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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, 2003
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, 2003.
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2003: 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 1
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 18
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
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 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31
Item 9A. Controls and Procedures 31
PART III 32
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 37
Item 14. Principal Accounting Fees and Services 40
PART IV 41
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
Index to Financial Statements F-1
Report of Independent Auditors F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2003 and 2002 F-3
Consolidated Statements of Operations and Comprehensive Income for the years ended
June 30, 2003, 2002 and 2001 F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
June 30, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001 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
75% of our fiscal 2003 net sales were from our Animal Health and Nutrition
business, and approximately 25% of our fiscal 2003 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 for one of the leading new products
for manufacturing pressure-treated wood will represent our largest growth
opportunity in our Specialty Chemicals business. Over 40% of our fiscal 2003 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 closed our facility in Odda,
Norway, and we are in the process of selling our subsidiary, The Prince
Manufacturing Company ("PMC") to Palladium Equity Partners II, LP and certain of
its affiliates (the "Palladium Investors"). Unless otherwise indicated, the
information in this Item 1 does not include PMC or Mineral Resource
Technologies, Inc.
RECENT DEVELOPMENTS
On August 28, 2003, we sold our subsidiary, Mineral Resource Technologies,
Inc. ("MRT"), to Cemex, Inc. for a net value after payment of transaction
expenses of approximately $14 million in cash, subject to certain escrow
arrangements and post closing adjustments. MRT managed and sold coal combustion
by-products, including fly ash.
We recently changed our name to Phibro Animal Health Corporation. We were
formerly known as Philipp Brothers Chemicals, Inc. The new name reflects our
core focus and strategic direction.
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 2003, antibiotics and antibacterials generated sales
for us of approximately $80 million, anticoccidials generated sales for us of
approximately $53 million, and anthelmintics and other medicated feed additives
generated sales for us of approximately $7 million.
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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) semduramycin 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. The antibiotic inhibits the
bacterial destruction and degradation of nutrients such as carbohydrates and
amino acids, resulting in more energy and nutrients and less production of
harmful waste products such as lactic acid, volatile fatty acids and ammonia.
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. And it alleviates some of the effects of heat stress and
crowding on performance and improves nutrient utilization. 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:
- fowl cholera in chickens,
- airsacculitis in turkeys,
- pneumonia and enteritis in swine, and
- pneumonia, enteritis and liver abscesses in cattle.
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
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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 sole 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 semduramycin, 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) and amprolium under the trademark Amprol(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 semduramycin 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. Commercial studies to date show that Aviax(R) significantly improves feed
conversion. 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 crystaline dosage
form. This dosage form is significantly more cost-effective and may improve
profitability significantly. Regulatory approvals are expected in the United
States in the last quarter of fiscal 2004.
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.
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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 and can be
tolerated at levels up to six times the recommended use level without adverse
effects on swine performance.
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:
- Guarulhos, Brazil (salinomycin and semduramycin),
- Rixensart, Belgium (virginiamycin and semduramycin),
- Ramat Hovav, Israel (nicarbazin and amprolium), and
- 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 15
countries including: the United States, Canada, Mexico, Venezuela, Brazil,
Argentina, Chile, Australia, Japan, 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, EU/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. In most countries, our MFA
registrations have already been transferred from Pfizer to us, however transfers
are continuing in several countries and under our purchase agreement with
Pfizer, Pfizer agreed to continue to support the registration transfer effort.
Currently, our new MFA product development is focused on geographical
expansion of the present product line, new label claims and applications for
existing active ingredients and new formulations. This effort is coordinated by
product development personnel located in Belgium, Brazil, and the United States.
We also have an active program to identify and license new products and new
technologies.
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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, Bowmanstown, Pennsylvania 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.
OUR SPECIALTY CHEMICALS BUSINESS
We manufacture and market a number of specialty chemicals for use in the
wood treatment, chemical catalyst, brick, semiconductor, automotive, aerospace,
glass 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. The United States
Environmental Protection Agency ("EPA") has ruled that by 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 $9
million in fiscal 2004 and by approximately $30 million over the life of the
contract, based on existing forecasts. We have applied for a patent with respect
to the manufacturing process of our solution, and the claims in our patent
application were recently allowed by the United States Patent and Trademark
Office. 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 commercially a production facility in Sumter, South Carolina
which is supplying this market, and we have begun construction on a similar
plant 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 and Bordeaux, France
facilities. These contracts were part of the sale by us of our Agtrol business,
consisting of inventory of and intangible assets related to, copper fungicides
and other crop protection products, 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
Through our subsidiary, PMC, which we are in the process of selling to the
Palladium Investors, we manufacture and market various mineral oxides, including
iron compounds and manganese compounds. Iron compounds include red iron oxide
(Hematite) (sold to the brick, masonry, glass, foundry, electrode, abrasive,
feed, and other chemical industries); black iron oxide (Magnetite) (sold under
the Magna Float brand name to the heavy media, coal, steel foundry, electrode,
abrasive, colorant, fertilizer, and various other chemical industries); iron
chromite (sold under the Chromox brand as a colorant or additive to the glass
industry). Manganese compounds include manganese dioxide (sold under the Brickox
brand name, which is considered a standard color in many applications to the
brick, masonry, glass, and other chemical industries); and manganous oxide (sold
to customers requiring an acid soluble form of manganese, such as animal feed,
fertilizer and chemical manufacturers).
We also 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
5
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 2,700 customers, and sales to our top ten customers
represented approximately 23% of our fiscal 2003 net sales and no single
customer represented more than 5% of our fiscal 2003 net sales.
Our world-wide sales and marketing network consists of approximately 126
employees, 3 independent agents and 134 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 approximately 50 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
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."
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 2003, no single raw material accounted for more than 5% of our
cost of goods sold. Total raw materials cost was approximately $116 million or
35% of net sales in fiscal 2003. 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 by 60
chemists and technicians at our various facilities. We operate research and
development facilities in Rixensart, Belgium, Sumter, South Carolina, Ramat
Hovav, Israel and at 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 2003 net sales. We typically do not enter into long-term contracts
with our customers.
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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, 2003, we had 1,018 employees worldwide (which does not
include 108 employees dedicated to PMC). Of these, 185 employees were in
management and administration, 126 were in sales and marketing, 60 were chemists
or technicians, and 647 were in production. Certain 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 Jericho litigation referred to
under Item 3, Legal Proceedings) to be approximately $2.0 million, which is
included in current and long-term liabilities in our June 30, 2003 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.
7
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.
The EPA's regulations, and most state regulations in authorized states,
establish categories of regulated entities and set standards and procedures
those entities must follow in their handling of hazardous wastes. The three
general categories of waste handlers governed by the regulations are hazardous
waste generators, hazardous waste transporters, and owners and operators of
hazardous waste treatment, storage and/or disposal facilities. Generators are
required, among other things, to obtain identification numbers and to arrange
for the proper treatment and/or disposal of their wastes by licensed or
permitted operators and all three categories of waste handlers are required to
utilize a document tracking system to maintain records of their activities.
Transporters must obtain permits, transport hazardous waste only to properly
permitted treatment, storage or disposal facilities, and maintain required
records of their activities. Treatment, storage and disposal facilities are
subject to extensive regulations concerning their location, design and
construction, as well as the operating methods, techniques and practices they
may use. Such facilities are also required to demonstrate their financial
responsibility with respect to compliance with RCRA, including closure and
post-closure requirements.
The Federal Water Pollution Control Act, as amended (the "Clean Water
Act"). The Clean Water Act prohibits the discharge of pollutants to the waters
of the United States without governmental authorization. Like RCRA, the Clean
Water Act provides that states with programs approved by the EPA may administer
and enforce their own water pollution control programs. Pursuant to the mandate
of the Clean Water Act, the EPA has promulgated "pre-treatment" regulations,
which establish standards and limitations for the introduction of pollutants
into publicly-owned treatment works.
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws,
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. Phibro-Tech is 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.
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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 equivalent state programs: (i) transport of
wastes to our facilities; (ii) storage of wastes prior to processing; (iii)
treatment and/or recycling of wastes; and (iv) corrective action at its RCRA
facilities. Although all aspects of the treatment and recycling of waste at 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. 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 14 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.
9
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. Separately, as part of an
earlier investigation, Phibro-Tech has submitted a report to the State
recommending no further action in connection with that matter. This
recommendation is also under review by the State.
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 submitted to the State and is pending. 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, C P 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 will commence the implementation of its approved closure
plan. Based on a formula established by the Department of Environmental
Protection, those closure costs were estimated at $292,822.92 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. The closure plan for the Union City, California facility
was approved by the State of California and closure activities have been
substantially completed. Certain additional soil sampling is being conducted and
the Company does not expect any material additional work to be required at this
site.
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.
10
Ramat Hovav, Israel. The Ramat Hovav plant of our Israeli subsidiary,
Koffolk (1949) Ltd. ("Koffolk Israel") 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 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 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
11
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 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 our 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. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations - General - Other Risks and Uncertainties.
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.
TRADEMARKS
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).
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
12
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:
- our substantial leverage and potential inability to service our debt
- our dependence on distributions from our subsidiaries
- risks associated with our international operations and significant
foreign assets
- our dependence on our Israeli operations
- competition in each of our markets
- potential environmental liability
- potential legislation affecting the use of medicated feed additives
- extensive regulation by numerous government authorities in the
United States and other countries
- our reliance on the continued operation and sufficiency of our
manufacturing facilities
- our reliance upon unpatented trade secrets
- the risks of legal proceedings and general litigation expenses
- potential operating hazards and uninsured risks
- the risk of work stoppages
- our dependence on key personnel
See also the discussion under Item 7 and also 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.
13
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that
could affect our Israeli subsidiary, Koffolk Israel. As of June 30, 2003 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 13% 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 provide no 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 assure that we will, in the future, be
eligible for or receive such or similar grants.
14
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
Bowmanstown, Pennsylvania............. 56,500 Premixing and Warehouse
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 Premixing and 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)................... 187,000 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
Queretaro, Mexico(a).................. 3,500 Sales
Santiago, Chile(a).................... 6,500 Sales and Administrative
Sydney, Australia(a).................. 3,500 Sales
Tokyo, Japan(a)....................... 2,100 Sales and Administrative
Valencia, Venezuela(a)................ 1,100 Sales and Administrative
SPECIALTY CHEMICALS
Bordeaux, France...................... 141,000 Sales, Manufacturing and
Administrative
Garland, Texas........................ 20,000 Manufacturing
Joliet, Illinois...................... 34,500 Manufacturing
Phenix City, Alabama.................. 6,000 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 14 to our Consolidated
Financial Statements included herein.
(b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the
active ingredients semduramycin-mycelial and salinomycin. The plant also
produces Aviax(R), Terramycin(R), and Stafac(R) formulations as well as
the new Coxistac(R) Granular product. The plant is cGMP compliant and is
in the process of obtaining an FDA approval.
(c) Comprises six facilities, including three warehouses, two manufacturing
and one sales facility.
(d) Our Rixensart, Belgium plant utilizes fermentation processes to produce
the active ingredients semduramycin-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.
15
(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, 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.
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 and Brazil manufacture products that
conform to the FDA's cGMP regulations. Four 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 plants in Bowmanstown,
Pennsylvania and Petach Tikva, Israel have 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. The third member of the limited liability company will be
Vulcan Materials Company. 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.
Our 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, 2003. Some
recovery from insurance and other sources is expected. We have also accrued our
best estimate of any future costs.
By notice dated August 14, 2003, our Phibro-Tech subsidiary's Santa Fe
Springs, California facility was notified by the California Department of Toxic
Substances Control that it could be a potentially responsible party in
connection with a third-party site in Wilmington, California. We are
investigating this matter but believe it relates to matters that took place
before Phibro-Tech acquired the assets and began operating at its Santa Fe
Springs, California site. In any event, we do not believe that Phibro-Tech will
have any material liability in this matter.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substance Control ("DTSC") and has
reached on oral 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.
16
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 of the settlement amount.
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, 2003.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information. There is no public trading market for our common
equity securities.
(b) Holders. As of June 30, 2003, 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, 2003.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data as of and for fiscal
years ended June 30, 1999, 2000, 2001, 2002 and 2003 have been derived from our
audited consolidated financial statements. The selected consolidated financial
data reflect our Odda, Carbide and MRT businesses as discontinued operations for
all periods presented. Results of operations include the PAH business from the
November 30, 2000 acquisition date. 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 offering circular.
