- --------
OPERATING RESULTS:
Net sales $ 3,327 $ 18,671 $ 17,045
Cost of goods sold 3,135 19,943 17,676
Selling, general and
administrative expenses 316 2,182 2,299
-------- -------- --------
(Loss) before income taxes (124) (3,454) (2,930)
Provision for income taxes -- -- --
-------- -------- --------
(Loss) from operations $ (124) $ (3,454) $ (2,930)
======== ======== ========
Depreciation and amortization $ -- $ 1,309 $ 1,192
======== ======== ========
GAIN ON SALE:
Current Assets $ (5,813)
Property, plant & equipment-net
and other assets (10,703)
Liabilities 2,911
Net proceeds of sale 13,836
--------
Gain on disposal $ 231
========
As of
June 30, 2003
-------------
BALANCE SHEET:
Trade receivables $ 2,633
Other receivables 304
Inventories 1,643
Prepaid expenses and other current assets 362
-------
Current assets from discontinued operations $ 4,942
=======
Property, plant and equipment, net $ 9,999
Intangibles 196
Other assets 455
-------
Other assets from discontinued operations $10,650
=======
Accounts payable $ 1,466
Accrued expenses and other current liabilities 585
-------
Current liabilities from discontinued operations $ 2,051
=======
Other liabilities $ 198
-------
Other liabilities from discontinued operations $ 198
=======
F-16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
La Cornubia, S.A.
During June 2004 the Company determined that it would no longer fund the
operations of La Cornubia. On June 30, 2004, La Cornubia filed for bankruptcy in
France. The bankruptcy is proceeding in accordance with French law. The Company
has been advised that, as a result of the bankruptcy, the creditors of La
Cornubia have recourse only to the assets of La Cornubia. The Company removed
all assets, liabilities, and cumulative translation adjustments related to La
Cornubia from the Company's consolidated balance sheet as of June 30, 2004, and
recorded a loss on disposal of discontinued operations. The Company obtained the
consent of a majority of the holders of its senior secured notes due 2007 and
its senior subordinated notes due 2008 to amend the indentures governing these
notes in such a manner that the bankruptcy of La Cornubia would not create an
event of default thereunder. The Company also obtained a waiver under its senior
credit facility so that the bankruptcy of La Cornubia would not constitute an
event of default under the senior credit facility.
Operating results, loss on disposal and balance sheet items of La Cornubia
were:
For the Years Ended June 30,
-------------------------------------
2004 2003 2002
-------- -------- --------
OPERATING RESULTS:
Net sales $ 13,918 $ 13,479 $ 11,873
Cost of goods sold 13,723 12,528 11,144
Selling, general and
administrative expenses 1,686 1,310 1,641
Other income 102 389 263
Interest (expense) - net (94) (60) (78)
-------- -------- --------
(Loss) before income taxes (1,483) (30) (727)
Provision for income taxes 18 16 62
-------- -------- --------
(Loss) from operations $ (1,501) $ (46) $ (789)
======== ======== ========
Depreciation and amortization $ 400 $ 359 $ 325
======== ======== ========
LOSS ON DISPOSAL:
Current Assets $ (5,085)
Property, plant & equipment-net
and other assets (2,557)
Liabilities 3,614
Unsecured debt 2,167
Currency translation adjustment (459)
--------
(Loss) on disposal $ (2,320)
========
F-17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
As of
June 30,
2003
-------
BALANCE SHEET:
Trade receivables $2,957
Other receivables 139
Inventories 918
Prepaid expenses and other current assets 348
------
Current assets from discontinued operations $4,362
======
Property, plant and equipment, net $2,535
Other assets 140
------
Other assets from discontinued operations $2,675
======
Accounts payable $1,560
Accrued expenses and other current liabilities 910
Unsecured debt 1,036
------
Current liabilities from discontinued operations $3,506
======
Other liabilities $ 975
------
Other liabilities from discontinued operations $ 975
======
6. Property, Plant and Equipment
Property, plant and equipment was:
As of June 30,
--------------------------
2004 2003
-------- --------
Land $ 5,657 $ 5,816
Buildings and improvements 27,925 29,841
Machinery and equipment 105,308 106,026
-------- --------
138,890 141,683
Less: accumulated depreciation 80,104 77,778
-------- --------
$ 58,786 $ 63,905
======== ========
Certain of the buildings of Koffolk are on land leased for a nominal amount
from the Israel Land Authority. The lease expires on July 9, 2027.
Depreciation expense was $9,122, $9,202 and $10,235 for 2004, 2003 and
2002, respectively.
7. Related Party Transactions
The Company owns approximately $2,300 par value of preferred stock of a
pharmaceutical company. The principal common stockholder of the Company owns
approximately 15% voting common stock interest in the pharmaceutical company,
acquired for approximately $500. The preferred stock investment, included in
other assets, has a net carrying value of $1,610 at June 30, 2004.
F-18
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
A subsidiary of the Company leases the property underlying its Santa Fe
Springs, California plant from a limited partnership controlled by common
shareholders of the Company. The lease requires annual base rent of $250 and
terminates on December 31, 2008. The Company is responsible under the lease
agreement to pay all real property taxes.
In accordance with the terms of the Prince Transactions (Note 4) the Buyer
paid the Company advisory fees of $500 for the year ended June 30, 2004. The
Buyer also supplied manganous oxide and red iron oxide products, and provided
certain mineral blending services to the Company's Prince Agriproducts
subsidiary ("Prince Agri") for which Prince Agri paid $2,149 during the year
ended June 30, 2004. Prince Agri provided the Buyer with certain laboratory, MIS
and telephone services, and leased to Buyer office space in Quincy, Illinois for
which the buyer paid Prince Agri $421 during the year ended June 30, 2004. The
Company also has an agreement to receive certain treasury services from the
Palladium Investors for $100 per year. Prior to the Prince Transactions an
annual management advisory fee of $2,250 was payable to the Palladium Investors.
Payments were due quarterly in advance and were charged to general and
administrative expense. The management fee was $1,125, $2,250 and $2,250 for
2004, 2003 and 2002, respectively.
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were:
As of June 30,
-------------------------
2004 2003
------- -------
Employee related expenses $11,444 $10,003
Payments due to Pfizer -- 9,040
Interest and tax accruals 4,836 9,249
Other accrued liabilities 23,730 12,407
------- -------
$40,010 $40,699
======= =======
9. Debt
Loans Payable to Banks
At June 30, 2004, loans payable to banks included $10,996 under the senior
credit facility with Wells Fargo Foothill, Inc. The weighted average interest
rate under the senior credit facility from its inception at October 21, 2003
through June 30, 2004 was 8.0%. At June 30, 2004, the Company had $6,504 of
borrowings available under the borrowing base formula in effect for the working
capital facility that is provided under the senior credit facility.
On October 21, 2003, the Company entered into a new senior credit facility
with Wells Fargo Foothill, Inc., providing for a working capital facility plus a
letter of credit facility. The aggregate amount of borrowings under such working
capital and letter of credit facilities may not exceed $25,000, including
aggregate borrowings under the working capital facility of up to $15,000. On
April 29, 2004, the Company amended the senior credit facility to increase the
aggregate amount of borrowings available under such working capital and letter
of credit facilities from $25,000 to $27,500 and to increase the amount of
aggregate borrowings available under the working capital facility from $15,000
to $17,500. As of September 24, 2004, the Company amended the senior credit
facility to: (i) increase the aggregate amount of borrowings available under
such working capital and letter of credit facilities from $27,500 to $32,500;
the amount of aggregate borrowings available under the working capital facility
remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude
charges and expenses related to unsuccessful acquisitions and related financings
in an aggregate amount not to exceed $5,300 for the period beginning January 1,
2004 and ending June 30, 2004; (iii) amend the definition of Additional
Indebtedness to exclude advances under the working capital facility; (iv) amend
the definition of Permitted Investments to allow other investments made during
the period from January 1, 2004 through June 30, 2004 in an aggregate amount not
to exceed $336; and (v) establish covenant EBITDA levels for the periods after
June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and
(iii); effective January 1, 2004 for item (iv); and effective September 24, 2004
for all other items.
F-19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Borrowings under the senior credit facility are subject to a borrowing base
formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
As of June 30, 2004, the Company was in compliance with the financial
covenants of the amended senior credit facility. The senior credit facility
requires, among other things, the maintenance of certain levels of trailing
consolidated and domestic EBITDA (earnings before interest, taxes, depreciation
and amortization) calculated on a monthly basis, and an acceleration clause
should an event of default (as defined in the agreement) occur. In addition,
there are certain restrictions on additional borrowings, additional liens on the
Company's assets, guarantees, dividend payments, redemption or purchase of the
Company's stock, sale of subsidiaries' stock, disposition of assets,
investments, and mergers and acquisitions.
The senior credit facility contains a lock-box requirement and a material
adverse change clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the consolidated balance sheet.
Long-Term Debt
As of
-----------------------------
June 30, 2004 June 30, 2003
------------- -------------
Senior secured notes due December 1, 2007 $105,000 $ --
Senior subordinated notes due June 1, 2008 48,029 100,000
Foreign bank loans 6,237 3,906
Pfizer promissory note -- 20,075
Bank capital expenditure facility -- 1,496
Capitalized lease obligations and other 103 910
-------- --------
159,369 126,387
Less: current maturities 1,351 24,124
-------- --------
$158,018 $102,263
======== ========
Senior Secured Notes due 2007
In October 2003 the Company issued 105,000 units, consisting of $85,000 of
13% Senior Secured Notes due 2007 (the "US Senior Notes") and $20,000 of 13%
Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the
"Dutch Senior Notes" and, together with the US Senior Notes, the "Senior Secured
Notes"), an indirect wholly-owned subsidiary of the Company (the "Dutch
issuer").
F-20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of the Company (the "US issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all the US Issuer's domestic restricted subsidiaries,
and the Dutch Senior Notes are guaranteed on a senior secured basis by the US
Issuer and by the restricted subsidiaries of the Dutch issuer, presently
consisting of Phibro Animal Health SA. The US Senior Notes and related
guarantees are collateralized by substantially all of the US Issuer's assets and
the assets of its domestic restricted subsidiaries, other than real property and
interests therein, including a pledge of all the capital stock of such domestic
restricted subsidiaries. The Dutch Senior Notes and related guarantees are
collateralized by a pledge of all the accounts receivable, a security interest
or floating charge on the inventory to the extent permitted by applicable law,
and a mortgage on substantially all of the real property of the Dutch issuer and
each of its restricted subsidiaries, a pledge of 100% of the capital stock of
each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by
the Dutch issuer to its restricted subsidiaries and substantially all of the
assets of the U.S. guarantors, other than real property and interests therein.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires the Company to make certain offers to
purchase Senior Secured Notes upon a change of control, upon certain asset sales
and from fifty percent (50%) of excess cash flow (as such terms are defined in
the indenture).
The indenture contains certain covenants with respect to the Company and the
guarantors, which restrict, among other things, (a) the incurrence of additional
indebtedness, (b) the payment of dividends and other restricted payments, (c)
the creation of certain liens, (d) the sale of assets, (e) certain payment
restrictions affecting subsidiaries, and (f) transactions with affiliates. The
indenture restricts the Company's ability to consolidate, or merge with or into,
or to transfer all or substantially all of its assets to, another person.
Senior Subordinated Notes due 2008
The Company issued $100,000 aggregate principal amount of 9-7/8% Senior
Subordinated Notes due 2008 ("Senior Subordinated Notes") of which $51,971
principal amount was repurchased with proceeds of the Senior Secured Notes. The
Senior Subordinated Notes are general unsecured obligations of the Company and
are subordinated in right of payment to all existing and future senior debt (as
defined in the indenture agreement of the Company) and rank pari passu in right
of payment with all other existing and future senior subordinated indebtedness
of the Company. The Senior Subordinated Notes are unconditionally guaranteed on
a senior subordinated basis by the domestic restricted subsidiaries of the
Company. Additional future domestic subsidiaries may become guarantors under
certain circumstances.
The indenture contains certain covenants with respect to the Company and the
Guarantors, which restrict, among other things, (a) the incurrence of additional
indebtedness, (b) the payment of dividends and other restricted payments, (c)
the creation of certain liens, (d) the sale of assets, (e) certain payment
restrictions affecting subsidiaries, and (f) transactions with affiliates. The
indenture restricts the Company's ability to consolidate, or merge with or into,
or to transfer all or substantially all of its assets to, another person.
Foreign Bank Loans
The bank loans of the Company's Koffolk Ltd. (Israel) subsidiary are
collateralized by its receivables and inventory, accrue interest at LIBOR plus
1.25%, and are repayable in equal quarterly payments through 2005. The LIBOR
rate was 1.15% at June 30, 2004.
The Company's foreign subsidiaries have aggregate credit lines of $11,044.
At June 30, 2004, the Company had $4,807 of borrowings available under these
credit lines.
F-21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Aggregate Maturities of Long-Term Debt
The aggregate maturities of long-term debt as of June 30, 2004 were:
Year Ended June 30,
- -------------------
2005 $ 1,351
2006 4,127
2007 --
2008 153,891
2009 --
--------
Total $159,369
========
10. Redeemable Common Stock of Subsidiary
A key executive of the Company has a 2.1% ownership interest in the common
stock of a subsidiary. The subsidiary's shares are redeemable at fair market
value, based on independent appraisal, upon the death, disability or termination
of the key executive. The Company and its subsidiary have entered into a
severance agreement with the executive for payments based on a multiple of
pre-tax earnings (as defined). The payments are subject to certain restrictions
pursuant to terms of the senior credit facility. At June 30, 2004 no severance
payments would have been due upon termination.
11. Redeemable Preferred Stock
Effective December 26, 2003 (the "Closing Date"), the Company entered into
the Prince Transactions with the Palladium Investors (Note 4). Pursuant to
definitive purchase and other agreements executed on and effective as of the
Closing Date, the Prince Transactions included the following elements which
relate to the Company's Redeemable Preferred Stock: the reduction of the value
of the Company's Preferred Stock owned by the Palladium Investors from $72,184
(25,000 Series B shares and 20,000 Series C shares) to $16,517 (accreted through
the Closing Date) (10,591 Series C shares) by means of the redemption of all of
its shares of Series B Preferred Stock and a portion of its Series C Preferred
Stock; the termination of $2,250 in annual management advisory fees payable by
the Company to Palladium; a cash payment of $10,000 to the Palladium Investors
in respect of the portion of the Company's Preferred Stock not exchanged in
consideration of the business and assets of PMC; and the agreement of the
Palladium Investors to pay the Company for advisory fees for the next three
years of $1,000, $500, and $200, respectively (which were pre-paid at closing by
the Palladium Investors and satisfied for $1,300, the net present value of such
payments). The Company has an agreement to receive certain treasury services
from the Palladium Investors for $100 per year.
The redeemable preferred stock is entitled to cumulative cash dividends,
payable semi-annually, at 15% per annum of the liquidation value. The redeemable
Preferred C stock is entitled to the Liquidation Value plus a percentage of the
equity value of the Company, as defined in the amended Certificate of
Incorporation. The equity value is calculated as a multiple of earnings before
interest, taxes, depreciation and amortization ("EBITDA") of the Company's
business ("Equity Value").
On the third closing anniversary and on each closing anniversary
thereafter, the Company may redeem, for cash only, in whole the Preferred C, at
the Liquidation Value plus the Equity Value payment. At any time after the
redemption of the Company's Senior Subordinated Notes (due June 2008), Palladium
Investors shall have the right to require the Company to redeem, for cash, the
Preferred C at the Liquidation Value plus the Equity Value payment.
Dividends of $6,042, $8,808 and $7,623 for the years ended June 30, 2004,
2003 and 2002, respectively, were accrued on the preferred shares and charged to
retained earnings. Equity Value of $5,421, $3,470 and $0 for the years ended
June 30, 2004, 2003 and 2002, respectively, was accrued and charged to retained
earnings.
F-22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
As of
--------------------------------
June 30, 2004 June 30, 2003
------------- -------------
Series B
Value at issuance $ -- $25,000
Accrued dividends -- 11,339
Series C
Value at issuance 10,591 20,000
Accrued dividends 7,200 9,072
Accreted equity value 6,887 3,470
------- -------
Total redeemable preferred stock $24,678 $68,881
======= =======
The agreement with the Palladium Investors contains covenants which
restrict, without the consent of at least one director designated by the
Palladium Investors (or if no such director is then serving on the Board, at
least one of the Palladium Investors), certain (a) issuances of equity
securities, (b) sales of assets in excess of $10,000, (c) purchases of business
and other investments in excess of $10,000, (d) incurrence of indebtedness for
borrowed money in excess of $12,500, (e) redemptions, acquisitions or other
purchases of equity securities, (f) transactions with officers, directors,
stockholders or employees or any family member or affiliate thereof in excess of
$500, (g) compensation and benefits of certain officers, and (h) transactions
involving a change of control.
12. Common Stock and Paid-in Capital
Common Stock:
Common stock at June 30, 2004 and 2003 was:
Authorized
Shares Issued Shares Amount at Par
---------- ------------ -------------
Class A common stock................. 16,200 12,600 $.10
Class B common stock................. 14,100 11,888 $.10
------ ------
30,300 24,488
The entire voting power is vested in the holders of Class A common stock,
except the holders of Class A common stock are entitled to elect all but three
of the directors. The holders of Class B common stock are entitled to elect one
director, and the purchasers of the Preferred B and Preferred C are entitled by
contract to elect two directors. No dividends may be paid to common stockholders
until all dividends have been paid to preferred stockholders. Thereafter,
holders of Class A common stock shall receive dividends, when and as declared by
the directors, at the rate of 5.5% of the par value of such stock
(non-cumulative). After all declared dividends have been paid to Class A common
stockholders, dividends may be declared and paid to the holders of Class B
common stock. In the event of any complete liquidation, dissolution, winding-up
of the business, or sale of all the assets of the Company, and after the
redemption of the preferred stock, the Class A common stockholders are entitled
to a distribution equal to the par value of the stock plus declared and unpaid
dividends. Thereafter, the remaining assets of the Company shall be distributed
to the holders of Class B common stock.
Redeemable Common Stock:
Pursuant to terms of an agreement with a minority shareholder, who is also
an officer of the Company, the Company is required to purchase at book value,
the Class B shares of such shareholder upon his retirement, death, disability,
or the termination of his employment. Should such shareholder elect to sell his
shares, the Company has a right of first offer and an option to purchase the
shares. The Company records a liability for the redemption amount as calculated
at each balance sheet date. No liability was recorded as of June 30, 2004 and
2003. Income of $378 was recorded during 2002 to adjust the shares to redeemable
value.
F-23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
13. Employee Benefit Plans
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible domestic nonunion employees who meet
certain requirements of age, length of service and hours worked per year. The
Company's Belgium subsidiary maintains a defined contribution and defined
benefit plan for eligible employees. The benefits provided by the plans are
based upon years of service and the employees' average compensation, as defined.
The measurement date for the domestic and international pension plans was June
30, 2004 and 2003, respectively.
Reconciliations of changes in benefit obligations, plan assets, and funded
status of the plans were:
Domestic International
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Change in Benefit Obligation
Benefit obligation at beginning
of year $ 15,846 $ 11,821 $ 6,595 $ 4,251
Service cost 1,260 1,056 467 310
Employee contributions -- -- 27 100
Interest cost 891 784 374 259
Benefits paid (595) (243) (3) (29)
Actuarial (gain) or loss (251) (663) (475) 879
Curtailment (922) -- -- --
Change in Discount Rate (786) 3,092 -- --
Exchange rate impact -- -- 338 825
-------- -------- -------- --------
Benefit obligation at
end of year $ 15,443 $ 15,846 $ 7,323 $ 6,595
======== ======== ======== ========
At June 30, 2004 and 2003, the accumulated benefit obligation was $13,075
and $12,458, respectively, for domestic pension plans and $4,383 and $4,248,
respectively, for international pension plans.