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
RESULTS OF OPERATIONS:
Net sales ........................................ $ 267,234 $ 280,618 $ 319,664 $ 340,549 $ 355,225
Cost of goods sold ............................... 210,800 216,510 250,305 258,555 263,728
---------- ---------- ---------- ---------- ----------
Gross profit ..................................... 56,434 64,108 69,359 81,994 91,497
Selling, general and administrative expenses ..... 46,896 50,454 63,925 72,277 66,360
Curtailment of operations at manufacturing
facility ....................................... (500) (1,481) -- -- --
---------- ---------- ---------- ---------- ----------
Operating income ................................. 10,038 15,135 5,434 9,717 25,137
Interest expense ................................. 13,142 14,754 18,297 18,158 16,342
Interest (income) ................................ (628) (600) (566) (356) (86)
Other expense (income), net ...................... 1,828 (506) 855 3,104 1,277
(Gain) from property damage claim ................ (3,701) (946) -- -- --
(Gain) from sale of assets ....................... -- -- (1,457) (18) (127)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes ................................... (603) 2,433 (11,695) (11,171) 7,731
Provision (benefit) for income taxes ............. 773 1,188 (381) 14,829 10,076
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations ......... (1,376) 1,245 (11,314) (26,000) (2,345)
Income (loss) from discontinued operations ....... 910 8,808 (3,581) (25,770) (14,531)
(Loss) on disposal of discontinued operations .... -- -- -- -- (683)
---------- ---------- ---------- ---------- ----------
Net income (loss) ................................ (466) 10,053 (14,895) (51,770) (17,559)
Change in derivative instruments ................. -- -- -- 1,062 (981)
Change in foreign currency translation adjustments (2,043) 55 (5,146) (6,125) 7,377
---------- ---------- ---------- ---------- ----------
Comprehensive income (loss) ...................... $ (2,509) $ 10,108 $ (20,041) $ (56,833) $ (11,163)
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 3,022 $ 2,403 $ 14,845 $ 6,419 $ 11,179
Total assets ..................................... 238,779 258,451 330,019 296,444 274,347
Long-term debt ................................... 134,088 139,722 139,464 136,641 102,391
Series B and C redeemable preferred stock ........ -- -- 48,980 56,602 68,881
Total stockholders' equity (deficit) ............. 21,448 31,618 3,405 (61,189) (84,510)
18
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, and MRT 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 our fiscal year ending June 30. All references to
years 2003, 2002, and 2001 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. The Company operates in over 17 countries around the world and
sells its animal health and nutrition products and specialty chemicals products
into over 40 countries. Approximately 71% of 2003 net sales were from the Animal
Health and Nutrition business, and approximately 29% of 2003 net sales were from
the Specialty Chemicals businesses, included in the Industrial Chemicals,
Distribution, and All Other segments.
The Company recently changed its name to Phibro Animal Health Corporation.
The Company was formerly known as Philipp Brothers Chemicals, Inc. The new name
reflects the core focus and strategic direction of the Company.
During 2003, the Company took significant steps to refocus on its core
business, improve operating results and to reduce debt levels. Operating income
improved more than $15 million, and total debt, net of cash, decreased more than
$26 million. Actions included the shutdown of the Company's Norwegian
subsidiary, Odda Smelteverk and the sale of its Carbide business. Odda and
Carbide's operating losses (included in discontinued operations) were $13.5
million, $27.7 million and $3.1 million in 2003, 2002 and 2001, respectively.
Actions also included partial disposal of the ammoniacal etchant business
related to the printed circuit board market, headcount and other cost
reductions, and aggressive working capital management. The Company continues to
evaluate its Specialty Chemicals businesses and will continue to restructure,
discontinue or sell those businesses that are dilutive to earnings. In August
2003, the Company completed the sale of MRT for net proceeds, after transaction
costs, of approximately $14.0 million, the amount dependent upon certain
post-closing adjustments. MRT's operating losses (included in discontinued
operations) were $3.5 million, $2.9 million and $1.3 million in 2003, 2002 and
2001, respectively.
LIQUIDITY AND REFINANCING RISK
The Company's senior bank credit facility and its note payable to Pfizer
mature in November 2003 and March 2004, respectively. It is unlikely the Company
will have sufficient cash resources from operations to repay these obligations
as they come due.
In connection with the Company's acquisition in November 2000 of the
Medicated Feed Additives business of Pfizer (the "MFA acquisition"), it incurred
certain obligations to Pfizer (amounts are shown as of June 30, 2003). By the
terms of an agreement with Pfizer which is subject to certain conditions, the
following would be terminated and satisfied in full by the payment to Pfizer of
approximately $28.5 million, plus accrued interest on the existing promissory
note due 2004, from the proceeds of the notes offering described below: (i)
approximately $20.1 million aggregate principal amount of such promissory note;
(ii) approximately $12.8 million of accounts payable; (iii) approximately $9.2
million of accrued expenses; and (iv) future contingent purchase price
obligations under the Pfizer agreements.
The Company is currently pursuing the issuance of $105.0 million of Senior
Secured Notes due 2007 ("new notes"). Concurrent with the issuance, the Company
intends to purchase through privately negotiated transactions approximately
$52.0 million of its 9 7/8% Senior Subordinated Notes due 2008 ("existing
notes") at a price equal to 60% of the principal amount thereof, plus accrued
and unpaid interest. The issuance will be subject to certain conditions,
including, among other things, receiving consents of holders of existing notes
that represent more than 50% of the outstanding principal amount of the existing
notes. The Company expects to use the proceeds from the new notes to repurchase
the existing notes, repay its senior domestic credit facility, and pay certain
of its outstanding obligations to Pfizer, including the Pfizer note payable due
2004.
If the Company is unable to refinance these obligations on acceptable terms,
the creditors could declare the loans to be in default and exercise their rights
under the respective agreements, and the Company might be required to take
actions outside of the ordinary course of operations to generate cash or
otherwise settle these obligations, all of which would have a material adverse
impact on the
19
Company's financial position, results of operations, and cash flows. There can
be no assurance the Company will be successful in executing the refinancing
plan. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company intends to sell PMC to the Palladium Investors. The material
elements of the transactions relating to PMC are expected to include the
following: (i) the transfer of ownership to the Palladium Investors of PMC; (ii)
the reduction of the preferred stock of the Palladium Investors from $68.9
million (as of June 30, 2003) to $15.2 million (as of September 30, 2003); (iii)
the termination of any obligation of the Company or any subsidiary of the
Company, other than PMC, in respect of the $2.25 million annual management
advisory fee; (iv) a separate cash payment to the Palladium Investors of $10
million (derived from the recent sale of MRT); (v) payments by PMC to the
Company for central support services for the next three years of $1 million,
$0.5 million and $0.2 million, respectively; and (vi) supply arrangements
between the Company and PMC with respect to manganous oxide and red iron oxide.
The PMC transactions are subject to definitive documentation that is expected to
include customary representations, warranties and indemnities of the Company,
and provisions for working capital adjustments and settlement of intercompany
accounts. Any transaction with the Palladium Investors is dependent upon
successful completion of the refinancing plan. See Item 13, Certain
Relationships and Related Transactions.
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.
SUMMARY CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------
2003 2002 2001
------------ ------------ -----------
(THOUSANDS)
Net sales...................................... $ 355,225 $ 340,549 $ 319,664
Gross profit................................... 91,497 81,994 69,359
Selling, general and administrative............ 66,360 72,277 63,925
Operating income............................... 25,137 9,717 5,434
Interest expense, net.......................... 16,256 17,802 17,731
Other expense (income), net.................... 1,150 3,086 (602)
Provision (benefit) for income taxes........... 10,076 14,829 (381)
(Loss) from continuing operations.............. $ (2,345) $ (26,000) $ (11,314)
20
2003 COMPARED WITH 2002
Net Sales of $355.2 million increased $14.7 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 $104.5 million increased $3.6 million, or
4%, primarily due to volume increases in the Distribution and All Other
businesses.
Gross Profit of $91.5 million improved $9.5 million to 25.8% of net sales,
compared with 24.1% 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 25.0% in 2002.
Selling, General and Administrative Expenses of $66.4 million decreased $5.9
million, or 8%. Expenses declined $6.8 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 also included 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, 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 $25.1 million increased $15.4 million to 7.1% 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 $16.3 million decreased $1.5 million, compared with
$17.8 million in 2002, primarily due to lower average interest rates and reduced
average borrowing levels.
Other Expense, Net of $1.2 million improved in comparison with $3.1 million
last 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.
2002 COMPARED WITH 2001
Net Sales of $340.6 million increased $20.9 million, or 7%. Animal Health
and Nutrition sales increased $41.8 million, primarily due to a full year of the
MFA acquisition in 2002, compared with 7 months of operations in 2001. Specialty
Chemicals net sales decreased $20.9 million due to the divestiture of the Agtrol
crop protection business to Nufarm in the fourth quarter of 2001, the continued
decline in the sale and recycling of etchant related to the printed circuit
board market, and lower sales of the Distribution segment.
Gross Profit of $82.0 million increased $12.6 million to 24.1% of net sales,
compared with 21.7% in 2001. Animal Health and Nutrition gross profit increased
$21.4 million due to a full year of the MFA acquisition. Purchase accounting
adjustments relating to inventory acquired in the MFA acquisition resulted in an
increase to cost of goods sold of $3.3 million and $8.9 million for 2002 and
2001, respectively. Specialty Chemicals gross profit declined $8.8 million due
to lower sales volumes and environmental recovery services revenues related to
the printed circuit board market, lower unit volume of the Distribution segment
and lower margins from contract manufacturing revenues, compared with higher
margin 2001 sales of crop protection chemicals to third parties prior to the
Agtrol divestiture.
Selling, General and Administrative Expenses of $72.3 million increased $8.4
million, or 13%. Animal Health and Nutrition expenses increased $10.7 million
due to a full year of the MFA acquisition versus seven months in 2001. Specialty
Chemicals expenses decreased $5.6 million, due to the divestiture of Agtrol,
which reduced expenses by $8.0 million. Expenses for 2002 increased by $1.6
million due to the write-off of unamortized permit fees at closed facilities and
additional environmental reserves. Corporate expenses increased $3.3 million.
The full year 2002 management advisory fee to Palladium was $2.3 million,
compared with $1.4 million for a partial year in 2001. In 2002, the Company
recorded a $0.4 million non-cash gain to adjust the value of redeemable common
stock; the 2001 gain was $3.1 million. In 2001, the Company recorded $1.3
million of expense for the severance of an executive.
21
Operating Income of $9.7 million increased $4.3 million. The improvement was
due to a full year of the MFA acquisition and improved operating results in
Animal Health and Nutrition. Specialty Chemicals reported increased losses
related to declining sales to the printed circuit board market, offset in part
by the elimination of losses related to the Agtrol business, divested in 2001.
Interest Expense, Net of $17.8 million increased $0.1 million primarily due
to debt incurred in connection with the MFA acquisition and higher levels of
average bank borrowings, offset in part by lower interest rates.
Other Expense, Net principally reflects foreign currency transaction and
translation gains and losses of the Company's foreign subsidiaries. During 2001,
a $1.5 million gain was recorded on the divestiture of the Agtrol crop
protection business.
Income Taxes of $14.8 million were primarily due to an increase in valuation
allowances for domestic deferred tax assets and income tax provisions in
profitable foreign jurisdictions. The Company incurred domestic losses in recent
years and a reassessment of the likelihood of recovering net domestic deferred
tax assets resulted in the recording of a full domestic valuation allowance of
$14.7 million.
OPERATING SEGMENTS
YEAR ENDED JUNE 30,
--------------------------------------------
2003 2002 2001
----------- ----------- -----------
NET SALES
Animal Health & Nutrition............. $ 250,706 $ 239,602 $ 197,806
Specialty Chemicals:
Industrial Chemicals............... 48,797 50,854 55,111
Distribution....................... 30,072 27,852 34,074
All Other.......................... 25,650 22,241 32,673
----------- ----------- -----------
$ 355,225 $ 340,549 $ 319,664
=========== =========== ===========
YEAR ENDED JUNE 30,
--------------------------------------------
2003 2002 2001
------------ ------------ -----------
OPERATING INCOME
Animal Health & Nutrition............. $ 38,472 $ 28,298 $ 17,562
Specialty Chemicals:
Industrial Chemicals............... (1,855) (7,324) 664
Distribution....................... 3,207 2,345 3,057
All Other.......................... 261 252 (5,763)
Corporate............................. (14,948) (13,854) (10,086)
----------- ----------- -----------
$ 25,137 $ 9,717 $ 5,434
=========== =========== ===========
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
Koffolk 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. The All Other segment in
2001 includes the Agtrol crop protection business, which was sold to Nufarm in
the fourth quarter of fiscal 2001.
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.
22
SPECIALTY CHEMICALS
INDUSTRIAL CHEMICALS net sales of $48.8 million decreased $2.1 million, or
4%. Industrial Chemicals net sales decreased $2.9 million principally due to
reduced sales of etchants to the printed circuit board market. Sales of iron and
manganese compounds to the brick, masonry, glass, and other chemical industries
increased $0.8 million. Industrial Chemicals operating loss of $1.9 million
improved $5.5 million. 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 Company continues its
existing etchant business at one remaining facility. No manufacturing
facilities, equipment or inventory were included in the transaction. The gain on
the transaction was not material.
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 $25.7 million increased $3.4 million, or 15%. Sales
to new customers accounted for the increase, as contract manufacturing declined
$0.8 million and specialized lab projects and formulations declined $0.6
million. All Other operating income of $0.3 million approximated the prior year.
OPERATING SEGMENTS 2002 COMPARED TO 2001
ANIMAL HEALTH AND NUTRITION
NET SALES of $239.6 million increased $41.8 million, or 21%. The net sales
increase was due to a full year of the MFA acquisition. Excluding the MFA
acquisition, 2002 net sales increased $0.4 million. The adverse business climate
in Israel and discontinuation of sales of vitamin exports by Koffolk Israel
lowered international net sales. Domestic operations reported higher net sales
due to increased unit volume sales of vitamin, mineral and other pre-mix
products offset in part by lower average selling prices and other product mix
changes.
OPERATING INCOME of $28.3 million increased $10.7 million, or 61%. The
increase primarily was due to a full year of the MFA acquisition offset by the
adverse business climate in Israel. Purchase accounting adjustments relating to
inventory from the MFA acquisition resulted in increased cost of goods sold of
$3.3 million and $8.9 million in 2002 and 2001, respectively. Adjusted to
exclude the purchase accounting adjustments, the operating income margin was 13%
in 2002, approximately the same as the prior year.