Change in Plan Assets
Fair value of plan assets at
beginning of year $ 10,387 $ 9,717 $ 4,566 $ 2,882
Actual return on plan assets 1,069 537 435 204
Employer contributions 935 376 558 841
Employee contributions -- -- 27 100
Benefits paid (595) (243) (3) (29)
Exchange rate impact -- -- 245 568
-------- -------- -------- --------
Fair value of plan assets at
end of year $ 11,795 $ 10,387 $ 5,828 $ 4,566
======== ======== ======== ========
Funded Status
Funded status of the plan $ (3,648) $ (5,459) $ (1,495) $ (2,029)
Unrecognized net actuarial
(gain) or loss 152 2,358 368 961
Unrecognized prior service cost (337) (554) -- --
Unrecognized transition
obligation/(asset) (8) (12) -- --
-------- -------- -------- --------
(Accrued) pension cost $ (3,842) $ (3,666) $ (1,127) $ (1,068)
======== ======== ======== ========
The Company expects to contribute $990 and $602 to its Domestic and
International plans, respectively, during fiscal 2005. The Company's policy is
to fund the pension plans in amounts which comply with contribution limits
imposed by law.
F-24
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Components of net periodic pension expense were:
2004 2003 2002
------- ------- -------
Domestic Pension Expense
Service cost - benefits earned during the year $ 1,260 $ 1,056 $ 879
Interest cost on benefit obligation 891 784 714
Expected return on plan assets (846) (756) (709)
Amortization of initial unrecognized
net transition (asset) (3) (3)
(3)
Amortization of prior service costs (153) (162) (165)
Amortization of net actuarial loss (gain) 25 (57)
(31)
Curtailment benefit (64) -- --
------- ------- -------
Net periodic pension cost - domestic $ 1,110 $ 862 $ 685
======= ======= =======
International Pension Expense
Service cost - benefits earned during the year $ 467 $ 310 $ 217
Interest cost on benefit obligation 374 259 164
Expected return on plan assets (300) (203) (123)
Amortization of net actuarial loss 22 -- --
------- ------- -------
Net periodic pension cost - international $ 563 $ 366 $ 258
======= ======= =======
Significant actuarial assumptions for the plans were:
2004 2003 2002
---- ---- ----
Domestic Actuarial Assumptions
Discount rate for service and interest 5.8% 7.1% 7.5%
Expected rate of return on plan assets 7.5% 7.5% 7.5%
Rate of compensation increase 3.0%-4.5% 3.0%-4.5% 3.0%-4.5%
Discount rate for year-end benefit
obligation 6.1% 5.8% 7.1%
International Actuarial Assumptions
Discount rate for service and interest 5.5% 5.8% 5.8%
Expected rate of return on plan assets 6.0% 6.0% 6.0%
Rate of compensation increase 3.0% 3.0% 3.0%
Discount rate for year-end benefit
obligation 5.5% 5.5% 5.8%
Estimated future benefit payments, including benefits attributable to future
service, are as follows:
Domestic International
-------- -------------
2005 $ 295 $ 37
2006 301 38
2007 311 40
2008 451 41
2009 508 42
2010-2014 4,500 1,817
F-25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
The Company's domestic plan target allocations for fiscal 2005 and the
weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as
follows:
2005 2004 2003
---- ---- ----
Domestic Plan Asset Allocations
Debt Securities 45% - 55% 50% 59%
Equity Securities 15% - 25% 19% 9%
Other 25% - 35% 31% 32%
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on the
median of the target allocation of each class. Equity securities are expected to
return 8% to 10% over the long-term, while debt securities are expected to
return 4% to 6%. Based on historical experience, the Committee expects that the
Plan's asset managers will provide a modest (1/2% to 1% per annum) premium to
their respective market benchmark indices.
The investment policy and strategy is to earn a long-term investment return
sufficient to meet the obligations of the Plan, while assuming a moderate amount
of risk in order to maximize investment return. In order to achieve this goal,
assets are invested in a diversified portfolio consisting of equity securities,
debt securities, limited partnerships and other investments in a manner
consistent with ERISA's fiduciary requirements.
The Company's international plan target allocations for fiscal 2005 and the
weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as
follows:
2005 2004 2003
---- ---- ----
International Plan Asset Allocations
Debt Securities 59% 62% 79%
Equity Securities 25% 21% 20%
Other 16% 17% 1%
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on the
target allocation for each class. Equity securities are expected to return 7.5%
over the long-term, while debt securities are expected to return 5.5%.
The Company assumed the liability for the International pension plan during
2002 as part of the MFA acquisition.
In addition to Belgium, most of the Company's foreign subsidiaries have
retirement plans covering substantially all employees. Contributions to these
plans are generally deposited under fiduciary-type arrangements. Benefits under
these plans primarily are based on compensation levels. Funding policies are
based on legal requirements and local practices. Expense under these plans was
$585, $522 and $534 for 2004, 2003 and 2002, respectively.
The Company and its domestic subsidiaries provide a 401(k) savings plan,
under which an employee may make a pre-tax contribution of up to 60% of base
compensation. The Company makes a non-matching contribution equal to 1% of the
employee's base compensation and a matching contribution equal to 50% of the
employee's contribution up to the first 3% of base compensation and 25% of the
employee's contribution from 3% to 6% of base compensation. All employee
contributions are subject to the maximum amounts permitted for federal income
tax purposes. Employees vest in the Company's matching contributions over 5
years. The Company's contribution was $502, $528 and $539 in 2004, 2003 and
2002, respectively.
F-26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
The Company has a deferred compensation and supplemental retirement plan for
certain senior executives. The benefits provided by the plan are based upon
years of service and the executives' average compensation, subject to certain
limits. The plan also provides for death benefits before retirement. Expense
under this plan was $259, $249, and $204 in 2004, 2003 and 2002, respectively.
The aggregate liability under this plan amounted to $2,018 and $1,678 at June
30, 2004 and 2003, respectively. To assist in funding the benefits of the plan,
the Company invested in corporate-owned life insurance policies, through a
trust, which at June 30, 2004 and 2003 had cash surrender values of $1,481 and
$1,299, respectively, and are included in other assets.
The Company has an executive income program to provide a pre-retirement
death benefit and a supplemental retirement benefit for certain senior
executives. The aggregate liability under this plan amounted to $416 and $385 at
June 30, 2004 and 2003, respectively. To assist in funding the benefits of the
plan, the Company invested in split-dollar life insurance policies, which at
June 30, 2004 and 2003 had cash surrender values to the Company of $1,529 and
$1,392, respectively, and are included in other assets.
14. Income Taxes
Income (loss) from continuing operations before income taxes was:
2004 2003 2002
-------- -------- --------
Domestic .................................... $ 27,587 $ 3,855 $ (5,507)
Foreign ..................................... (3,054) 3,906 (4,937)
-------- -------- --------
Income (loss) from continuing operations
before income taxes ....................... $ 24,533 $ 7,761 $(10,444)
======== ======== ========
Components of the provision for income taxes were:
2004 2003 2002
-------- -------- --------
Current tax provision (benefit):
Federal .................................. $ 563 $ -- $ --
State and local .......................... 1,333 516 (256)
Foreign .................................. 5,747 3,084 3,785
-------- -------- --------
Total current tax provision .............. 7,643 3,600 3,529
-------- -------- --------
Deferred tax provision (benefit):
Federal .................................. 10,150 1,705 (1,225)
State and local .......................... (1,396) (345) (590)
Foreign .................................. (1,671) 850 (1,673)
Change in valuation allowance -domestic .. (8,754) (1,360) 14,726
-foreign ... 1,997 5,610 --
-------- -------- --------
Total deferred tax provision ............. 326 6,460 11,238
-------- -------- --------
Provision for income taxes .................. $ 7,969 $ 10,060 $ 14,767
======== ======== ========
F-27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Reconciliations of the Federal statutory rate to the Company's effective
tax rate are:
2004 2003 2002
---- ---- ----
Federal income tax rate ...................... 35.0% 35.0% (35.0)%
State and local taxes, net of federal
income tax effect .......................... 3.5 1.4 (4.9)
Foreign tax rate differences and taxes
in certain profitable foreign jurisdictions 22.9 33.2 50.8
Change in valuation allowance ................ (41.4) 55.0 131.8
Gain not taxable for book purposes ........... 10.4 -- --
Expenses with no tax benefit ................. 1.7 4.4 1.0
Other ........................................ 0.3 0.6 (2.3)
---- ----- -----
Effective tax rate ........................... 32.4% 129.6% 141.4%
==== ===== =====
Most of the investments in fixed assets of the Company's Israeli subsidiary
have been granted "approved enterprise" status under Israeli law. The subsidiary
is also a "foreign investors' company" as defined by Israeli law. This status
entitles the subsidiary to reduced tax rates. The entitlement of the reduced tax
rates is conditional upon the subsidiary fulfilling the conditions stipulated by
Israeli law, regulations published there-under and the instruments of approval
for the specific investments in approved enterprises. In the event of failure to
comply with these conditions, the benefits may be canceled and the subsidiary
may be required to refund the amount of the benefits, in whole or in part, with
the addition of interest. The periods of benefits expire in various years
through 2010.
Provision has not been made for United States or additional foreign taxes on
undistributed earnings of foreign subsidiaries of approximately $39,200, whose
earnings have been or are intended to be reinvested. It is not practicable at
this time to determine the amount of income tax liability that would result
should such earnings be repatriated.