SPECIALTY CHEMICALS
INDUSTRIAL CHEMICALS net sales of $50.9 million decreased $4.3 million, or
8%. Industrial Chemicals net sales declined $3.7 million due to volume declines
in the sales and recycling revenues of etchants related to the contraction of
the U.S. printed circuit board industry. Sales price declines at the Company's
PMC operations, partially offset by volume improvements of iron and manganese
oxides, decreased revenues $0.6 million. Industrial Chemicals operating loss was
$7.3 million in fiscal 2002 compared to income of $0.7 million in the prior
year. These losses were primarily due to reduced sales volumes from printed
circuit board customers.
DISTRIBUTION net sales of $27.9 million decreased $6.2 million, or 18%. The
net sales decrease was primarily due to lower unit volumes of carbide,
dicyandiamide and cyanide products in 2002. Distribution operating income of
$2.3 million decreased $0.7 million, or 23%, primarily due to sales volume
declines.
ALL OTHER net sales of $22.2 million decreased $10.4 million, or 32%. This
decrease principally was due to the divestiture of the Agtrol crop protection
business during the fourth quarter of 2001. The transaction included multi-year
supply agreements to continue to produce crop protection chemicals for Nufarm.
The sales decline reflects contract manufacturing volumes under the supply
agreements, compared with sales to third-party customers in 2001. Specialized
lab projects and formulations net sales increased $1.3 million. All Other
operating income was $0.3 million in 2002 compared to an operating loss of $5.8
million in the prior year. The improvement was primarily the result of the sale
of Agtrol, which generated 2001 operating losses of $6.4 million. An increase in
specialized lab projects and formulations also contributed to improved 2002
profitability.
23
DISCONTINUED OPERATIONS
During 2003, the Company decided to shutdown or divest 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 2003 presentation.
YEAR ENDED JUNE 30, 2003
------------------------
ODDA/CARBIDE MRT TOTAL
------------ --- -----
Net sales............................................................ $ 11,217 $ 18,671 $ 29,888
========== ========== ===========
Loss before income taxes............................................. $ (11,135) $ (3,454) $ (14,589)
Provision (benefit) for income tax................................... (58) -- (58)
---------- ---------- -----------
(Loss) from discontinued operations.................................. $ (11,077) $ (3,454) $ (14,531)
========== ========== ===========
Depreciation and amortization........................................ $ 894 $ 1,309 $ 2,203
========== ========== ===========
YEAR ENDED JUNE 30, 2002
------------------------
ODDA/CARBIDE MRT TOTAL
------------ --- -----
Net sales............................................................ $ 31,219 $ 17,045 $ 48,264
========== ========== ===========
Loss before income taxes............................................. $ (24,010) $ (2,930) $ (26,940)
Provision (benefit) for income tax................................... (1,170) -- (1,170)
---------- ---------- -----------
(Loss) from discontinued operations.................................. $ (22,840) $ (2,930) $ (25,770)
========== ========== ===========
Depreciation and amortization........................................ $ 17,676 $ 1,192 $ 18,868
========== ========== ===========
YEAR ENDED JUNE 30, 2001
------------------------
ODDA/CARBIDE MRT TOTAL
------------ --- -----
Net sales............................................................ $ 30,440 $ 14,306 $ 44,746
========== ========== ==========
Loss before income taxes............................................. $ (3,858) $ (1,323) $ (5,181)
Provision (benefit) for income tax................................... (1,150) (450) (1,600)
---------- ---------- ----------
(Loss) from discontinued operations.................................. $ (2,708) $ (873) $ (3,581)
========== ========== ==========
Depreciation and amortization........................................ $ 2,962 $ 465 $ 3,427
========== ========== ==========
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 has been advised that, as a result of
the bankruptcy, the creditors of Odda have recourse only to the assets of Odda,
except in the case of certain debt guaranteed by the Company. The Company has
removed all assets, liabilities (except as noted below), and cumulative
translation adjustments related to Odda from the Company's consolidated balance
sheet as of June 30, 2003, and has recorded the net result as a loss on disposal
of discontinued operations. The Company is the guarantor of certain debt of
Odda. As of June 30, 2003, debt of Norwegian Krone (NOK) 41.1 million ($5.7
million) was outstanding and was included in loans payable to banks on the
Company's consolidated balance sheet. The Company has entered into forbearance
agreements with the Norwegian banks holding the guarantees from the Company,
under which the banks have agreed not to demand immediate payment and the
Company has agreed to pay the principal amount plus interest in installments.
The Company has been advised by Norwegian counsel that it will obtain the
benefit of the banks' position as a secured creditor upon payment pursuant to
the guarantees. The Company obtained the consent of a majority of the holders of
its senior subordinated notes due 2008 to amend the indenture governing these
existing notes in such a manner that the bankruptcy of Odda did not create an
event of default there under. 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 $14.0 million, the
amount dependent upon certain post-closing adjustments. The Company does not
anticipate a material gain or loss on disposal based upon its assessment of the
likely outcomes of the post-closing adjustments. MRT was included in the
Company's All Other segment.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Provided (Used) by Operating Activities. Cash provided (used) by
operations for 2003 and 2002 was $34.7 million and ($4.7) million, respectively.
Cash provided in 2003 was due to improved income from continuing operations and
aggressive working capital management. Improvements in net working capital,
principally due to close control of accounts receivables and accounts
24
payable, contributed $15.8 million to operating cash flow. Cash of $6.1 million
used for the reduction of cash overdrafts is a partial offset to the working
capital improvement, and is included in the financing activities section of the
cash flow statement.
Net Cash (Used) by Investing Activities. Net cash used by investing
activities for 2003 and 2002 was ($4.0) million and ($17.4) million,
respectively. Capital expenditures of $9.0 million and $8.7 million for 2003 and
2002, respectively, were for new product capacity, for maintaining the Company's
existing asset base and for environmental, health and safety projects. Included
in 2002 was $7.2 million for contingent purchase price payments for the MFA
acquisition. Proceeds from sales of fixed assets and discontinued operations
accounted for the remainder of cash provided by investing activities in 2003.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used)
by financing activities for 2003 and 2002 was ($26.4) million and $13.7 million,
respectively. The domestic credit facility and related capital expenditure line
were reduced $10.1 million during 2003. Debt payments related to Odda were $6.8
million, funded by the reductions in Odda's working capital, asset sales and
cash provided by the Company. The Company made a $2.5 million scheduled payment
on the Pfizer note. Cash overdrafts declined $6.1 million as the Company
improved its cash management practices.
Working Capital and Capital Expenditures. Working capital, defined as
accounts receivables, inventories and prepaid expenses and other current assets,
less accounts payable and accrued expenses and other current liabilities, was
$59.7 million and $93.8 million as of June 30, 2003 and 2002, respectively. The
decrease was primarily due to improved management of accounts receivables and
accounts payable. In addition, $9.0 million of accrued purchase price payable to
Pfizer, due March 2004, was included in Other current liabilities at June 30,
2003, and was classified as a long-term liability at the prior year end.
The Company anticipates spending approximately $10.0 million for capital
expenditures related to continuing operations in 2004, primarily to cover the
Company's asset replacement needs, to improve processes, and for environmental
and regulatory compliance, subject to the availability of funds.
Liquidity. At June 30, 2003, the Company was in compliance with the
financial covenants included in its domestic senior credit facility with its
lending banks. The credit facility was amended in October 2002 to: waive
noncompliance with financial covenants as of June 30, 2002; amend financial
covenants prospectively until maturity; amend the borrowing base formula and
also reduce maximum availability under the revolving credit portion of the
facility from $70 million to $55 million; limit borrowings under the capital
expenditure line of the facility outstanding balance as of the amendment date;
and revise the interest rate to 1.5% to 1.75% per annum over the base rate (as
defined in the agreement). The credit facility expires November 30, 2003.
See the "General" section of this Item 7 for a discussion of significant
liquidity issues, the Company's current plans to refinance its obligations, and
the potential for a material adverse impact if the Company does not succeed in
its refinancing objectives.
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.
At June 30, 2003, the amount of credit extended under the Company's domestic
senior credit facility totaled $32.1 million under the revolving credit facility
and $1.5 million under the capital expenditure facility and the Company had
$10.0 million available under the borrowing base formula in effect under the
domestic senior credit facility. In addition, certain of the Company's foreign
subsidiaries also had availability totaling $9.3 million under their respective
loan agreements.
The Company's contractual obligations (in millions) at June 30, 2003 mature
as follows:
YEARS
-----
WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 AFTER 5 TOTAL
-------- ------------ ------------ --------- -------
Loans payable to banks(1)...................... $ 38.9 $ -- $ -- -- $ 38.9
Lease commitments.............................. 2.4 2.3 0.9 0.1 5.7
Long-term debt (including current
portion)..................................... 24.1 2.2 100.2 -- 126.5
------- ----- ------- ----- --------
Total contractual obligations................ $ 65.4 $ 4.5 $ 101.1 $ 0.1 $ 171.1
======= ===== ======= ===== ========
- ----------
(1) Includes $33.6 million outstanding under the Company's domestic senior
credit facility which matures in November 2003 (see Note 8).
On November 30, 2000, the Company issued $25 million of redeemable Series B
preferred stock and $20 million of redeemable Series C preferred stock. Each
Series is entitled to cumulative cash dividends, payable semi-annually at 15%
per annum of the liquidation value. The liquidation value of the Preferred B
stock is an amount equal to $1 per share plus all accrued and unpaid
25
dividends (Liquidation Value). The 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 the earnings before interest, tax, depreciation and
amortization of the Company (Equity Value). The Company may, at the date of the
annual closing anniversary, redeem the Preferred B in whole or in part at the
Liquidation Value, for cash, provided that if the Preferred B stock is redeemed
separately from the Preferred C stock then the Preferred B must be redeemed for
the Liquidation Value plus an additional amount which would generate an internal
rate of return of 20% to the holders of the shares. Redemption in part of the
Preferred B shares is only available if at least 50% of the outstanding
Preferred B shares are redeemed. On the third closing anniversary and on each
closing anniversary thereafter, the Company may redeem for cash only in whole
the Preferred C shares, at the Liquidation Value plus the Equity Value payment.
At any time after the redemption of the Company's Senior Subordinated Notes due
2008, the holders of both series have the right to require the Company to redeem
for cash all such preferred shares outstanding.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC" or the "Commission") recently
issued disclosure guidance for "critical accounting policies". The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The Company's significant accounting policies are described in Note 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 14 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 $2.8 million at June
30, 2003 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.
26
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; however
certain subsidiaries of the Company use the last-in, first-out (LIFO) method for
valuing inventories. The determination of market value to compare to cost
involves assessment of numerous factors, including costs to 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 13 to the Consolidated Financial
Statements.
NEW ACCOUNTING PRONOUNCEMENTS
Effective for 2003, the Company adopted the following new accounting
pronouncements:
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS No. 141") and No. 142 "Goodwill and Other Intangibles" ("SFAS No. 142").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 establishes
specific criteria for recognition of intangible assets separately from goodwill.
The statement requires that goodwill and indefinite lived intangible assets no
longer be amortized and be tested for impairment at least annually. The
amortization period of intangible assets with determinable lives will no longer
be limited to forty years. Identifiable intangible assets with determinable
useful lives will continue to be amortized. The Company has no goodwill, but has
assessed the useful lives of its intangible assets. The adoption of SFAS No. 141
and SFAS No. 142 did not result in an impact on the Company's financial
statements.
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 established accounting
standards for the recognition and measurement of an asset retirement obligation
("ARO") and its associated asset retirement cost. The Company has reviewed its
tangible long-lived assets for associated asset retirement obligations in
accordance with SFAS No. 143. The adoption of SFAS No. 143 did not result in an
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses significant issues relating to the implementation of FASB Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), and the development of a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. As a result of the adoption of SFAS No. 144, the Company
classified the Odda, Carbide, and MRT businesses as discontinued operations.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections" ("SFAS No.
145"). The adoption of SFAS No. 145 did not result in an impact on the Company's
financial statements.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred rather than at the date of a commitment to an exit or disposal plan.
Costs covered by SFAS No. 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not result in an impact on the Company's
financial statements.
27
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. The adoption of FIN No. 45 did not
result in a material impact on the Company's financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN No. 46"). FIN No. 46 requires consolidation by business enterprises of
variable interest entities (including entities commonly referred to as special
purpose entities), which meet certain characteristics. The adoption of FIN No.
46 did not result in an impact on the Company's financial statements.
The Company will adopt the following new accounting pronouncements in 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. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company is currently assessing the impact of
this pronouncement.
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. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Effective
in 2004, the Company will classify its Redeemable Preferred Stock as a
liability.
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 losses were $480, $3,027 and $711 for 2003, 2002 and 2001,
respectively, and were included in other expense, net in the consolidated
statements of operations.
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.
28
The Company's debt portfolio is comprised of fixed rate and variable rate
debt of approximately $165.4 million as of June 30, 2003. Approximately 27% of
the debt is variable and would be interest rate sensitive. For further details,
see Note 8, 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, 2003, the fair value of the Company's senior subordinated
debt is estimated based on quoted market rates at $40 million and the related
carrying amount is $100 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,
2003, the Company does not believe that an instantaneous 10% adverse movement in
foreign currency rates from their levels at June 30, 2003, with all other
variables held constant, would have a material effect on the Company's results
of operations, financial position or cash flows.
OTHER
The Company obtains third party letters of credit in connection with certain
insurance obligations. At June 30, 2003, the contract values of these letters of
credit and surety bonds were $2.6 million and their fair values did not differ
materially from their carrying value.