The tax effects of significant temporary differences that comprise deferred
tax assets and liabilities at June 30, 2004 and 2003 were:
As of June 30,
-----------------------
2004 2003
-------- --------
Deferred tax assets:
Employee benefits ............................. $ 3,274 $ 3,194
Property, plant and equipment ................. 475 686
Insurance ..................................... 350 341
Receivables allowances ........................ 724 770
Inventory ..................................... 3,441 4,588
Environmental remediation ..................... 1,322 1,232
Alternative minimum tax ....................... 701 163
Net operating loss carry forwards -domestic ... 11,645 20,186
-foreign .... 10,432 1,290
Other ......................................... 1,333 2,059
-------- --------
33,697 34,509
Valuation allowance ........................... (30,045) (32,954)
-------- --------
3,652 1,555
Deferred tax liabilities
Property, plant and equipment ................. (2,727) (2,354)
Other ......................................... (2,649) --
-------- --------
(5,376) (2,354)
-------- --------
Net deferred tax liability ....................... $ (1,724) $ (799)
======== ========
F-28
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Deferred taxes are included in the following line items in the consolidated
balance sheets:
2004 2003
------- -------
Prepaid expenses and other current assets .......... $ 502 $ 543
Accrued expenses and other current liabilities ..... (138) (111)
Other assets ....................................... 669 624
Other liabilities .................................. (2,757) (1,855)
------- -------
$(1,724) $ (799)
======= =======
The Company has incurred domestic and foreign losses in recent years and
has reassessed the likelihood of recovering net deferred tax assets, resulting
in the recording of valuation allowances due to the uncertainty of future
profitability. The Company recorded income tax expense and increased the
valuation allowances by $5,610 and $11,594 during the fourth quarters of 2003
and 2002, respectively. The Company will continue to evaluate the likelihood of
recoverability of these deferred tax assets based upon actual and expected
operating performance.
The valuation allowance for deferred tax assets was:
2004 2003 2002
-------- -------- --------
Balance at beginning of period $ 32,954 $ 18,495 $ 1,434
Change in valuation allowance (6,757) 4,250 14,726
Other adjustments 3,848 10,209 2,335
-------- -------- --------
Balance at end of period $ 30,045 $ 32,954 $ 18,495
======== ======== ========
The other adjustments in the valuation allowance consist primarily of
changes in the valuation allowance attributable to discontinued operations.
The Company has domestic federal net operating loss carry forwards of
approximately $25,000 that expire in 2019 through 2024, state net operating loss
carry forwards of approximately $55,000 that expire over various periods
beginning in 2005 and foreign net operating loss carry forwards of approximately
$30,000 that expire over various periods beginning in 2010.
15. Commitments and Contingencies
Leases:
The Company leases office, warehouse and manufacturing equipment and
facilities for minimum annual rentals (plus certain cost escalations) as
follows:
Non-Cancelable
Capital Operating
Year Ended June 30 Leases Leases
- ----------------- ------- ---------
2005 ........................................... $ 103 $1,524
2006 ........................................... 2 778
2007 ........................................... -- 568
2008 ........................................... -- 456
2009 ........................................... -- 167
Thereafter ..................................... -- 72
------ ------
Total minimum lease payments ................... $ 105 $3,565
======
Amounts representing interest .................. 2
------
Present value of minimum lease payments ........ $ 103
======
F-29
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Equipment under capitalized leases included in the consolidated balance
sheet at June 30, 2004 was $1,027, net of accumulated depreciation of $440.
Operating lease commitments include $1,125 with a related party controlled
by shareholders of the Company, as described in Related Party Transactions.
Rent expense under operating leases for 2004, 2003 and 2002 was $2,441,
$2,221 and $2,015, respectively.
Litigation:
On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and the
Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in
the United States District Court for the District of New Jersey, alleging that
the operations of CP at its Sewaren plant affected adjoining property owned by
Chevron and alleging that the Company, as the parent of CP, is also responsible
to Chevron. In July 2002, a phased settlement agreement was reached and a
Consent Order entered by the Court. That settlement is in the process of being
implemented. The Company's and CP's portion of the settlement for past costs and
expenses through the entry of the Consent Order was $495 and was included in
selling, general and administrative expenses in fiscal 2002 and was paid in
fiscal 2003. The Consent Order then provides for a period of due diligence
investigation of the property owned by Chevron. The investigation has been
conducted and the results are under review. The investigation costs are being
split with one other defendant, Vulcan Materials Company. Upon completion of the
review of the results of the investigation, a decision will be made whether to
opt out of the settlement or proceed. If no party opts out of the settlement,
the Company and CP will take title to the adjoining Chevron property, probably
through the use of a three-member New Jersey limited liability company. In
preparation to move forward, a limited liability company has been formed, with
Vulcan Materials Company as the third member. The Company also has commenced
negotiations with Chevron regarding its allocation of responsibility and
associated costs under the Consent Order. While the costs cannot be estimated
with any degree of certainty at this time, the Company believes that 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 the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency ("the EPA"),
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which such subsidiary agreed to
contribute up to $900 of which $635 has been paid as of June 30, 2004. Some
recovery from insurance and other sources is expected but has not been recorded.
The Company also has accrued its best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
agreement to pay $425 over a six year period ending October 2008.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 in full
settlement.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company is investigating the
matter, which relates to events in the 1950's and 1960's, but management does
not believe that the Company has any liability in this matter.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes that,
because its Sumter, South Carolina facility is distant from Turkey Creek and
does not discharge into Turkey Creek, there is a low probability of liability
associated with this matter.
F-30
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
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 its
financial position.
Environmental Remediation:
The Company's operations, properties and 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 remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters. 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
results. 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.
The Company's subsidiaries 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 its
subsidiaries are engaged in continuing investigation, remediation and/or
monitoring efforts to address contamination associated with their historic
operations.
The nature of the Company's and its subsidiaries' current and former
operations exposes the Company and its subsidiaries to the risk of claims with
respect to environmental matters and the Company cannot assure it will not incur
material costs and liabilities 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's financial position.
Based upon information available, the Company estimates the cost of
litigation proceedings described above and the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, and closure costs for closed sites to be
approximately $2,933, which is included in current and long-term liabilities in
the June 30, 2004 consolidated balance sheet (approximately $2,652 at June 30,
2003). Environmental provisions were $1,511, $1,610 and $2,148 for 2004, 2003
and 2002, respectively, and were included in selling, general and administrative
expenses in the consolidated statements of operations.
16. Guarantees
As part of the Prince Transactions (Note 4), as is normal for such
transactions, the Company has agreed to indemnify the Palladium Investors for
losses arising out of breach of representations, warranties and covenants. The
Company's maximum liability under such indemnifications is limited to $15,000.
The Company agreed to indemnify the Palladium Investors for a portion, at
the rate of $0.65 for every dollar, of the amount they receive in respect of the
disposition of Buyer for less than $21,000, up to a maximum payment by the
Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop
Indemnification Amount would be payable on the earlier to occur of July 1, 2008
or six months after the redemption date of all of the Company's Senior Secured
Notes due 2007 if such a disposition closes prior to such redemption and six
months after the closing of any such disposition if the disposition closes after
any such redemption. The Company's obligations with respect to the Backstop
Indemnification Amount will cease if the Palladium Investors do not close the
disposition of Buyer by January 1, 2009. The maximum potential Backstop
Indemnification Amount is included in other liabilities on the Company's
condensed consolidated balance sheet at June 30, 2004.
F-31
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
The Company established a $1,000 letter of credit escrow for two years to
collateralize its working capital adjustment and certain other indemnification
obligations relating to the Prince Transactions.
17. Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and cash equivalents and trade receivables. The
Company places its cash and cash equivalents with high quality financial
institutions in various countries. The Company sells to customers in a variety
of industries, markets and countries. Concentrations of credit risk with respect
to receivables arising from these sales are limited due to the large number of
customers comprising the Company's customer base. Ongoing credit evaluations of
customers' financial conditions are performed and, generally, no collateral is
required. The Company maintains appropriate reserves for uncollectible
receivables.
The carrying amounts of cash and cash equivalents, trade receivables, trade
payables and short-term debt is considered to be representative of their fair
value because of their short maturities. The fair values of the Company's Senior
Secured Notes and Senior Subordinated Notes are estimated based on quoted market
prices. At June 30, 2004 the fair values of the Company's Senior Secured Notes
and Senior Subordinated Notes were $114,450 and $43,706, respectively, and the
related carrying amounts were $105,000 and $48,029, respectively. At June 30,
2003 the fair value of the Company's Senior Subordinated Notes was $40,000 and
the related carrying amount was $100,000. The fair value of the Company's other
long-term debt does not differ materially from its carrying amount based on the
variable interest rate structure of these obligations.
The Company obtains third-party letters of credit in connection with
certain inventory purchases and insurance obligations. The contract values of
the letters of credit at June 30, 2004 and 2003 were $9,263 and $2,593,
respectively. The difference between the carrying values and fair values of
these letters of credit was not material.
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world and utilizes certain financial
instruments to manage its foreign currency and commodity exposures, primarily
related to forecasted transactions. To qualify a derivative as a hedge at
inception and throughout the hedge period, the Company formally documents the
nature and relationships between hedging instruments and hedged items, as well
as its risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected
terms of a forecasted transaction must be specifically identified, and it must
be probable that each forecasted transaction would occur. If it were deemed
probable that the forecasted transaction would not occur, the gain or loss would
be recognized in operations currently. Financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the
hedging instrument and the item being hedged, both at inception and throughout
the hedged period. The Company hedges forecasted transactions for periods not
exceeding the next twelve months. The Company does not engage in trading or
other speculative uses of financial instruments.
From time to time, the Company uses forward contracts and options to
mitigate its exposure to changes in foreign currency exchange rates and as a
means of hedging forecasted operating costs. When using options as a hedging
instrument, the Company excludes the time value from the assessment of
effectiveness. Pursuant to SFAS No. 133, all cumulative changes in a foreign
currency option's fair value are deferred as a component of accumulated other
comprehensive income until the underlying hedged transactions are reported on
the Company's consolidated statement of operations and comprehensive income. The
Company also utilizes, on a limited basis, certain commodity derivatives,
primarily on copper used in its manufacturing process, to hedge the cost of its
anticipated production requirements. The Company's foreign currency options and
forward contracts and commodity futures contracts were designated as cash flow
hedges and qualified for hedge accounting treatment. The Company deferred $9 and
$81 of cumulative gains (net of losses) on various copper futures contracts
designated as cash flow hedges as of June 30, 2004 and 2003, respectively.