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, 2002 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.
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,
29
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:
- our substantial leverage and potential inability to service our debt
- our dependence on distributions from our subsidiaries
- risks associated with our international operations and significant
foreign assets
- our dependence on our Israeli operations
- competition in each of our markets
- potential environmental liability
- potential legislation affecting the use of medicated feed additives
- extensive regulation by numerous government authorities in the United
States and other countries
- our reliance on the continued operation and sufficiency of our
manufacturing facilities
- our reliance upon unpatented trade secrets
- the risks of legal proceedings and general litigation expenses
- potential operating hazards and uninsured risks
- the risk of work stoppages
- 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.
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.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No response required.
ITEM 9A. CONTROLS AND PROCEDURES.
Our management has evaluated, under the supervision and with the
participation of our Chief Executive Officer, Chairman of the Board and Chief
Financial Officer, the effectiveness and design of our disclosure controls and
procedures, and 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 effective for gathering,
analyzing and disclosing information we are required to disclose in reports that
we furnish to the Securities and Exchange Commission. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
There have been no changes in our internal control over financial
reporting that occurred during our fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
31
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...................... 56 Chairman of the Board of Directors; President
Gerald K. Carlson..................... 60 Chief Executive Officer
Marvin S. Sussman..................... 56 Vice Chairman of the Board of Directors and President, Prince Agri
James O. Herlands..................... 61 Director and Executive Vice President
Peter A. Joseph....................... 51 Director
Richard G. Johnson.................... 53 Chief Financial Officer
Steven L. Cohen....................... 59 Vice President, General Counsel and Assistant Secretary
David G. McBeath...................... 56 President, Animal Health Group
William A. Mathison................... 62 President, Specialty Chemicals Group
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 and at PMC. 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.
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.
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.
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.
David G. McBeath President Animal Health Group. Mr. 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.
William A. Mathison President, Specialty Chemicals Group. Mr. Mathison
joined us in June 2002 as President, Specialty Chemicals Group. Prior to joining
us, Mr. Mathison served as Senior Vice President, Global Industrial Accounts for
Ecolab Inc. from
32
2000 until his retirement in March 2002. From 1991 to 2000, Mr. Mathison served
as Vice President and General Manager of the North American Food and Beverage
Division of Ecolab Inc.
BOARD COMPOSITION
Our Board of Directors consists of 4 members. 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
Our directors do not receive any cash compensation for service on our board
of directors, but directors may be reimbursed for certain expenses in connection
with attendance at board meetings. We have entered into certain transactions
with certain of the directors. See Item 13, Certain Relationships and Related
Transactions.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has not created any committees.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation paid by us and our
subsidiaries for services during fiscal 2003, 2002, and 2001 to each of our five
most highly compensated executive officers:
ANNUAL COMPENSATION
-------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
- ---------------------------------- ----- ----------- ---------- ------------- ----------------
Jack C. Bendheim 2003 $ 1,650,000 $ -- $ 150,000(2) $ 6,500
Chairman of the Board; President 2002 1,500,000 265,000 -- 6,000
2001 1,640,000 600,000 -- 5,300
Gerald K. Carlson(3) 2003 500,000 -- 24,000 --
Chief Executive Officer 2002 49,350 -- -- --
Marvin S. Sussman(4) 2003 1,000,000 -- -- 6,500
Vice Chairman of the Board; 2002 1,000,000 -- -- 6,000
President of Prince Agri 2001 733,500 710,000 -- 5,300
James O. Herlands 2003 400,000 150,000 -- 6,500
Executive Vice President 2002 400,000 150,000 -- 6,000
2001 395,000 382,500 -- 5,300
William A. Mathison(5) 2003 235,000 -- 50,000 --
President, Specialty Chemicals
- ----------
(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 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. 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 2003, 2002 and 2001, the expense (income) attributable
to Mr. Sussman's shares was $0, ($378,000) and ($3,135,000), respectively.
No distributions have been made to Mr. Sussman under this agreement.
33
(5) Salary is since date of employment for 2003. Mr. Mathison also received
$50,000 as a signing bonus and relocation allowance.
In fiscal 2003, we granted no options to the named executive officers and no
options were held or exercised by any of the named executive officers.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Our UK subsidiary, PAH Management Company Ltd., entered into an employment
agreement with David McBeath in May 2003, for a term commencing August 1, 2003
and ending October 31, 2004, unless renewed, 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 term of 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.
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.
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, 2003, 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.
The accounts of Messrs. Bendheim, Carlson, Sussman, Herlands, and Mathison
were credited with employer contributions of $6,500, $0, $6,500, $6,500, and $0,
respectively, for fiscal 2003.
Retirement Plan. We have adopted The Retirement Plan of Philipp Brothers
Chemicals Inc. 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
34
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............................... $ 11,590 $ 15,000 $ 18,750 $ 22,500 $ 26,250
$100,000.............................. $ 17,220 $ 22,230 $ 27,270 $ 32,320 $ 37,640
$150,000.............................. $ 28,470 $ 37,230 $ 46,020 $ 54,820 $ 63,890
$200,000.............................. $ 39,720 $ 52,230 $ 64,770 $ 77,320 $ 90,140
As of June 30, 2003, Messrs. Bendheim, Carlson, Sussman, Herlands, and
Mathison had 34, 1, 32, 39 and 1 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, 2003 is $200,000. Such
individuals, at normal retirement age 65, will have 43, 6, 41, 43 and 6 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, 2003, is $118,250, $16,590, $134,170,
$129,260, and $16,550, 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, 2003.
ANNUAL SURVIVOR'S DEFERRED
RETIREMENT INCOME COMPENSATION
INCOME BENEFIT BENEFIT BENEFIT
-------------- ------- -------
Jack C. Bendheim.............. $ 27,101 $ 1,500,000 $ 315,229
Marvin S. Sussman............. $ 27,101 $ 1,500,000 $ 110,953
James O. Herlands............. $ 27,101 $ 780,000 $ 278,999
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 two 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.
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.
35
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.
MEETINGS AND COMPENSATION OF DIRECTORS
During fiscal 2002, 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. Our directors do not receive any cash compensation
for service on the Board of Directors, but directors may be reimbursed for
certain expenses in connection with attendance at board meetings. We have
entered into certain transactions with certain of the directors. See Item 13,
Certain Relationships and Related Transactions.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has not created any committees.
REPORT OF BOARD OF DIRECTORS AS TO COMPENSATION
We do not have a Compensation Committee or other Board Committee performing
equivalent functions. Executive compensation is determined by the Board as a
whole. During fiscal 2003, 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. 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.
Messrs. Bendheim, Sussman and Herlands 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, 2003 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.
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 are entitled to
elect all but three of the directors. The holders of Class B Common Stock,
Series B Preferred Stock and Series C Preferred Stock are each entitled to
elect one director but do not vote on any other matters.
(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.
36
(4) Includes 4,414.886 shares owned by trusts for the benefit of Jack Bendheim,
his spouse, his children and their spouses and his grandchildren.
(5) Peter A. Joseph has been designated as director of the Company by Palladium
Equity Partners II, LP ("Palladium") which beneficially owns 25,000 and
20,000 shares of our Series B Preferred Stock and Series C Preferred Stock,
respectively.
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.
In connection with the retirement of Nathan Z. Bistricer from us and
Phibro-Tech in January, 2001, pursuant to the Shareholders Agreement among the
executives and Phibro-Tech, we paid $855,000 in connection with the repurchase
of 71.67 shares of his Class B Common Stock of Phibro-Tech. In addition, in
satisfaction of Phibro Tech's severance obligation under a Severance Agreement
between Phibro Tech and Mr. Bistricer, we agreed to pay $516,070 in twenty-four
(24) equal monthly installments to Mr. Bistricer. We also agreed to provide
certain unspecific out-placement services to Mr. Bistricer not to exceed $15,000
in total costs and fees.
We have advanced $200,000 to Marvin Sussman and his wife 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 certain of the executive
officers named above, provide services to us, in one case through a consulting
firm controlled by him, and in other cases as employees, including one of our
Vice Presidents, and received directly or through such consulting firm annual
aggregate payments of approximately $400,000 for the fiscal year ended June 30,
2003.
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. Pursuant to a Shareholders' Agreement among the shareholders of
PHC, Mr. Bendheim has been designated as one of three directors of PHC, and Mr.
Katzenstein, our Secretary, has been designated as Secretary and Treasurer of
PHC. The Company has invested $1,980,000 for shares of Series A Preferred Stock
of PHC bearing an 8.5 percent annual cumulative dividend, and PBCI LLC invested
approximately $20,000 for 20 percent of the Common Stock of PHC.
37
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 be comprised of five directors, at least two of whom will be designees
of the Palladium Investors. Peter A. Joseph is currently the sole designee of
the Palladium Investors serving as a director. The Palladium Investors are in
discussions with us regarding filling the currently vacant directorship entitled
to be designated by the Palladium Investors. 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.
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, on the same basis as the Indenture
for the Senior Subordinated Notes and our secured domestic credit agreement. 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. Pursuant to the sale of PMC
described below, our obligations for this fee will be terminated.
We intend to sell PMC to the Palladium Investors. The material elements of
the transactions relating to PMC, as currently contemplated, would include the
following: (i) the transfer of ownership to the Palladium Investors of PMC
(which would be valued at approximately $21 million); (ii) the reduction of the
preferred stock of the Palladium Investors from $68.9 million (as of June 30,
2003) to $15.2 million (as of September 30, 2003); (iii) the termination of our
obligation in respect of the $2.25 million annual management advisory fee
(except as provided below); (iv) a separate cash payment to the Palladium
Investors of $10 million (from the recent sale of MRT); (v) payments by PMC to
the Company for central support services for the next three years of $1 million,
$0.5 million and $0.2 million, respectively; and (vi) supply arrangements
between the Company and PMC with respect to manganous oxide and red iron oxide.
The PMC transactions are subject to definitive documentation that is expected to
include customary representations, warranties and indemnities by us, and
provisions for closing working capital balance adjustments, settlement of
intercompany accounts owed to PMC, a closing fee payable to Palladium and our
agreement to pay or reimburse the Palladium Investors for their reasonable
out-of-pocket transaction expenses. The economic terms set forth above are
subject to the terms upon which intercompany accounts would be settled, the
amount of minimum working capital of PMC to be agreed upon and the amount of the
closing fee payable to Palladium. The Company also expects that it will
establish a $1 million escrow or other credit support for two years to secure
its net working capital and foregoing indemnification obligations, and indemnify
the Palladium Investors, payable after the maturity of the Existing Notes, for a
portion, at the rate of $0.65 for every dollar, of the amount they receive in
respect of the disposition of PMC less than $21 million, up to a maximum payment
by the Company of $4 million. Effective immediately prior to the consummation of
the offering of our senior secured notes due 2007 or, if earlier, September 30,
2003, (i) the Management and Advisory Service Agreement is expected to become
the obligation of PMC, and the obligations of and annual fee payable by Phibro
Animal Health Corporation thereunder to be terminated, and (ii) PMC will become
bound by such agreement or enter into a new management agreement substantially
the same as the Management and Advisory Services Agreement, without recourse to
Phibro Animal Health Corporation or any other subsidiaries thereof. The new
management agreement of PMC with Palladium is expected to
38
provide that if the Palladium transactions are not consummated on or before
December 31, 2003 such new management agreement will become the direct
obligation of Phibro Animal Health Corporation. In the event that the
transaction is structured as an asset sale, upon consummation of the Palladium
transaction such new management agreement will become the direct obligation of
the buyer, without any recourse to PMC or Phibro Animal Health Corporation or
any other subsidiaries thereof.
39
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Aggregate fees for professional services rendered for us by
PricewaterhouseCoopers LLP, ("PwC") our independent auditors, for the fiscal
years ended June 30, 2003 and 2002 were:
2003 2002
---- ----
Audit $ 795,000 $ 874,000
---------- ----------
Audit Related $ -- $ --
Tax
Tax Planning $ 123,000 $ 203,000
Tax Compliance and other 29,000 23,000
---------- ----------
Total Tax $ 152,000 $ 226,000
---------- ----------
All Other $ -- $ --
Total $ 947,000 $1,100,000
========== ==========
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.
40
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 (10)
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)
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, 2003. For a description of
such indebtedness, see Note 8 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 Amended and Restated Revolving Credit, Capital Expenditure Line
and Security Agreement, dated November 30, 2000, among Registrant,
the Guarantors thereunder and PNC Bank, National Association
("PNC") (4)
10.1.1 First Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated September 28, 2001
and effective June 30, 2001, among Registrant, the Guarantors
thereunder and PNC (7)
10.1.2 Second Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated October 18, 2002
among Registrant, the Guarantors thereunder and PNC (8)
10.1.3 Third Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated August 8, 2003
among Registrant, the Guarantors thereunder and PNC (10)
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)++
41
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 Separation Agreement among Registrant, Phibro Tech, Inc. and
Nathan Bistricer dated as of October 4, 2000 (3)
10.20 Stock Purchase Agreement between Phibro Tech, Inc. and Nathan
Bistricer dated as of October 4, 2000 (3)
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
42
Partners, L.L.C. (7)++
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)!
21 List of Subsidiaries (10)
31.1 Certification of Gerald K. Carlson, Chief Executive Officer
required by Rule 15d-14(a) of the Act (10)
31.2 Certification of Jack C. Bendheim, Chairman of the Board required
by Rule 15d-14(a) of the Act (10)
31.3 Certification of Richard G. Johnson, Chief Financial Officer
required by Rule 15d-14(a) of the Act (10)
- ----------
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
10 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).
! A request for confidential treatment has been furnished to the SEC 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 an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company submits periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its senior subordinated notes.
(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 no reports on Form 8-K during the last quarter of the
fiscal year ended June 30, 2003. The Company did
43
furnish reports on Form 8-K since then. On September 12, 2003 the Company
furnished a report on Form 8-K reporting items 2 and 7 and on September 24,
2003, the Company furnished a report on Form 8-K reporting items 7 and 9.
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.................................. F-2
Consolidated Balance Sheets as of June 30, 2003 and 2002........ F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 2003, 2002 and 2001....... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2003, 2002 and 2001.............. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2003, 2002 and 2001.................................. F-6
Notes to Consolidated Financial Statements...................... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
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, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Phibro Animal Health Corporation (formerly Philipp
Brothers Chemicals, Inc.) and its subsidiaries at June 30, 2003 and June 30,
2002, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2003, 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2, the Company's senior
bank credit facility and note payable to Pfizer Inc. mature in November 2003 and
March 2004, respectively. It is unlikely the Company will have sufficient cash
resources from operations to repay these obligations as they come due. The
Company plans to refinance these obligations prior to their respective
maturities; however, there is no assurance that it will be able to do so on
terms acceptable to the Company, if at all. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are further described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
In fiscal 2003, the Company adopted a new accounting standard for the accounting
for the impairment or disposal of long-lived assets.
Florham Park, New Jersey
August 29, 2003
F-2
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
-------------------------
2003 2002
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 11,179 $ 6,419
Trade receivables, less allowance for doubtful accounts of
$1,445 at June 30, 2003 and $1,485 at June 30, 2002 .................... 55,671 57,979
Other receivables ......................................................... 3,642 3,075
Inventories ............................................................... 88,767 85,396
Prepaid expenses and other current assets ................................. 10,188 15,325
Current assets from discontinued operations ............................... 4,942 16,780
--------- ---------
Total current assets ................................................. 174,389 184,974
Property, plant and equipment, net .......................................... 66,440 65,665
Intangibles ................................................................. 8,669 9,633
Other assets ................................................................ 14,199 14,448
Other assets from discontinued operations ................................... 10,650 21,724
--------- ---------
$ 274,347 $ 296,444
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft ............................................................ $ 1,686 $ 7,767
Loans payable to banks .................................................... 38,914 41,535
Current portion of long-term debt ......................................... 24,124 8,851
Accounts payable .......................................................... 56,915 38,158
Accrued expenses and other current liabilities ............................ 41,609 29,813
Current liabilities from discontinued operations .......................... 2,051 8,389
--------- ---------
Total current liabilities ............................................ 165,299 134,513
Long-term debt .............................................................. 102,391 136,641
Other liabilities ........................................................... 22,088 28,399
Other liabilities from discontinued operations .............................. 198 1,478
--------- ---------
Total liabilities .................................................... 289,976 301,031
--------- ---------
Commitments and contingencies
Redeemable securities:
Series B and C preferred stock ............................................ 68,881 56,602
--------- ---------
Stockholders' equity (deficit):
Preferred stock -- $100 par value, 150,543 shares authorized, none
issued at June 30, 2003 and 2002; Series A preferred stock --
$100 par value, 6% non-cumulative, 5,207 shares authorized and
issued at June 30, 2003 and 2002 ....................................... 521 521
Common stock -- $0.10 par value, 30,300 authorized and 24,488 shares issued
at June 30, 2003 and 2002 .............................................. 2 2
Paid-in capital ........................................................... 860 740
Accumulated deficit ....................................................... (79,489) (49,652)
Accumulated other comprehensive income (loss):
Gain on derivative instruments ......................................... 81 1,062
Cumulative currency translation adjustment ............................. (6,485) (13,862)
--------- ---------
Total stockholders' equity (deficit) ................................. (84,510) (61,189)
--------- ---------
$ 274,347 $ 296,444
========= =========
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
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS)
Net sales .............................................. $ 355,225 $ 340,549 $ 319,664
Cost of goods sold ..................................... 263,728 258,555 250,305
--------- --------- ---------
Gross profit ......................................... 91,497 81,994 69,359
Selling, general and administrative expenses (includes
litigation income of $3,040 in 2003 and $742 in 2002) 66,360 72,277 63,925
--------- --------- ---------
Operating income ..................................... 25,137 9,717 5,434
Other:
Interest expense ..................................... 16,342 18,158 18,297
Interest (income) .................................... (86) (356) (566)
Other expense, net ................................... 1,277 3,104 855
(Gains) from sale of assets .......................... (127) (18) (1,457)
--------- --------- ---------
Income (loss) from continuing operations before income
taxes ............................................. 7,731 (11,171) (11,695)
Provision (benefit) for income taxes ................... 10,076 14,829 (381)
--------- --------- ---------
(Loss) from continuing operations .................... (2,345) (26,000) (11,314)
Discontinued operations:
(Loss) from discontinued operations (net of income
taxes) ............................................ (14,531) (25,770) (3,581)
(Loss) on disposal of discontinued operations (net of
income taxes) ..................................... (683) -- --
--------- --------- ---------
Net (loss) ........................................... (17,559) (51,770) (14,895)
Other comprehensive income (loss):
Change in derivative instruments ..................... (981) 1,062 --
Change in currency translation adjustment ............ 7,377 (6,125) (5,146)
--------- --------- ---------
Comprehensive (loss) ................................. $ (11,163) $ (56,833) $ (20,041)
========= ========= =========
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' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2000, 2001, 2002 AND 2003
---------------------------------------------------------------------------------------------
RETAINED ACCUMULATED
PREFERRED COMMON STOCK EARNINGS OTHER
STOCK --------------------- PAID-IN (ACCUMULATED COMPREHENSIVE
SERIES A CLASS "A" CLASS "B" CAPITAL DEFICIT) (LOSS) INCOME TOTAL
--------- --------- --------- ------- ------------ ------------- ---------
(IN THOUSANDS)
Balance, July 1, 2000.... $ 521 $ 1 $ 1 $ 878 $ 32,808 $ (2,591) $ 31,618
Accretion of redeemable
preferred securities
to fair market
value............... (4,192) (4,192)
Dividends on Series B and
C redeemable preferred
stock............... (3,980) (3,980)
Foreign currency
translation
adjustment.......... (5,146) (5,146)
Net (loss)............. (14,895) (14,895)
------ ------- --------- --------- ---------
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......... 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......... (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)
====== === === ======= ========= ========= =========
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,
--------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net (loss) .................................................. $(17,559) $(51,770) $(14,895)
Adjustment for discontinued operations ...................... 15,214 25,770 3,581
-------- -------- --------
Income (loss) from continuing operations .................... (2,345) (26,000) (11,314)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided (used) by operating
activities:
Depreciation and amortization ............................ 12,883 12,680 10,405
Deferred income taxes .................................... 7,228 12,512 (5,731)
Gains from sale of assets ................................ (127) (18) (1,457)
Change in redemption amount of redeemable common
stock .................................................. -- (378) (3,491)
Unrealized foreign currency losses ....................... 390 2,120 --
Other .................................................... 79 2,175 784
Changes in operating assets and liabilities:
Accounts receivable .................................... 3,008 9,756 (1,607)
Inventories ............................................ (522) (13,853) (1,570)
Prepaid expenses and other current assets .............. (3,177) (2,780) 5,975
Other assets ........................................... (2,632) 2,667 2,782
Accounts payable ....................................... 20,548 (8,058) 18,243
Accrued expenses and other liabilities ................. (1,462) 7,222 2,725
Cash provided (used) by discontinued operations ............. 786 (2,790) (2,603)
-------- -------- --------
Net cash provided (used) by operating activities .... 34,657 (4,745) 13,141
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures ........................................ (9,045) (8,677) (6,610)
Acquisition of a business, net of cash acquired ............. -- (7,182) (51,700)
Proceeds from property damage claim ......................... -- 411 --
Proceeds from sale of assets ................................ 2,566 80 25,418
Other investing ............................................. 724 580 (320)
Discontinued operations ..................................... 1,784 (2,573) (6,937)
-------- -------- --------
Net cash (used) by investing activities ............. (3,971) (17,361) (40,149)
-------- -------- --------
FINANCING ACTIVITIES:
Cash overdraft .............................................. (6,081) 3,438 2,654
Net increase (decrease) in short-term debt .................. (6,260) 12,656 (8,006)
Proceeds from long-term debt ................................ 2,000 2,322 9,363
Proceeds from issuance of redeemable preferred stock ........ -- -- 45,000
Payments of long-term debt .................................. (16,037) (4,739) (4,924)
Other financing ............................................. -- -- (4,192)
-------- -------- --------
Net cash provided (used) by financing activities .... (26,378) 13,677 39,895
-------- -------- --------
Effect of exchange rate changes on cash ....................... 452 3 (445)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,760 (8,426) 12,442
Cash and cash equivalents at beginning of period .............. 6,419 14,845 2,403
-------- -------- --------
Cash and cash equivalents at end of period .................... $ 11,179 $ 6,419 $ 14,845
======== ======== ========
Supplemental Cash Flow Information:
Interest paid ............................................... $ 16,244 $ 17,173 $ 16,810
Income taxes paid ........................................... 3,062 2,645 704
Noncash investing and financing activities:
Debt issued in connection with acquisition .................. -- -- 25,093
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 (formerly Philipp Brothers Chemicals, Inc.)
(the "Company") is a leading diversified global manufacturer and marketer of a
broad range of animal health and nutrition products, specifically medicated feed
additives and nutritional feed additives, 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, Carbide, and MRT businesses have been classified as
discontinued operations, as discussed in Note 3. 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 2003, 2002, and 2001 in
these financial statements refer to the fiscal year ended June 30 of that year.
LIQUIDITY AND REFINANCING RISK:
The Company's senior bank credit facility and its note payable to Pfizer
Inc. ("Pfizer") mature in November 2003 and March 2004, respectively (See Note
8). It is unlikely the Company will have sufficient cash resources from
operations to repay these obligations as they come due.
In connection with the Company's acquisition in November 2000 of the
Medicated Feed Additives business of Pfizer (the "MFA acquisition"), it incurred
certain obligations to Pfizer (amounts are shown as of June 30, 2003), the
following of which will be terminated and satisfied in full by the payment to
Pfizer of approximately $28,500, plus accrued interest on the existing
promissory note due 2004, from the proceeds of the Notes: (i) $20,075 aggregate
principal amount of such promissory note; (ii) $12,826 of accounts payable,
(iii) $9,257 of accrued expenses; and (iv) future contingent purchase price
obligations under the Pfizer agreements.
The Company is currently pursuing the issuance of $105,000 of Senior Secured
Notes due 2007 (the "Notes"). Concurrently, the Company is purchasing through
privately negotiated transactions up to $51,900 of its 9 7/8% Senior
Subordinated Notes due 2008 ("Existing Notes") at a price equal to 60% of the
principal amount thereof, plus accrued and unpaid interest. The offering is
subject to certain conditions, including, among other things, receiving consents
of holders of Existing Notes that represent more than 50% of the outstanding
principal amount of the Existing Notes. The Company will use the proceeds from
the Notes to repurchase the Existing Notes, repay its senior credit facility,
and pay certain of its outstanding obligations to Pfizer, including the note
payable due 2004.
If the Company is unable to refinance these obligations on acceptable terms,
the lenders could declare the loans to be in default and exercise their rights
under the respective agreements, and the Company might be required to take
actions outside of the ordinary course of operations to generate cash or
otherwise settle these obligations, all of which would have a material adverse
impact on the Company's financial position, results of operations, and cash
flows. There can be no assurance the Company will be successful in executing the
refinancing plan. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
F-7
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The Company intends to sell PMC to Palladium Equity Partners II, LP and
certain of its affiliates (the "Palladium Investors"). The material elements of
the transactions relating to PMC include the following: (i) the transfer of
ownership to the Palladium Investors of PMC; (ii) the reduction of the preferred
stock of the Palladium Investors from $68.9 million (as of June 30, 2003) to
$15.2 million (as of September 30, 2003); (iii) the termination of any
obligation of the Company or any Restricted Subsidiary of the Company in respect
of the $2.25 million annual management advisory fee; (iv) a separate cash
payment to the Palladium Investors of $10 million (derived from the recent sale
of MRT); (v) payments by PMC to the Company for central support services for the
next three years of $1 million, $0.5 million and $0.2 million, respectively; and
(vi) supply arrangements between the Company and PMC with respect to manganous
oxide and red iron oxide. The PMC transactions are subject to definitive
documentation that is expected to include customary representations, warranties
and indemnities of the Company, and provisions for working capital adjustments
and settlement of intercompany accounts. Any transaction with the Palladium
Investors is dependent upon successful completion of the refinancing plan.
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.
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 and realizability of deferred tax assets.
REVENUE RECOGNITION:
Revenue is recognized upon transfer of title and risk of loss to the
customer, generally at 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.
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 $3,805 and $3,111 at June 30, 2003 and
2002, respectively. Obsolete and unsaleable inventories are reflected at
estimated net realizable value. Inventory costs include materials, direct labor
and manufacturing overhead. Inventories were:
AS OF JUNE 30,
-----------------------
2003 2002
-------- --------
Raw materials .................... $ 22,277 $ 22,501
Work-in-process .................. 1,765 2,155
Finished goods ................... 65,357 61,261
Excess of FIFO cost over LIFO cost (632) (521)
-------- --------
Total inventory .................. $ 88,767 $ 85,396
======== ========
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, $106 and $227 in 2003, 2002 and
2001, 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.