The fair value of commodity contracts is estimated based on quotes from the
market makers of these instruments and represents the estimated amounts that the
Company would expect to receive or pay to terminate the agreements as of the
reporting date.
F-32
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
18. Business Segments
The Company's reportable segments are Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets more than 500 formulations
and concentrations of medicated feed additives and nutritional feed additives
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products. The Industrial Chemicals segment manufactures and markets a number of
chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, and aerospace industries. The Distribution segment
markets and distributes a variety of industrial, specialty and fine organic
chemicals and intermediates produced primarily by third parties. The All Other
segment manufactures and markets a variety of specialty custom chemicals and
copper-based fungicides. Intersegment sales and transfers were not significant.
The following segment data includes information only for continuing operations.
Animal Corporate
Health & Industrial All Expenses &
2004 Segment Detail Nutrition Chemicals Distribution Other Adjustments Total
- ------------------- --------- --------- ------------ ----- ----------- -----
Net Sales $265,421 $ 42,253 $ 30,861 $ 19,739 $ -- $358,274
Operating income/(loss) 33,307 2,899 2,900 2,301 (17,132) 24,275
Depreciation and amortization 8,263 2,123 11 419 2,367 13,183
Identifiable assets 185,601 26,146 7,715 5,696 16,211 241,369
Capital expenditures 3,850 2,216 6 115 57 6,244
Animal Corporate
Health & Industrial All Expenses &
2003 Segment Detail Nutrition Chemicals Distribution Other Adjustments Total
- ------------------- --------- --------- ------------ ----- ----------- -----
Net Sales $250,706 $ 48,797 $ 30,072 $ 12,171 $ -- $341,746
Operating income/(loss) 38,472 (1,855) 3,207 620 (14,948) 25,496
Depreciation and amortization 7,690 2,904 12 364 1,554 12,524
Identifiable assets 190,864 33,191 9,154 5,726 12,811 251,746
Capital expenditures 5,669 2,836 -- 129 2 8,636
Animal Corporate
Health & Industrial All Expenses &
2002 Segment Detail Nutrition Chemicals Distribution Other Adjustments Total
- ------------------- --------- --------- ------------ ----- ----------- -----
Net Sales $239,602 $ 50,854 $ 27,852 $ 10,368 $ -- $328,676
Operating income/(loss) 28,298 (7,324) 2,345 1,164 (13,854) 10,629
Depreciation and amortization 7,438 3,535 12 321 1,049 12,355
Identifiable assets 186,118 38,985 8,059 8,097 10,393 251,652
Capital expenditures 5,915 2,328 12 144 119 8,518
F-33
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
19. Geographic Information
The following is information about the Company's geographic operations.
Information is attributed to the geographic areas based on the location of the
Company's subsidiaries.
2004 2003 2002
-------- -------- --------
Net Sales:
United States $248,577 $233,942 $219,981
Europe 18,605 16,643 12,004
Israel 43,170 44,383 45,266
Latin America 26,800 25,235 28,970
Asia/Pacific 21,122 21,543 22,455
-------- -------- --------
Total $358,274 $341,746 $328,676
======== ======== ========
Property, Plant and Equipment, net:
United States $ 13,836 $ 16,719 $ 19,370
Europe 20,732 20,463 17,451
Israel 9,157 10,990 12,647
Latin America 14,783 15,396 13,772
Asia/Pacific 278 337 258
-------- -------- --------
Total $ 58,786 $ 63,905 $ 63,498
======== ======== ========
20. Consolidating Financial Statements
The units of Senior Secured Notes due 2007, consisting of US Senior Notes
issued by the Company (the "Parent Issuer") and Dutch Senior Notes issued by
Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are guaranteed by
certain subsidiaries. The Company and its U.S. subsidiaries ("U.S. Guarantor
Subsidiaries"), excluding The Prince Manufacturing Company, Prince MFG, LLC and
Mineral Resource Technologies, Inc. (until divested) (the "Unrestricted
Subsidiaries", as defined in the indenture), fully and unconditionally guarantee
all of the Senior Secured Notes on a joint and several basis. In addition, the
Dutch Issuer's subsidiaries, presently consisting of Phibro Animal Health SA
(the "Belgium Guarantor"), fully and unconditionally guarantee the Dutch Senior
Notes. The Dutch issuer and the Belgium Guarantor do not guarantee the US Senior
Notes. Other foreign subsidiaries ("Non-Guarantor Subsidiaries") do not
presently guarantee the Senior Secured Notes. The U.S. Guarantor Subsidiaries
include all domestic subsidiaries of the Company other than the Unrestricted
Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc, Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium
Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc.
The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP
F-34
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
Chemicals, Inc., Phibro-Tech, Inc., Prince Agriproducts, Inc., The Prince
Manufacturing Company, Prince MFG, LLC, Mineral Resource Technologies, Inc.
(until divested), Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium
Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent Issuer,
Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium
Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S.
Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor
Subsidiaries are directly or indirectly wholly owned as to voting stock by the
Company.
Investments in subsidiaries are accounted for by the Parent Issuer using the
equity method. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group. The
principal consolidation adjustments are to eliminate investments in subsidiaries
and intercompany balances and transactions.
F-35
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING BALANCE SHEET
As of June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 $ -- $ 5,568
Trade receivables 2,670 -- 26,996 -- 2,592 25,400 -- 57,658
Other receivables 317 414 1,195 -- 72 768 -- 2,766
Inventory 1,994 -- 37,890 -- 23,159 16,867 -- 79,910
Prepaid expenses
and other 3,195 110 565 -- 1,018 3,800 -- 8,688
---------------------------------------------------------------------------------------------------
TOTAL CURRENT
ASSETS 8,312 524 67,447 17 27,053 51,237 -- 154,590
---------------------------------------------------------------------------------------------------
Property, plant &
equipment, net 105 -- 13,730 -- 17,321 27,630 -- 58,786
Intangibles -- -- 4,252 -- 1,569 5,874 -- 11,695
Investment in
subsidiaries 125,355 -- 3,619 1,604 -- -- (130,578) --
Intercompany (14,995) 20,995 60,030 20,181 1,630 (12,497) (75,344) --
Other assets 14,506 -- 1,056 -- -- 736 -- 16,298
---------------------------------------------------------------------------------------------------
$ 133,283 $ 21,519 $ 150,134 $ 21,802 $ 47,573 $ 72,980 $(205,922) $ 241,369
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ -- $ 10 $ 881 $ -- $ -- $ -- $ -- $ 891
Loan payable to
banks 10,996 -- -- -- -- -- -- 10,996
Current portion of
long-term debt -- -- 101 -- -- 1,250 -- 1,351
Accounts payable 4,734 9 28,434 -- 2,258 11,537 -- 46,972
Accrued expenses
and other 11,857 159 8,306 216 12,022 7,450 -- 40,010
---------------------------------------------------------------------------------------------------
TOTAL CURRENT
LIABILITIES 27,587 178 37,722 216 14,280 20,237 -- 100,220
---------------------------------------------------------------------------------------------------
Long-term debt 133,029 -- 2 20,000 -- 4,987 -- 158,018
Intercompany debt -- -- -- -- 30,553 44,791 (75,344) --
Other liabilities 11,822 -- 4,897 -- 1,136 4,431 -- 22,286
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 172,438 178 42,621 20,216 45,969 74,446 (75,344) 280,524
---------------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Series C preferred
stock 24,678 -- -- -- -- -- -- 24,678
---------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
(DEFICIT):
Series A preferred
stock 521 -- -- -- -- -- -- 521
Common stock 2 1 31 -- -- -- (32) 2
Paid-in capital 860 -- 112,004 21 52 1,537 (113,614) 860
Retained earnings
(accumulated
deficit) (57,964) 21,340 (4,339) (2,744) (2,757) 8,374 (19,874) (57,964)
Accumulated other
comprehensive --
income (loss):
Gain on derivative
instruments 9 -- 9 -- -- -- (9) 9
Cumulative
currency
translation
adjustment (7,261) -- (192) 4,309 4,309 (11,377) 2,951 (7,261)
---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (63,833) 21,341 107,513 1,586 1,604 (1,466) (130,578) (63,833)
---------------------------------------------------------------------------------------------------
$ 133,283 $ 21,519 $ 150,134 $ 21,802 $ 47,573 $ 72,980 $(205,922) $ 241,369
===================================================================================================
F-36
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Twelve Months Ended June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
NET SALES $ 21,868 $ 11,118 $ 215,591 $ -- $ 5,742 $ 103,955 $ -- $ 358,274
NET SALES -
INTERCOMPANY 150 2,598 468 -- 28,970 4,375 (36,561) --
COST OF GOODS SOLD 17,318 10,139 160,136 -- 25,293 91,546 (36,561) 267,871
---------------------------------------------------------------------------------------------------
GROSS PROFIT 4,700 3,577 55,923 -- 9,419 16,784 -- 90,403
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 20,238 1,299 25,317 4 2,676 16,594 -- 66,128
COSTS OF NON-COMPLETED
TRANSACTION 5,261 -- -- -- -- -- -- 5,261
---------------------------------------------------------------------------------------------------
OPERATING INCOME
(LOSS) (20,799) 2,278 30,606 (4) 6,743 190 -- 19,014
OTHER:
Interest expense 16,208 18 -- 1,806 95 491 -- 18,618
Interest (income) (4) -- -- -- -- (126) -- (130)
Other (income)
expense, net 578 -- (605) -- (265) (489) -- (781)
Net (gain) on
extinguishment
of debt (23,226) -- -- -- -- -- -- (23,226)
Intercompany
interest and
other (26,755) 1,892 16,392 (1,823) 3,335 6,959 -- --
(Profit) loss
relating to
subsidiaries (5,349) -- -- (2,124) -- -- 7,473 --
---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS
BEFORE INCOME
TAXES 17,749 368 14,819 2,137 3,578 (6,645) (7,473) 24,533
PROVISION FOR INCOME
TAXES 1,185 221 1,294 -- 1,454 3,815 -- 7,969
---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS 16,564 147 13,525 2,137 2,124 (10,460) (7,473) 16,564
DISCONTINUED
OPERATIONS:
Profit (loss)
relating to
discontinued
operations (517) -- -- -- -- -- 517 --
(Loss) from
discontinued
operations
(net of income