DEFERRED FINANCING COSTS:
Deferred financing costs related to the senior subordinated notes are
amortized using the interest method over the ten-year life of the notes.
Deferred financing costs related to the senior credit facility are amortized
over the three-year life of the agreement.
INTANGIBLES:
Intangible assets with determinable useful lives are amortized on a
straight-line basis over their estimated useful lives of 10 years.
Product intangibles cost arising from the MFA acquisition was $10,449 at
June 30, 2003 and 2002 and accumulated amortization of $1,780 and $816 at June
30, 2003 and 2002, respectively. Amortization expense was $964, $816 and $0 for
2003, 2002 and 2001, respectively. Amortization expense from the MFA acquisition
for each of the next five years from 2004 to 2008 will be $1,045 per year.
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 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 losses were $480, $3,027 and $711 for 2003, 2002 and 2001,
respectively, and were included in other expense, net in the consolidated
statements of operations.
DERIVATIVE FINANCIAL INSTRUMENTS:
Effective for 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended ("SFAS No. 133"). The standard requires all derivative
financial instruments be recorded on the consolidated balance sheet at fair
value. Changes in the fair value of derivatives are recorded in results of
operations
F-9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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. The cumulative effect of a
change in accounting principle due to the adoption of SFAS No. 133 was not
material.
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.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are expensed as incurred and were
$4,634, $4,251 and $1,889 for 2003, 2002 and 2001, respectively.
RECLASSIFICATION:
Certain prior-year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2003
presentation.
NEW ACCOUNTING PRONOUNCEMENTS:
Effective for 2003, the Company adopted the following new accounting
pronouncements:
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS No. 141") and No. 142 "Goodwill and Other Intangibles" ("SFAS No. 142").
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 establishes
specific criteria for recognition of intangible assets separately from goodwill.
The statement requires that goodwill and indefinite lived intangible assets no
longer be amortized and be tested for impairment at least annually. The
amortization period of intangible assets with determinable lives will no longer
be limited to forty years. Identifiable intangible assets with determinable
useful lives will continue to be amortized. The Company has no goodwill, but has
assessed the useful lives of its intangible assets. The adoption of SFAS No. 141
and SFAS No. 142 did not result in an impact on the Company's financial
statements.
F-10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 established accounting
standards for the recognition and measurement of an asset retirement obligation
("ARO") and its associated asset retirement cost. The Company has reviewed its
tangible long-lived assets for associated asset retirement obligations in
accordance with SFAS No. 143. The adoption of SFAS No. 143 did not result in an
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses significant issues relating to the implementation of FASB Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), and the development of a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. As a result of the adoption of SFAS No. 144, the Company
classified the Odda, Carbide, and MRT businesses as discontinued operations.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections" ("SFAS No.
145"). The adoption of SFAS No. 145 did not result in an impact on the Company's
financial statements.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred rather than at the date of a commitment to an exit or disposal plan.
Costs covered by SFAS No. 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not result in an impact on the Company's
financial statements.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. The adoption of FIN No. 45 did not
result in a material impact on the Company's financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN No. 46"). FIN No. 46 requires consolidation by business enterprises of
variable interest entities (including entities commonly referred to as special
purpose entities), which meet certain characteristics. The adoption of FIN No.
46 did not result in an impact on the Company's financial statements.
The Company will adopt the following new accounting pronouncements in 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. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company is currently assessing the impact of
this pronouncement.
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. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Effective
in 2004, the Company will classify its Redeemable Preferred Stock as a
liability.
3. DISCONTINUED OPERATIONS
During 2003, the Company decided to shutdown or divest 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 2003 presentation.
F-11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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 has been advised that, as a result of the bankruptcy, the
creditors of Odda have recourse only to the assets of Odda, except in the case
of certain debt guaranteed by the Company. The Company has removed all assets,
liabilities (except as noted below), and cumulative translation adjustments
related to Odda from the Company's consolidated balance sheet as of June 30,
2003, and has recorded the net result as a Loss on disposal of discontinued
operations. The Company is the guarantor of certain debt of Odda. As of June 30,
2003, debt of Norwegian Krone (NOK) 41,073 ($5,731) was outstanding and was
included in Loans payable to banks on the Company's consolidated balance sheet.
The Company has entered into forbearance agreements with the Norwegian banks
holding the guarantees from the Company, under which the banks have agreed not
to demand immediate payment and the Company has agreed to pay the principal
amount plus interest in installments. The Company has been advised by Norwegian
counsel that it will obtain the benefit of the banks' position as a secured
creditor upon payment pursuant to the guarantees. The Company obtained the
consent of a majority of the holders of its senior subordinated notes due 2008
to amend the Indenture governing these notes in such a manner that the
bankruptcy of Odda did not create an event of default thereunder.
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. Operating results, loss on disposal, and
certain balance sheet items of Odda and Carbide were:
FOR THE YEARS ENDED JUNE 30,
--------------------------------------
2003 2002 2001
-------- -------- --------
OPERATING RESULTS:
Net sales .................................. $ 11,217 $ 31,219 $ 30,440
Cost of goods sold ......................... 13,723 46,116 27,877
Selling, general and administrative expenses 3,175 12,812 5,698
Asset write downs .......................... 7,781 -- --
Other income (expense) ..................... 2,327 3,699 (723)
-------- -------- --------
Loss before income taxes ................... (11,135) (24,010) (3,858)
Benefit for income taxes ................... (58) (1,170) (1,150)
-------- -------- --------
Loss from operations ....................... $(11,077) $(22,840) $ (2,708)
======== ======== ========
Depreciation and amortization .............. $ 894 $ 17,676 $ 2,962
======== ======== ========
LOSS ON DISPOSAL:
Assets ..................................... $ (3,359)
Liabilities ................................ 6,432
Unsecured debt ............................. 2,488
Currency translation adjustment ............ (6,244)
--------
Loss on disposal ........................... $ (683)
========
AS OF JUNE 30,
-----------------
2003 2002
---- -------
BALANCE SHEET:
Trade receivables .............................. $ -- $ 4,004
Other receivables .............................. -- 728
Inventories .................................... -- 6,592
Prepaid expenses and other current assets ...... -- 445
---- -------
Current assets from discontinued operations .... $ -- $11,769
==== =======
Property, plant and equipment, net ............. $ -- $ 8,234
Intangibles .................................... -- 1,411
Other assets ................................... -- 787
---- -------
Other assets from discontinued operations ...... $ -- $10,432
==== =======
Accounts payable ............................... $ -- $ 2,565
Accrued expenses and other current liabilities . -- 4,095
---- -------
Current liabilities from discontinued operations $ -- $ 6,660
==== =======
Other liabilities .............................. $ -- $ 1,280
---- -------
Other liabilities from discontinued operations . $ -- $ 1,280
==== =======
F-12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
MINERAL RESOURCE TECHNOLOGIES, INC. ("MRT"):
During 2003, the Company decided to pursue a sale of MRT. The sale was
completed in August 2003 for net proceeds, after transaction costs, of
approximately $14,000, the amount dependent upon certain post-closing
adjustments. The Company does not anticipate a material gain or loss on disposal
based upon its assessment of the likely outcomes of the post-closing
adjustments. MRT was included in the Company's All Other segment. Operating
results and certain balance sheet items of MRT were:
FOR THE YEARS ENDED JUNE 30,
--------------------------------------
2003 2002 2001
-------- -------- --------
OPERATING RESULTS:
Net sales .................................. $ 18,671 $ 17,045 $ 14,306
Cost of goods sold ......................... 19,943 17,676 12,955
Selling, general and administrative expenses 2,182 2,299 2,674
-------- -------- --------
Loss before income taxes ................... (3,454) (2,930) (1,323)
Provision (benefit) for income taxes ....... -- -- (450)
-------- -------- --------
Loss from operations ....................... $ (3,454) $ (2,930) $ (873)
======== ======== ========
Depreciation and amortization .............. $ 1,309 $ 1,192 $ 465
======== ======== ========
AS OF JUNE 30,
2003 2002
------- -------
BALANCE SHEET:
Trade receivables .............................. $ 2,633 $ 3,178
Other receivables .............................. 304 109
Inventories .................................... 1,643 1,529
Prepaid expenses and other current assets ...... 362 195
------- -------
Current assets from discontinued operations .... $ 4,942 $ 5,011
======= =======
Property, plant and equipment, net ............. $ 9,999 $10,831
Intangibles .................................... 196 149
Other assets ................................... 455 312
------- -------
Other assets from discontinued operations ...... $10,650 $11,292
======= =======
Accounts payable ............................... $ 1,466 $ 1,557
Accrued expenses and other current liabilities . 585 172
------- -------
Current liabilities from discontinued operations $ 2,051 $ 1,729
======= =======
Other liabilities .............................. $ 198 $ 198
------- -------
Other liabilities from discontinued operations . $ 198 $ 198
======= =======
4. ACQUISITION
On November 30, 2000, the Company purchased the medicated feed additives
("MFA") business of Pfizer. The operating results of this business are included
in the Company's consolidated statements of operations from the date of
acquisition and are included in the Animal Health and Nutrition segment.
The purchase price of $76,793 (including costs of acquisition) was paid with
cash of $51,700 and the issue of a promissory note to Pfizer for $25,093. The
Company financed the cash payment through the issuance of $40,808 of redeemable
preferred securities ($45,000 of redeemable preferred securities, less costs
connected with the issue of those securities of $4,192), and through bank credit
facilities. In addition, under the terms of the purchase agreement, the Company
is required to pay Pfizer a contingent purchase price based on a percentage of
future net revenues of a certain product. The maximum contingent purchase price
due under this arrangement is limited to $55,000 over five years with a maximum
annual payment of $12,000. In addition, the Company is required to pay Pfizer a
contingent purchase price up to a maximum of $10,000 over five years based on
gross profit levels of certain other products. Contingent purchase price paid or
accrued of $7,498 has been allocated to related production equipment and $9,349
has been allocated to product intangibles. During 2003, Pfizer agreed to defer
until March 1, 2004, without interest, accrued purchase price amounts existing
at May 31, 2002 and to waive contingent purchase price payments on future net
revenues from June 1, 2002 through March 1, 2004. Accrued purchase price payable
was $9,040 at June 30, 2003 and 2002. The accrued purchase price is expected to
be paid as part of the payment to Pfizer described in Note 2.
The acquisition was accounted for as a purchase. The purchase price was
allocated to inventory; property, plant and equipment; product intangibles; and,
pension liabilities. Property, plant and equipment include manufacturing
facilities in Rixensart, Belgium and Guarulhos, Brazil. The Company recorded, as
a cost of acquisition, a pension liability of $1,076 relating to the employees
of the Belgium plant who elected to transfer their benefits and the amount of
their accumulated benefit obligations.
F-13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The unaudited consolidated results of operations on a pro-forma basis as if
such acquisition had occurred at the beginning of 2001 are net sales of $367,257
and loss from continuing operations of $12,141 for 2001.
Purchase accounting adjustments allocated to the inventory acquired from
Pfizer increased cost of goods sold by $3,257 and $8,889 in 2002 and 2001,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was:
AS OF JUNE 30,
----------------------
2003 2002
-------- --------
Land ......................... $ 6,356 $ 6,140
Buildings and improvements ... 30,907 28,905
Machinery and equipment ...... 110,885 111,553
-------- --------
148,148 146,598
Less: accumulated depreciation 81,708 80,933
-------- --------
$ 66,440 $ 65,665
======== ========
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 $9,561, $10,560 and $8,659 for 2003, 2002 and 2001,
respectively.
6. RELATED PARTY TRANSACTIONS
The Company owns $1,980 par value of preferred stock of a pharmaceutical
company. The principal common stockholder of the Company owns a 20% voting
common stock interest in the pharmaceutical company, acquired for $20. The
preferred stock investment, included in other assets, is carried on the equity
basis with a net carrying value of $1,274 at June 30, 2003. The Company has
recorded losses of $199, $289 and $218 in other expense, net for 2003, 2002 and
2001, respectively.
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.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities were:
AS OF JUNE 30,
--------------------
2003 2002
------- -------
Employee related expenses ....... $10,485 $ 7,717
Accrued purchase price due Pfizer 9,040 --
Taxes ........................... 7,898 3,690
Other accrued liabilities ....... 14,186 18,406
------- -------
$41,609 $29,813
======= =======
Accrued purchase price due Pfizer of $9,040 was included in Long-Term
Liabilities at June 30, 2002.
8. DEBT
LOANS PAYABLE TO BANKS
At June 30, 2003, loans payable to banks included $32,147 under the domestic
senior credit facility with its lending banks, for which PNC Bank serves as
agent; NOK 41,073 ($5,731) under guarantees of certain debt of Odda; and $1,036
under foreign revolving lines of credit.
F-14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
At June 30, 2003, the Company's senior credit facility was $55,000 and
included a revolving credit facility and amounts currently outstanding under a
capital expenditure facility. The senior credit facility was amended in October
2002 to: waive noncompliance with financial covenants as of June 30, 2002; amend
financial covenants prospectively until maturity; amend the borrowing base
formula; reduce the credit facility from $70,000 to $55,000; limit borrowings
under the capital expenditure line of the facility to the then outstanding
balance of $5,800; and revise the interest rate from 1.5% to 1.75% per annum
over the base rate (as defined in the agreement). The senior credit facility
expires November 30, 2003.
The revolving credit facility is subject to availability under a borrowing
base formula for domestic accounts receivable and inventories (as defined in the
agreement), which also serve as collateral for the borrowings. At June 30, 2003,
the Company had $9,992 available under the borrowing base formula.