taxes) -- (124) -- -- -- (1,501) -- (1,625)
Gain (loss) from
disposal of
discontinued
operations
(net of income
taxes) (3,197) -- (2,735) -- -- 3,843 -- (2,089)
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 12,850 $ 23 $ 10,790 $ 2,137 $ 2,124 $ (8,118) $ (6,956) $ 12,850
===================================================================================================
F-37
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve Months Ended June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 12,850 $ 23 $ 10,790 $ 2,137 $ 2,124 $ (8,118) $ (6,956) $ 12,850
Adjustment for
discontinued
operation 3,714 124 2,735 -- -- (2,342) (517) 3,714
---------------------------------------------------------------------------------------------------
Income (loss) from
continuing
operations 16,564 147 13,525 2,137 2,124 (10,460) (7,473) 16,564
Adjustments to
reconcile income
(loss) from
continuing
operations to
net cash provided
(used) by
operating
activities:
Depreciation and
amortization 2,367 487 2,542 -- 2,669 5,118 -- 13,183
Deferred income
taxes 733 -- -- -- -- (407) -- 326
Net gain from
sales of assets -- -- (689) -- -- (3) -- (692)
Net gain on
extinguishment
of debt (23,226) -- -- -- -- -- -- (23,226)
Effects of changes
in foreign
currency -- -- 84 -- (264) (368) -- (548)
Other 525 -- 395 -- -- 194 -- 1,114
Changes in
operating assets
and liabilities: --
Accounts receivable 79 336 (4,826) -- (945) (1,866) -- (7,222)
Inventory 618 (543) 4,143 -- (8,762) 8,204 -- 3,660
Prepaid expenses
and other (268) 188 (479) -- 1,369 (1,124) -- (314)
Other assets 1,997 -- (4,548) -- -- (528) -- (3,079)
Intercompany (981) 17,331 (8,706) (22,336) 13,316 (6,097) 7,473 --
Accounts payable (370) (328) (2,368) -- (2,395) (189) -- (5,650)
Accrued expenses
and other 2,803 (89) 5,089 216 2,742 (3,796) -- 6,965
Accrued costs of
non-completed
transaction 3,970 -- -- -- -- -- -- 3,970
Cash provided (used)
by discontinued
operations (3,197) (652) (2,735) -- -- 4,395 -- (2,189)
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
OPERATING
ACTIVITIES 1,614 16,877 1,427 (19,983) 9,854 (6,927) -- 2,862
---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (57) (62) (2,506) -- (1,613) (2,006) -- (6,244)
Proceeds from sale
of assets -- -- 1,057 -- -- 37 -- 1,094
Other investing (654) -- -- -- -- (1) -- (655)
Discontinued
operations 14,343 -- -- -- -- 532 -- 14,875
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
INVESTING
ACTIVITIES 13,632 (62) (1,449) -- (1,613) (1,438) -- 9,070
---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) in
cash overdraft (350) (276) (160) -- -- (9) -- (795)
Net (decrease) in
short-term debt (26,882) -- -- -- -- (72) -- (26,954)
Proceeds from
long-term debt 85,000 -- -- 20,000 -- 4,661 -- 109,661
Payments of
long-term debt (32,679) (13) (1,055) -- -- (1,706) -- (35,453)
Payment of Pfizer
obligations (20,075) -- -- -- (8,225) -- -- (28,300)
Payments relating
to the Prince
Transactions and
transaction costs (4,619) (16,645) (129) -- -- -- -- (21,393)
Debt refinancing
costs (15,548) -- -- -- -- -- -- (15,548)
Discontinued
operations -- -- -- -- -- 1,005 -- 1,005
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
FINANCING
ACTIVITIES (15,153) (16,934) (1,344) 20,000 (8,225) 3,879 -- (17,777)
---------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE
RATE CHANGES ON CASH -- -- -- -- 11 223 234
---------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS 93 (119) (1,366) 17 27 (4,263) -- (5,611)
CASH AND CASH
EQUIVALENTS
at beginning of
period 43 119 2,167 -- 185 8,665 11,179
---------------------------------------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS
at end of period $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 $ -- $ 5,568
===================================================================================================
F-38
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING BALANCE SHEET
As of June 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ 11,179
Trade receivables 2,759 2,452 22,071 -- 1,542 23,890 52,714
Other receivables 957 3 733 -- 518 1,292 3,503
Inventory 2,612 4,278 41,266 -- 13,460 26,233 87,849
Prepaid expenses
and other 3,267 458 981 -- 1,866 3,296 9,868
Current assets from
discontinued
operations -- 4,942 -- -- -- 4,334 9,276
---------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,638 12,252 67,218 -- 17,571 67,710 -- 174,389
---------------------------------------------------------------------------------------------------
Property, plant &
equipment, net 153 3,269 13,297 -- 17,049 30,137 63,905
Intangibles -- -- -- -- 1,818 6,851 8,669
Investment in
subsidiaries 103,574 -- 3,619 -- -- -- (107,193) --
Intercompany 35,034 (19,431) 59,765 -- 6,731 (9,116) (72,983) --
Other assets 11,516 710 1,122 -- -- 711 14,059
Other assets from
discontinued
operations -- 10,650 -- -- -- 2,675 13,325
---------------------------------------------------------------------------------------------------
$159,915 $ 7,450 $ 145,021 $ -- $ 43,169 $ 98,968 $(180,176) $ 274,347
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ 350 $ 286 $ 1,041 $ -- $ -- $ 9 1,686
Loan payable to
banks 37,878 -- -- -- -- -- 37,878
Current portion of
long-term debt 21,599 66 381 -- -- 2,078 24,124
Accounts payable 3,304 2,350 25,926 -- 12,115 11,660 55,355
Accrued expenses
and other 7,943 1,151 9,931 -- 8,583 13,091 40,699
Current liabilities
from discontinued
operations -- 2,051 -- -- -- 3,506 5,557
---------------------------------------------------------------------------------------------------
TOTAL CURRENT
LIABILITIES 71,074 5,904 37,279 -- 20,698 30,344 -- 165,299
---------------------------------------------------------------------------------------------------
Long-term debt 100,073 213 149 -- -- 1,828 102,263
Intercompany debt -- -- -- -- 22,319 50,664 (72,983) --
Other liabilities 4,397 114 13,289 -- 1,256 2,185 21,241
Other liabilities
from discontinued
operations -- 198 -- -- -- 975 1,173
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 175,544 6,429 50,717 -- 44,273 85,996 (72,983) 289,976
---------------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Series B and C
preferred stock 68,881 -- -- -- -- -- 68,881
---------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
(DEFICIT):
Series A preferred
stock 521 -- -- -- -- -- 521
Common stock 2 1 31 -- -- -- (32) 2
Paid-in capital 860 -- 110,883 -- -- 5,179 (116,062) 860
Retained earnings
(accumulated
deficit) (79,489) 1,020 (16,499) -- (4,881) 17,862 2,498 (79,489)
Accumulated other
comprehensive --
income (loss):
Gain on derivative
instruments 81 -- 81 -- -- -- (81) 81
Cumulative
currency
translation
adjustment (6,485) -- (192) -- 3,777 (10,069) 6,484 (6,485)
---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (84,510) 1,021 94,304 -- (1,104) 12,972 (107,193) (84,510)
---------------------------------------------------------------------------------------------------
$159,915 $ 7,450 $ 145,021 $ -- $ 43,169 $ 98,968 $(180,176) $ 274,347
===================================================================================================
F-39
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Twelve Months Ended June 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
NET SALES $ 23,982 $ 22,332 $ 187,628 $ -- $ 6,625 $ 101,179 $ -- $ 341,746
NET SALES -
INTERCOMPANY 1,338 4,244 775 -- 26,994 6,812 (40,163) --
COST OF GOODS SOLD 20,083 20,422 144,543 -- 31,435 74,880 (40,163) 251,200
---------------------------------------------------------------------------------------------------
GROSS PROFIT 5,237 6,154 43,860 -- 2,184 33,111 -- 90,546
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 18,064 2,575 26,632 -- 1,868 15,911 65,050
---------------------------------------------------------------------------------------------------
OPERATING INCOME
(LOSS) (12,827) 3,579 17,228 -- 316 17,200 -- 25,496
OTHER:
Interest expense 15,050 86 1 -- 62 1,082 16,281
Interest (income) (2) -- -- -- -- (83) (85)
Other (income)
expense, net 3,283 -- (3,481) -- 1,283 454 1,539
Intercompany
interest and other (33,819) 4,952 18,997 -- 2,849 7,021 --
(Profit) loss
relating to
subsidiaries 4,036 -- -- -- -- -- (4,036) --
---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS BEFORE
INCOME TAXES (1,375) (1,459) 1,711 -- (3,878) 8,726 4,036 7,761
PROVISION FOR INCOME
TAXES 924 52 570 -- 572 7,942 10,060
---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS (2,299) (1,511) 1,141 -- (4,450) 784 4,036 (2,299)
DISCONTINUED
OPERATIONS:
Profit (loss)
relating to
discontinued
operations 14,759 -- -- -- -- -- (14,759) --
(Loss) from
discontinued
operations
(net of income
taxes) -- (3,454) -- -- -- (11,123) (14,577)
Gain (loss) from
disposal of
discontinued
operations
(net of income
taxes) (30,019) -- -- -- -- 29,336 (683)
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(17,559) $ (4,965) $ 1,141 $ -- $ (4,450) $ 18,997 $(10,723) $ (17,559)
===================================================================================================
F-40
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve Months Ended June 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(17,559) $ (4,965) $ 1,141 $ -- $ (4,450) $ 18,997 $(10,723) $ (17,559)
Adjustment for
discontinued
operation 15,260 3,454 -- -- -- (18,213) 14,759 15,260
---------------------------------------------------------------------------------------------------
Income (loss) from
continuing
operations (2,299) (1,511) 1,141 -- (4,450) 784 4,036 (2,299)
Adjustments to
reconcile income
(loss) from
continuing
operations to
net cash provided
(used) by
operating
activities:
Depreciation and
amortization 1,554 956 2,900 -- 2,019 5,095 12,524
Deferred income
taxes -- -- -- -- -- 6,460 6,460
Net gain from
sales of assets -- -- (118) -- -- (9) (127)
Effects of changes
in foreign
currency -- -- (399) -- 1,268 (479) 390
Other 218 13 540 -- -- (384) 387
Changes in
operating assets
and liabilities:
Accounts receivable 301 245 1,489 -- (322) 2,097 3,810
Inventory 95 (61) (3,658) -- 2,270 (244) (1,598)
Prepaid expenses
and other (702) (195) 558 -- (1,191) (1,592) (3,122)
Other assets (3,171) -- 1,131 -- -- (592) (2,632)
Intercompany 12,780 2,717 (12,285) -- 4,989 (4,165) (4,036) --
Accounts payable 2,280 714 12,542 -- 3,523 1,444 20,503
Accrued expenses
and other 1,415 95 2,326 -- (6,444) 2,253 (355)
Cash provided
(used) by
discontinued
operations -- (1,928) -- -- -- 2,644 716
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
OPERATING
ACTIVITIES 12,471 1,045 6,167 -- 1,662 13,312 -- 34,657