As of June 30, 2003, the Company was in compliance with the financial
covenants in the senior credit facility. The senior credit facility requires,
among other things, the maintenance of a consolidated interest coverage ratio
calculated quarterly, a certain level of trailing three month domestic cash
flows calculated on a monthly basis, and an acceleration clause should a
material adverse event (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 revolving credit facility contains a lock-box requirement and a
subjective acceleration clause. Accordingly, the amounts outstanding have been
classified as short-term and are included in Loans payable to banks in the
consolidated balance sheet. Advances under the capital expenditure facility were
included in the current portion of long-term debt as of June 30, 2003.
LONG-TERM DEBT:
AS OF JUNE 30,
----------------------
2003 2002
-------- --------
Domestic:
Senior subordinated notes due June 1, 2008(a) .... $100,000 $100,000
Bank capital expenditure facility ................ 1,496 5,800
Pfizer promissory note(b) ........................ 20,075 22,584
Capitalized lease obligations and other .......... 910 1,413
Foreign:
Norwegian bank loans payable in Norwegian Krone(c) -- 8,222
Norwegian government loans payable in Norwegian
Krone(d) ...................................... -- 3,557
Bank loans(e) .................................... 3,750 3,000
Capitalized lease obligations and other .......... 284 916
-------- --------
126,515 145,492
Less: current maturities ......................... 24,124 8,851
-------- --------
$102,391 $136,641
======== ========
- ----------
(a) The Company issued $100 million aggregate principal amount of ten year
9 7/8% Senior Subordinated Notes in June 1998. The 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 Notes are unconditionally guaranteed
on a senior subordinated basis by the domestic subsidiaries of the
Company (the "Guarantors"). 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.
(b) In connection with the MFA acquisition, the Company issued a 13%
promissory note to Pfizer in the amount of $25,093 with interest
payable semi-annually. Principal payments of 10% were paid December 3,
2001 and 2002. The remaining balance of $20,075 is due March 1, 2004.
The note is collateralized by the Company's facilities in Rixensart,
Belgium and
F-15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Guarulhos, Brazil. The note is expected to be paid and the facilities
released from the collateral agreements as part of the payment to
Pfizer described in Note 2.
(c) As a result of the Odda bankruptcy in 2003 (see Note 3), and due to the
Company's guarantee of the Norwegian bank loans, the Company agreed to
pay the remaining principal amount in installments through November 30,
2003. The remaining amounts outstanding of NOK 41,073 ($5,731) are
included in Loans payable to banks at June 30, 2003. The loans accrue
interest at NIBOR plus 2% to 2.75%.
(d) Odda entered into two separate loan agreements with the Norwegian Bank
Industrial and Regional Development Fund originally totaling NOK
26,500. The Company is not a guarantor of these loans. The outstanding
balance at the date of Odda's bankruptcy was NOK 12,329 ($1,770) and is
payable only from the assets of the bankruptcy estate. The Company has
removed this debt from its June 30, 2003 balance sheet as a component
of the loss on disposal of Odda.
(e) The bank loans are collateralized by Koffolk's receivables and
inventory, accrue interest at LIBOR plus 1.25%, and are repayable in
equal quarterly payments through 2005.
The aggregate maturities of long-term debt as of June 30, 2003 are:
YEAR ENDED JUNE 30,
---------------------
2004................. $ 24,124
2005................. 2,154
2006................. 78
2007................. 142
2008................. 100,017
-----------
Total.............. $ 126,515
===========
9. 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, 2003 no severance
payments would have been due upon termination.
In connection with the 2001 separation of employment of a senior executive,
who also had an ownership interest in the subsidiary, pursuant to stock buyback
and severance provisions similar to the aforementioned agreements, the Company
recorded a charge of $1,282 in selling, general and administrative expenses and
reclassified $200 from redeemable securities to accrued expenses and other
current liabilities.
10. REDEEMABLE PREFERRED STOCK
Redeemable preferred securities were issued on November 30, 2000 to
Palladium Equity Partners II, LP and certain of its affiliates ("Palladium
Investors") as follows:
Preferred B -- $25,000 -- 25,000 shares
Preferred C -- $20,000 -- 20,000 shares
The redeemable preferred stock is entitled to cumulative cash dividends,
payable semi-annually, at 15% per annum of the liquidation value. The
liquidation value of the Preferred B stock is an amount equal to $1 per share
plus all accrued and unpaid dividends (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"). The Company may, within 90 days before and 90 days
after the annual anniversary of the closing date, redeem the Preferred B stock,
in whole or in
F-16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
part, at the Liquidation Value for cash, provided that if Preferred B is
redeemed separately from the Preferred C, then the Preferred B must be redeemed
for the Liquidation Value plus an additional amount that would generate an
internal rate of return of 20% to Palladium Investors on the Preferred B
investment.
Redemption in part of Preferred B is only available if at least 50% of the
outstanding Preferred B is redeemed. 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 B at the Liquidation Value and the Preferred
C at the Liquidation Value plus the Equity Value payment.
In 2001, the redeemable preferred securities were initially recorded at
$40,808, representing proceeds of $45,000, net of issuance costs of $4,192.
Immediately thereafter, the Company recorded a charge of $4,192 to retained
earnings to reflect the accretion of the preferred securities to their fair
market value at the closing date.
Dividends of $8,808, $7,623 and $3,980 for 2003, 2002 and 2001,
respectively, were accrued on the preferred securities and charged to retained
earnings. Equity Value of $3,470, $0 and $0 for 2003, 2002 and 2001,
respectively, was accrued and charged to retained earnings.
An annual management advisory fee of $2,250 is payable to the Palladium
Investors until all Preferred B and Preferred C shares are redeemed. Payments
are due quarterly in advance and are charged to general and administrative
expense. The management fee was $2,250, $2,250 and $1,313 for 2003, 2002 and
2001, respectively.
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.
11. COMMON STOCK AND PAID-IN CAPITAL
COMMON STOCK:
Common stock at June 30, 2003 and 2002 was:
AUTHORIZED ISSUED AMOUNT
SHARES SHARES 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.
Issued shares include redeemable common stock held by a minority
shareholder.
F-17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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. The liability was $0 as of June 30, 2003 and 2002.
Income of $0, $378 and $3,135 for 2003, 2002 and 2001, respectively, was
recorded to adjust the shares to redeemable value at the balance sheet date.
12. 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
benefits provided by the plans are based upon years of service and the
employees' average compensation, as defined. The Company's policy is to fund the
pension plans in amounts which comply with contribution limits imposed by law.
The Company's Belgium subsidiary maintains a defined contribution and a
defined benefit plan for eligible employees. Benefits are based on employee
compensation and service.
Reconciliations of changes in benefit obligations, plan assets, and funded
status of the plans were:
DOMESTIC INTERNATIONAL
------------------------ -----------------------
JUNE 2003 JUNE 2002 JUNE 2003 JUNE 2002
--------- ---------- --------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ...... $ 11,821 $ 9,652 $ 4,251 $ 3,518
Service cost ................................. 1,056 879 310 217
Employee contributions ....................... -- -- 100 --
Interest cost ................................ 784 714 259 164
Benefits paid ................................ (243) (179) (29) --
Actuarial (gain) or loss ..................... (663) (34) 879 --
Amendments ................................... -- 37 -- --
Change in discount rate ...................... 3,091 752 218 --
Exchange rate effect ......................... -- -- 607 352
-------- -------- ------- -------
Benefit obligation at end of year ............ $ 15,846 $ 11,821 $ 6,595 $ 4,251
======== ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 9,717 $ 9,193 $ 2,882 $ 2,524
Actual return on plan assets ................. 537 75 204 123
Employer contributions ....................... 376 628 841 --
Employee contributions ....................... -- -- 100 --
Benefits paid ................................ (243) (179) (29) --
Exchange rate effect ......................... -- -- 568 235
-------- -------- ------- -------
Fair value of plan assets at end of year ..... $ 10,387 $ 9,717 $ 4,566 $ 2,882
======== ======== ======= =======
FUNDED STATUS
Funded status of the plan .................... $ (5,459) $ (2,104) $(2,029) $(1,369)
Unrecognized net actuarial (gain) or loss .... 2,359 (346) 961 --
Unrecognized prior service cost .............. (554) (715) -- --
Unrecognized transition (asset) .............. (12) (15) -- --
-------- -------- ------- -------
(Accrued) pension cost ....................... $ (3,666) $ (3,180) $(1,068) $(1,369)
======== ======== ======= =======
Significant assumptions for the plans were:
DOMESTIC INTERNATIONAL
------------------------------------- --------------
2003 2002 2001 2003 2002
---------- --------- ---------- ------ -----
Discount rate for service and interest cost ..... 7.1% 7.5% 7.5% 5.8% 5.8%
Expected rate of return on plan assets .......... 7.5% 7.5% 7.5% 6.0% 6.0%
Rate of compensation increase (depending on age) 3.0%-4.5% 3.0%-4.5% 3.0%-4.5% 3.0% 3.0%
Discount rate for year-end benefit obligation ... 5.8% 7.1% 7.5% 5.5% 5.8%
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Components of net periodic pension expense were:
DOMESTIC INTERNATIONAL
--------------------------------- --------------------
2003 2002 2001 2003 2002
------- ------- ------- ------- -------
Service cost -- benefits earned during the year ... $ 1,056 $ 879 $ 949 $ 310 $ 217
Interest cost on benefit obligation ............... 784 714 618 259 164
Expected return on plan assets .................... (756) (709) (576) (203) (123)
Amortization of initial unrecognized net transition
(asset) ......................................... (3) (3) (3) -- --
Amortization of prior service costs ............... (162) (165) (165) -- --
Amortization of (gain) ............................ (57) (57) (31) -- --
------- ------- ------- ------- -------
Net periodic pension expense ...................... $ 862 $ 659 $ 792 $ 366 $ 258
======= ======= ======= ======= =======
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
$682, $683 and $489 for 2003, 2002 and 2001, 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 $528, $539 and $580 in 2003, 2002 and
2001, respectively.
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 $249, $204, and $123 in 2003, 2002 and 2001, respectively.
The aggregate liability under this plan amounted to $1,678 and $1,429 at June
30, 2003 and 2002, 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, 2003 and 2002 had cash surrender values of $1,299 and
$1,142, 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 $385 and $364 at
June 30, 2003 and 2002, respectively. To assist in funding the benefits of the
plan, the Company invested in split-dollar life insurance policies, which at
June 30, 2003 and 2002 had cash surrender values to the Company of $1,392 and
$1,257, respectively, and are included in other assets.
13. INCOME TAXES
Income (loss) from continuing operations before income taxes was:
2003 2002 2001
-------- -------- --------
Domestic ............................................. $ 3,855 $ (5,507) $(11,238)
Foreign .............................................. 3,876 (5,664) (457)
-------- -------- --------
Income (loss) from continuing operations before income
taxes .............................................. $ 7,731 $(11,171) $(11,695)
======== ======== ========
Components of the provision (benefit) for income taxes were:
2003 2002 2001
--------- ---------- ----------
Current tax provision (benefit):
U.S. Federal................................... $ -- $ -- $ --
State and local................................ 516 (256) 1,711
Foreign........................................ 2,332 2,573 3,639
--------- ---------- ----------
Total current tax provision.................... 2,848 2,317 5,350
--------- ---------- ----------
Deferred tax provision (benefit):
U.S. Federal................................... 1,705 (1,225) (3,078)
F-19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
State and local................................ (345) (590) (210)
Foreign........................................ 1,618 (399) (3,373)
Change in valuation allowance -- domestic.... (1,360) 14,726 930
-- foreign .... 5,610 -- --
--------- ---------- ----------
Total deferred tax provision (benefit)......... 7,228 12,512 (5,731)
--------- ---------- ----------
Provision (benefit) for income taxes............. $ 10,076 $ 14,829 $ (381)
========= ========== ==========
Reconciliations of the Federal statutory rate to the Company's effective
tax rate are:
2003 2002 2001
---- ---- ----
U.S. Federal income tax rate.................................. 35.0% (35.0)% (35.0)%
State and local taxes, net of federal income tax effect....... 1.4 (4.9) 8.3
Foreign tax rate differences and taxes in certain profitable
foreign jurisdictions....................................... 33.9 42.1 23.8
Change in valuation allowance................................. 55.0 131.8 8.0
Non-taxable income............................................ -- -- (9.4)
Expenses with no tax benefit.................................. 4.4 1.0 1.5
Other......................................................... 0.6 (2.3) (0.5)
----- ----- ----
Effective tax rate............................................ 130.3% 132.7% (3.3)%
===== ===== ====
Provision has not been made for United States or additional foreign taxes
on undistributed earnings of foreign subsidiaries of approximately $37,500,
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, 2003 and 2002 were:
AS OF JUNE 30,
-------------------------
2003 2002
----------- -----------
Deferred tax assets:
Employee benefits................................. $ 3,194 $ 2,440
Property, plant and equipment..................... 686 959
Insurance......................................... 341 440
Receivables allowances............................ 770 878
Inventory......................................... 4,588 4,490
Environmental remediation......................... 1,232 852
Alternative minimum tax........................... 163 158
Net operating loss carry forwards -- domestic... 20,186 12,664
-- foreign.... 1,290 1,695
Other............................................. 2,125 3,260
----------- -----------
34,575 27,836
Valuation allowance............................... (32,954) (18,495)
----------- -----------
1,621 9,341
----------- -----------
Deferred tax liabilities
Property, plant and equipment..................... (2,354) (2,846)
Other............................................. (1,962) (1,872)
----------- -----------
(4,316) (4,718)
----------- -----------
Net deferred tax (liability) asset.................. $ (2,695) $ 4,623
=========== ===========
Deferred taxes are included in the following line items in the
consolidated balance sheets:
2003 2002
---------- ----------
Prepaid expenses and other current assets............... $ 690 $ 6,593
Accrued expenses, taxes and other current liabilities... (111) (717)
Other assets............................................ 624 305
Other liabilities....................................... (3,898) (1,558)
---------- ----------
$ (2,695) $ 4,623
========== ==========
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 $12,154 during the fourth quarters of 2003
and 2002,
F-20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
respectively. The Company will continue to evaluate the likelihood of
recoverability of these deferred tax assets based upon actual and expected
operating performance.