---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (2) (350) (2,573) -- (2,149) (3,562) (8,636)
Proceeds from sale
of assets -- -- 2,530 -- -- 35 2,565
Other investing -- -- -- -- -- 737 737
Discontinued
operations -- (493) -- -- -- 1,856 1,363
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
INVESTING
ACTIVITIES (2) (843) (43) -- (2,149) (934) -- (3,971)
---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) in
cash overdraft (226) (24) (4,151) -- -- (1,680) (6,081)
Net (decrease) in
short-term debt (5,844) -- -- -- -- (816) (6,660)
Proceeds from
long-term debt -- -- -- -- -- 2,000 2,000
Payments of
long-term debt (6,813) (111) (415) -- -- (8,675) (16,014)
Discontinued
operations -- -- -- -- -- 377 377
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
FINANCING
ACTIVITIES (12,883) (135) (4,566) -- -- (8,794) -- (26,378)
---------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE
RATE CHANGES ON CASH -- -- 9 -- 54 389 452
---------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (414) 67 1,567 -- (433) 3,973 -- 4,760
CASH AND CASH
EQUIVALENTS
at beginning
of period 457 52 600 -- 618 4,692 6,419
---------------------------------------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS
at end of period $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ -- $ 11,179
===================================================================================================
F-41
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Twelve Months Ended June 30, 2002
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
NET SALES $ 24,578 $ 21,451 $ 173,952 $ -- $ 4,196 $ 104,499 $ -- $ 328,676
NET SALES -
INTERCOMPANY 1,114 4,212 924 -- 21,509 9,607 (37,366) --
COST OF GOODS SOLD 20,837 19,400 135,378 -- 21,631 87,531 (37,366) 247,411
---------------------------------------------------------------------------------------------------
GROSS PROFIT 4,855 6,263 39,498 -- 4,074 26,575 -- 81,265
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 16,786 2,623 32,959 -- 1,559 16,709 70,636
---------------------------------------------------------------------------------------------------
OPERATING INCOME
(LOSS) (11,931) 3,640 6,539 -- 2,515 9,866 -- 10,629
OTHER:
Interest expense 15,858 (29) (172) -- 365 2,048 18,070
Interest (income) (15) -- -- -- -- (331) (346)
Other (income)
expense, net (2,001) -- (839) -- 2,294 3,895 3,349
Intercompany interest
and other (28,534) 5,210 12,467 -- 2,486 8,371 --
(Profit) loss
relating to
subsidiaries 17,913 -- -- -- -- -- (17,913) --
---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS BEFORE
INCOME TAXES (15,152) (1,541) (4,917) -- (2,630) (4,117) 17,913 (10,444)
PROVISION (BENEFIT)
FOR INCOME TAXES 10,059 (407) 4,636 -- (626) 1,105 14,767
---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS (25,211) (1,134) (9,553) -- (2,004) (5,222) 17,913 (25,211)
DISCONTINUED OPERATIONS:
Profit (loss)
relating to
discontinued
operations (26,559) -- -- -- -- -- 26,559 --
(Loss) from
discontinued
operations
(net of income
taxes) -- (2,930) -- -- -- (23,629) (26,559)
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(51,770) $ (4,064) $ (9,553) $ -- $ (2,004) $ (28,851) $ 44,472 $ (51,770)
===================================================================================================
F-42
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve Months Ended June 30, 2002
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(51,770) $ (4,064) $ (9,553) $ -- $ (2,004) $ (28,851) $ 44,472 $ (51,770)
Adjustment for
discontinued
operation 26,559 2,930 -- -- -- 23,629 (26,559) 26,559
---------------------------------------------------------------------------------------------------
Income (loss) from
continuing
operations (25,211) (1,134) (9,553) -- (2,004) (5,222) 17,913 (25,211)
Adjustments to
reconcile income
(loss) from
continuing
operations to net
cash provided
(used) by
operating
activities:
Depreciation and
amortization 1,049 966 3,434 -- 2,252 4,654 12,355
Deferred income
taxes 9,297 (466) 5,356 -- -- (2,949) 11,238
Net gain from
sales of assets -- -- -- -- -- (5) (5)
Change in
redemption
amount of
redeemable
common stock (378) -- -- -- -- -- (378)
Effects of changes
in foreign
currency -- -- (100) -- 1,912 308 2,120
Other (43) 12 985 -- -- 1,462 2,416
Changes in
operating assets
and liabilities:
Accounts
receivable 1,299 278 1,932 -- 886 1,651 6,046
Inventory 606 1,165 (2,915) -- (10,325) (2,522) (13,991)
Prepaid expenses
and other 210 (157) (1,550) -- 273 (1,595) (2,819)
Other assets (1,335) 1 2,519 -- 66 1,416 2,667
Intercompany 473 4,753 2,164 -- 7,562 2,961 (17,913) --
Accounts payable (719) (844) 1,460 1,472 (7,975) (6,606)
Accrued expenses
and other (119) (225) (3,248) -- 3,487 8,616 8,511
Cash provided
(used) by
discontinued
operations -- (2,437) -- -- -- 1,349 (1,088)
---------------------------------------------------------------------------------------------------
NET CASH
PROVIDED
(USED) BY
OPERATING
ACTIVITIES (14,871) 1,912 484 -- 5,581 2,149 -- (4,745)
---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (119) (192) (3,022) -- (1,939) (3,246) (8,518)
Acquisition of a
business -- -- -- -- (4,421) (2,761) (7,182)
Proceeds from
property damage
claim -- -- 411 -- -- -- 411
Proceeds from sale
of assets -- -- -- -- -- 19 19
Other investing 613 -- -- -- -- (33) 580
Discontinued
operations -- (1,832) -- -- -- (839) (2,671)
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
INVESTING
ACTIVITIES 494 (2,024) (2,611) -- (6,360) (6,860) -- (17,361)
---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase
(decrease) in
cash overdraft 563 (116) 1,447 -- -- 1,544 3,438
Net increase in
short-term debt 13,520 -- -- -- -- 717 14,237
Proceeds from
long-term debt 2,000 322 -- -- -- -- 2,322
Payments of
long-term debt (2,541) (98) (396) -- -- (1,695) (4,730)
Discontinued
operations -- -- -- -- -- (1,590) (1,590)
---------------------------------------------------------------------------------------------------
NET CASH PROVIDED
(USED) BY
FINANCING
ACTIVITIES 13,542 108 1,051 -- -- (1,024) -- 13,677
---------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE
RATE CHANGES ON CASH -- -- -- -- 128 (125) 3
---------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (835) (4) (1,076) -- (651) (5,860) -- (8,426)
CASH AND CASH
EQUIVALENTS
at beginning of
period 1,292 56 1,676 -- 1,269 10,552 14,845
---------------------------------------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS
at end of period $ 457 $ 52 $ 600 $ -- $ 618 $ 4,692 $ -- $ 6,419
===================================================================================================
F-43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHIBRO ANIMAL HEALTH CORPORATION
By: /s/ Jack C. Bendheim By: /s/ Gerald K. Carlson
- --------------------------------- ----------------------------
Jack C. Bendheim Gerald K. Carlson
Chairman of the Board Chief Executive Officer
Date: September 28, 2004 Date: September 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature and Title Date
- ------------------- ----
/s/ Gerald K. Carlson September 28, 2004
--------------------------------
Gerald K. Carlson
Chief Executive Officer
(Principal Executive Officer)
/s/ Jack C. Bendheim September 28, 2004
--------------------------------
Jack C. Bendheim
Director, Chairman of the Board
/s/ Richard G. Johnson September 28, 2004
- --------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Marvin S. Sussman September 28, 2004
--------------------------------
Marvin S. Sussman
Director
/s/ James O. Herlands September 28, 2004
- --------------------------------
James O. Herlands
Director
/s/ Sam Gejdenson September 28, 2004
- --------------------------------
Sam Gejdenson
Director
II-1
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Composite Certificate of Incorporation of Registrant (15)
3.2 By-laws of Registrant (1)
4.1 Indenture, dated as of June 11, 1998, among Registrant, the
Guarantors named therein and The Chase Manhattan Bank, as
trustee, relating to the 9 7/8% Senior Subordinated Notes due
2008 of Registrant, and exhibits thereto, including Form of 9
7/8% Senior Subordinated Note due 2008 of Company (1)
4.1.1 First Supplemental Indenture, dated as of January 15, 1999,
among Registrant, the Guarantors named therein and The Chase
Manhattan Bank, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2008 of Registrant (10)
4.1.2 Second Supplemental Indenture, dated as of March 19, 2003,
among Registrant, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2008 of Registrant (10)
4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among
Registrant, the Guarantors named therein and JPMorgan Chase
Bank, as trustee, relating to the 9 7/8% Senior Subordinated
Notes due 2008 of Registrant (10)
4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003,
among Phibro Animal Health Corporation, the Guarantors named
therein and JPMorgan Chase Bank, as trustee, relating to the 9
7/8% Senior Subordinated Notes due 2008 of Registrant. (11)
4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003,
among Phibro Animal Health Corporation, the Guarantors named
therein and JPMorgan Chase Bank, as trustee, relating to the 9
7/8% Senior Subordinated Notes due 2008 of Registrant. (12)
4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among
Phibro Animal Health Corporation, the Guarantors named therein
and JPMorgan Chase Bank, as trustee, relating to the 9 7/8%
Senior Subordinated Notes due 2008 of Registrant. (16)
4.2 Indenture, dated as of October 21, 2003, by and among Phibro
Animal Health Corporation and Philipp Brothers Netherlands III
B.V., as Issuers, the Guarantors named therein, and HSBC Bank
USA, as Trustee and Collateral Agent. (13)
4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by
and among Phibro Animal Health Corporation and Philipp
Brothers Netherlands III B.V., as Issuers, the Guarantors
named therein, and HSBC Bank USA, as Trustee and Collateral
Agent. (16)
Certain instruments which define the rights of holders of
long-term debt of Registrant and its consolidated subsidiaries
have not been filed as Exhibits to this Report since the total
amount of securities authorized under any such instrument does
not exceed 10% of the total assets of Registrant and its
subsidiaries on a consolidated basis, as of June 30, 2004. For
a description of such indebtedness, see Note 9 of Notes to
Consolidated Financial Statements. Registrant hereby agrees to
furnish copies of such instruments to the Securities and
Exchange Commission upon its request.
10.1 [Reserved]
10.2 Manufacturing Agreement, dated May 15, 1994, by and between
Merck & Co., Inc., Koffolk, Ltd., and Registrant (1)+
10.3 Lease, dated July 25, 1986, between Registrant and 400 Kelby
Associates, as amended December 1, 1986 and December 30, 1994
(1)
10.4 Lease, dated June 30, 1995, between First Dice Road Co. and
Phibro-Tech, Inc., as amended May 1998 (1)
10.5 Lease, dated December 24, 1981, between Koffolk (1949) Ltd.
and Israel Land Administration (1)
10.6 Master Lease Agreement, dated February 27, 1998, between
General Electric Capital Corp., Registrant and Phibro-Tech,
Inc. (1)
10.7 Stockholders Agreement, dated December 29, 1987, by and
between Registrant, Charles H. Bendheim, Jack C. Bendheim and
Marvin S. Sussman (1)
10.8 Employment Agreement, dated December 29, 1987, by and between
Registrant and Marvin S. Sussman (1)++
10.9 Stockholders Agreement, dated February 21, 1995, between James
O. Herlands and Phibro-Tech, Inc., as amended as of June 11,
1998(1)
10.10 Form of Severance Agreement, dated as of February 21, 1995,
between Registrant and James O. Herlands (1)++
10.11 Agreement of Limited Partnership of First Dice Road Company,
dated June 1, 1985, by and among Western Magnesium Corp., Jack
Bendheim, Marvin S. Sussman and James O. Herlands, as amended
November 1985 (1)
10.12 Philipp Brothers Chemicals, Inc. Retirement Income and
Deferred Compensation Plan Trust, dated as of January 1, 1994,
by and between Registrant on its own behalf and on behalf of
C.P. Chemicals, Inc., Phibro-Tech, Inc. and the Trustee
thereunder; Philipp Brothers Chemicals, Inc. Retirement Income
and Deferred Compensation Plan, dated March 18, 1994
("Retirement Income and Deferred Compensation Plan") (1)++
10.12.1 First, Second and Third Amendments to Retirement Income and
Deferred Compensation Plan. (2)++
10.13 Form of Executive Income Deferred Compensation Agreement, each
dated March 11, 1990, by and between Registrant and each of
Jack Bendheim, James Herlands and Marvin Sussman (1)++
10.14 Form of Executive Income Split Dollar Agreement, each dated
March 1, 1990, by and between Registrant and each of Jack
Bendheim, James Herlands and Marvin Sussman (1)++
10.15 [Reserved]
10.16 Administrative Consent Order, dated March 11, 1991, issued by
the State of New Jersey Department of Environmental
Protection, Division of Hazardous Waste Management, to C.P.
Chemicals, Inc. (1)
10.17 Agreement for Transfer of Ownership, dated as of June 8, 2000,
between C. P. Chemicals, Inc. ("CP") and the Township of
Woodbridge ("Township"), and related Environmental
Indemnification Agreement, between CP and Township, and Lease,
between Township and CP (2)
10.18 Stockholders' Agreement, dated as of January 5, 2000, among
shareholders of Penick Holding Company ("PHC"), and
Certificate of Incorporation of PHC and Certificate of
Designation, Preferences and Rights of Series A Redeemable
Cumulative Preferred Stock of PHC (2)
10.19 [Reserved]
10.20 [Reserved]
10.21 Asset Purchase Agreement, dated as of September 28, 2000,
among Pfizer, Inc., the Asset Selling Corporations (named
therein) and Registrant, and various exhibits and certain
Schedules thereto (3)+
10.21.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement,
dated as of September 28, 2000, among Pfizer, Inc., the Asset
Selling Corporations (named therein) and Registrant (10)
10.22 Stock Purchase Agreement, dated as of November 30, 2000,
between Registrant and the Purchasers (as defined therein) (4)
10.23 Stockholders' Agreement, dated as of November 30, 2000, among
Registrant, the Investor Stockholders (as defined therein) and
Jack C. Bendheim (4)
10.24 United States Asset Purchase Agreement between Phibro-Tech,
Inc. and Nufarm, Inc. dated as of May 1, 2001 (5)
10.24.1 Amendment No. 1 to United States Asset Purchase Agreement
between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June
14, 2001 (6)
10.25 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001 (5)
10.26 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001 (5)
10.27 Management and Advisory Services Agreement dated November 30,
2000 between Registrant and Palladium Equity Partners, L.L.C.
(7)++
10.27.1 Amended and Restated Management Services Agreement dated as of
October 21, 2003 between Registrant and Palladium Capital
Management, L.L.C. (15)++
10.28 Employment Agreement, dated May 28, 2002, by and between
Registrant and Gerald K. Carlson (8)++
10.29 Agreement dated as of May 2, 2003, by and between PAH
Management Company, Ltd. and David McBeath (10) ++
10.30 Stock Purchase Agreement, dated August 14, 2003, by and
between Registrant and Cemex, Inc. (9)
10.31 Loan and Security Agreement, dated October 21, 2003, by and
among, the lenders identified on the signature pages thereto,
Wells Fargo Foothill, Inc., and Phibro Animal Health
Corporation ("Parent"), and each of Parent's Subsidiaries
identified on the signature pages thereto. (12)
10.31.1 Amendment Number One to Loan and Security Agreement dated
November 14, 2003. (12)
10.31.2 Amendment Number Two to Loan and Security Agreement dated
April 29, 2004. (14)
10.31.3 Amendment Number Three to Loan and Security Agreement dated as
of September 24, 2004. (16)
10.32 Intercreditor and Lien Subordination Agreement, dated as of
October 21, 2003, made by and among Wells Fargo Foothill,
Inc., HSBC Bank USA, Phibro Animal Health Corporation
("Parent") and those certain subsidiaries of the Parent party
thereto. (12)
10.33 Purchase and Sale Agreement dated as of December 26, 2003 by
and among Phibro Animal Health Corporation ("PAHC"), Prince
MFG, LLC, ("Prince MFG"), The Prince Manufacturing Company
("Prince" and together with PAHC and Prince MFG, the "Phibro
Parties"), Palladium Equity Partners II, L.P. ("PEP II"),
Palladium Equity Partners II-A, L.P., ("PEP II-A"), Palladium
Equity Investors II, L.P., ("PEI II", and together with PEP II
and PEP II-A, the "Investor Stockholders"), and Prince
Mineral Company, Inc. ("Buyer"). (15)
10.34 Environmental Indemnification Agreement dated as of December
26, 2003 between the Phibro Parties (as defined therein) and
Buyer. (15)
10.35 Amendment to Stockholders Agreement dated as of December 26,
2003 between PAHC, the Investor Stockholders and Jack Bendheim
(15)
10.36 Advisory Fee Agreement dated as of December 26, 2003 between
Buyer and PAHC(15)++
21 List of Subsidiaries (16)
31.1 Certification of Gerald K. Carlson, Chief Executive Officer
required by Rule 15d-14(a) of the Act (16)
31.2 Certification of Jack C. Bendheim, Chairman of the Board
required by Rule 15d-14(a) of the Act (16)
31.3 Certification of Richard G. Johnson, Chief Financial Officer
required by Rule 15d-14(a) of the Act (16)
- ----------
1 Filed as an Exhibit to the Registrant's Registration Statement on Form
S-4, No. 333-64641.
2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2000.
4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001.
6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
8 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
9 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
September 11, 2003, as amended by the Registrant's Form 8-K/A dated June
2, 2004.
10 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003.
11 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 2, 2003.
12 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2003.
13 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 31, 2003.
14 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2004.
15 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
January 12, 2004.
16 Filed herewith.
+ A request for confidential treatment has been granted for portions of such
document. Confidential portions have been omitted and furnished separately
to the SEC in accordance with Rule 406(b).
++ This Exhibit is a management compensatory plan or arrangement.
Since the Company does not have securities registered under Section 12 of the
Securities Exchange Act of 1934 and is not required to file periodic reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company is not filing the written certification statement pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. The Company submits periodic reports with
the Securities and Exchange Commission because it is required to do so by the
terms of the indenture governing its senior subordinated notes.