The Company has domestic federal net operating loss carry forwards of
approximately $52,000 that expire in 2019 through 2023, state net operating loss
carry forwards of approximately $44,000 that expire over various periods
beginning in 2005 and foreign net operating loss carry forwards of approximately
$8,000 that expire over various periods beginning in 2010.
14. COMMITMENTS AND CONTINGENCIES
(A) LEASES:
The Company leases office, warehouse and manufacturing equipment and
facilities for minimum annual rentals (plus certain cost escalations) as
follows:
CAPITAL OPERATING
YEAR ENDED JUNE 30 LEASES LEASES
---------------------------------------------- --------- --------
2004.......................................... $ 452 $ 1,970
2005.......................................... 125 1,357
2006.......................................... 34 732
2007.......................................... 32 452
2008.......................................... 17 370
Thereafter.................................... -- 125
----- --------
Total minimum lease payments.................. $ 660 $ 5,006
========
Amounts representing interest................. 60
-----
Present value of minimum lease payments....... $ 600
=====
Equipment under capitalized leases included in the consolidated balance
sheet at June 30, 2003 was $1,245, net of accumulated depreciation of $350.
Operating lease commitments include $1,375 with a related party controlled
by shareholders of the Company, as described in Related Party Transactions.
Rent expense under operating leases for 2003, 2002 and 2001 was $2,271,
$2,061 and $1,851, respectively.
(B) 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 the 2002
statement of operations and comprehensive income. Such amount was paid in 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. The third member of the
limited liability company will be Vulcan Materials Company. 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 CERCLA by
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, 2003. Some recovery from insurance and other sources is expected. The
Company also has accrued its best estimate of any future costs.
F-21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
oral agreement to pay $425 over six years.
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 of the
settlement amount.
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.
By notice dated August 14, 2003, the Company's Phibro-Tech subsidiary's
Santa Fe Springs, California facility was notified by the California Department
of Toxic Substances Control that it was deemed a potentially responsible party
in connection with a third-party site in Wilmington, California. The Company is
investigating this matter, but believes it relates to matters that took place
before Phibro-Tech acquired the Santa Fe Springs, California operations. The
Company does not believe it will have any material liability in this matter.
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.
(C) 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 $2,791, which is included in current
and long-term liabilities in the June 30, 2003 consolidated balance sheet
(approximately $2,834 in 2002). Environmental provisions were $1,630, $2,164 and
$1,252 for 2003, 2002 and 2001, respectively, and were included in selling,
general and administrative expenses in the consolidated statements of
operations.
15. 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
F-22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
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 value of the Company's
Senior Subordinated Notes is estimated based on quoted market prices. At June
30, 2003 and 2002, the fair value of the Company's Senior Subordinated Notes was
$40,000 and $51,000, respectively, and the related carrying amount was $100,000.
At June 30, 2003 and 2002, 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, 2003 and 2002 were $2,593 and $1,793,
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 $81
and $1,062 of cumulative gains (net of losses) on various foreign exchange
options, forward contracts and copper futures contracts designated as cash flow
hedges as of June 30, 2003 and 2002, respectively.
The fair value associated with 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.
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.
16. 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.
F-23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
ANIMAL
HEALTH & INDUSTRIAL CORPORATE
2003 SEGMENT DATA NUTRITION CHEMICALS DISTRIBUTION ALL OTHER & OTHER TOTAL
----------------- --------- --------- ------------ --------- ------- -----
Net Sales ............. $250,706 $ 48,797 $ 30,072 $ 25,650 $ -- $355,225
Operating income (loss) 38,472 (1,855) 3,207 261 (14,948) 25,137
Depreciation and
amortization ........ 7,690 2,904 12 723 1,554 12,883
Identifiable assets ... 190,864 33,191 9,154 12,735 12,811 258,755
Capital expenditures .. 5,669 2,836 -- 538 2 9,045
ANIMAL
HEALTH & INDUSTRIAL CORPORATE
2002 SEGMENT DATA NUTRITION CHEMICALS DISTRIBUTION ALL OTHER & OTHER TOTAL
----------------- --------- --------- ------------ --------- ------- -----
Net Sales ............. $239,602 $ 50,854 $ 27,852 $ 22,241 $ -- $340,549
Operating income (loss) 28,298 (7,324) 2,345 252 (13,854) 9,717
Depreciation and
amortization ........ 7,438 3,535 12 646 1,049 12,680
Identifiable assets ... 186,118 38,985 8,059 14,385 10,393 257,940
Capital expenditures .. 5,915 2,328 12 303 119 8,677
ANIMAL
HEALTH & INDUSTRIAL CORPORATE
2001 SEGMENT DATA NUTRITION CHEMICALS DISTRIBUTION ALL OTHER & OTHER TOTAL
----------------- --------- --------- ------------ --------- ------- -----
Net Sales ............. $197,806 $ 55,111 $ 34,074 $ 32,673 $ -- $319,664
Operating income (loss) 17,562 664 3,057 (5,763) (10,086) 5,434
Depreciation and
amortization ........ 5,089 3,334 42 1,158 782 10,405
Identifiable assets ... 169,870 51,199 10,948 18,604 21,723 272,344
Capital expenditures .. 2,669 3,383 18 289 251 6,610
17. 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.
2003 2002 2001
----------- ----------- -----------
NET SALES:
United States.......................... $ 233,942 $ 219,981 $ 209,848
Europe................................. 30,122 23,877 25,133
Israel................................. 44,383 45,266 52,746
Latin America.......................... 25,235 28,970 19,603
Asia/Pacific........................... 21,543 22,455 12,334
----------- ----------- -----------
Total.................................. $ 355,225 $ 340,549 $ 319,664
=========== =========== ===========
2003 2002 2001
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET:
United States............................ $ 16,720 $ 19,370 $ 20,641
Europe................................... 22,998 19,618 16,745
Israel................................... 10,990 12,647 14,219
Latin America............................ 15,396 13,772 16,426
Asia/Pacific............................. 336 258 290
---------- ---------- ----------
Total.................................... $ 66,440 $ 65,665 $ 68,321
========== ========== ==========
F-24
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
18. VALUATION AND QUALIFYING ACCOUNTS
The allowance for doubtful accounts was:
2003 2002 2001
--------- ---------- ---------
Balance at beginning of period.... $ 1,485 $ 1,769 $ 677
Provision for bad debts........... 348 994 1,164
Bad debt write-offs............... (388) (1,278) (72)
--------- ---------- ---------
Balance at end of period.......... $ 1,445 $ 1,485 $ 1,769
========= ========== =========
19. DIVESTITURES
On May 4, 2001, the Company sold its Agtrol U.S. business to Nufarm, Inc.
("Nufarm"). On June 14, 2001, the Company sold its Agtrol international business
to Nufarm. The sale included inventory and intangible assets but did not include
the manufacturing facilities. The Company entered into agreements to supply
copper fungicide products to Nufarm from its Sumter, South Carolina plant for
five years, and from its Bordeaux, France plant for three years.
The sales price was cash of $27,139. The Company recorded a pre-tax gain
of $1,457. Approximately $1,484 of additional gain was deferred and is being
recognized over the period of the related supply agreements. Revenues for the
Agtrol business amounted to $31,333 for 2001. Operating (losses) for the Agtrol
business were ($6,444) for 2001.
20. CONSOLIDATING FINANCIAL STATEMENTS
The Senior Subordinated Notes due 2008 (the "Notes") (see Note 8) are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries fully and
unconditionally guaranteed such Notes on a joint and several basis. Foreign
subsidiaries do not presently guarantee the Notes.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent, Guarantors
and Non-Guarantor Subsidiaries. The Company is the Parent. The Guarantor
Subsidiaries include all domestic subsidiaries of the Company including: CP
Chemicals, Inc.; Phibro-Tech, Inc.; Mineral Resource Technologies, Inc.; Prince
Agriproducts, Inc.; The Prince Manufacturing Company; Phibrochem, Inc.; Phibro
Chemicals, Inc.; Western Magnesium Corp.; Phibro Animal Health Holdings, Inc.;
and Phibro Animal Health U.S., Inc. The Guarantor Subsidiaries 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 using the
equity method. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
The principal consolidation adjustments are to eliminate investments in
subsidiaries and intercompany balances and transactions. Separate financial
statements of the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries are
not presented because management has determined that such financial statements
would not be material to investors.
F-25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2003
-------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents..... $ 43 $ 2,286 $ 8,850 $ 11,179
Trade receivables............. 2,759 24,523 28,389 55,671
Other receivables............. 957 736 1,949 3,642
Inventory..................... 2,612 45,544 40,611 88,767
Prepaid expenses and other.... 3,267 1,439 5,482 10,188
Current assets from discontinued
operations.................. -- 4,942 -- 4,942
------------ ------------ ------------ ------------ ------------
Total current assets........ 9,638 79,470 85,281 -- 174,389
------------ ------------ ------------ ------------ ------------
Property, plant & equipment,
net........................... 153 16,566 49,721 66,440
Intangibles..................... -- -- 8,669 8,669
Investment in subsidiaries...... 96,672 3,621 -- (100,293) --
Intercompany.................... 35,186 (27,293) (2,537) (5,356) --
Other assets.................... 11,516 1,832 851 14,199
Other assets from discontinued
operations.................... -- 10,650 -- 10,650
------------ ------------ ------------ ------------ ------------
$ 153,165 $ 84,846 $ 141,985 $(105,649) $ 274,347
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Cash overdraft................ $ 350 $ 1,327 $ 9 $ 1,686
Loan payable to banks......... 32,147 -- 6,767 38,914
Current portion of long term
debt........................ 21,599 447 2,078 24,124
Accounts payable.............. 3,304 28,276 25,335 56,915
Accrued expenses and other.... 6,924 11,082 23,603 41,609
Current liabilities from
discontinued operations..... -- 2,051 -- 2,051
------------ ------------ ------------ ------------ ------------
Total current liabilities... 64,324 43,183 57,792 -- 165,299
------------ ------------ ------------ ------------ ------------
Long term debt.................. 100,073 (67,265) 74,939 (5,356) 102,391
Other liabilities............... 4,397 13,403 4,288 22,088
Other liabilities from
discontinued operations....... -- 198 -- 198
Redeemable Securities:
Series B and C preferred
stock....................... 68,881 -- -- 68,881
------------ ------------ ------------ ------------ ------------
Stockholders' Equity (Deficit):
Series A preferred stock...... 521 -- -- 521
Common stock.................. 2 32 -- (32) 2
Paid in capital............... 860 110,885 5,179 (116,064) 860
Accumulated deficit........... (79,489) (15,479) 6,079 9,400 (79,489)
Accumulated other comprehensive
income (loss): --
gain on derivative
instruments.............. 81 81 -- (81) 81
cumulative currency
translation adjustment... (6,485) (192) (6,292) 6,484 (6,485)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity
(deficit)................ (84,510) 95,327 4,966 (100,293) (84,510)
------------ ------------ ------------ ------------ ------------
$ 153,165 $ 84,846 $ 141,985 $(105,649) $ 274,347
============ ============ ============ ============ ============
F-26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2003
--------------------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
Net sales ..................... $ 25,320 $ 210,111 $ 128,380 $ (8,586) $ 355,225
Cost of goods sold ............ 20,083 160,097 92,134 (8,586) 263,728
------------ ------------ ------------ ------------ ------------
Gross profit ................ 5,237 50,014 36,246 -- 91,497
Selling, general and
administrative expenses ..... 18,064 29,207 19,089 66,360
------------ ------------ ------------ ------------ ------------
Operating income (loss) ....... (12,827) 20,807 17,157 -- 25,137
Other:
Interest expense ............ (3,789) 9,670 10,461 16,342
Interest (income) ........... (2) -- (84) (86)
Other expense (income) ...... 3,283 (3,363) 1,357 1,277
(Gains) from sale of
assets ................... -- (118) (9) (127)
Intercompany allocation ..... (14,980) 14,366 614 --
Loss (profit) relating to
subsidiaries ............. 4,082 -- -- (4,082) --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income
taxes .................... (1,421) 252 4,818 4,082 7,731
Provision for income taxes .... 924 622 8,530 10,076
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations ............... (2,345) (370) (3,712) 4,082 (2,345)
Discontinued operations:
Profit (loss) relating to
discontinued operations .. 14,805 -- -- (14,805) --
(Loss) from discontinued
operations (net of income
taxes) ................... -- (3,454) (11,077) (14,531)
(Loss) income on disposal of
discontinued operations
(net of income taxes) .... (30,019) -- 29,336 (683)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........ $ (17,559) $ (3,824) $ 14,547 $ (10,723) $ (17,559)
============ ============ ============ ============ ============
F-27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2003
--------------------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
Operating Activities:
Net income (loss) ............... $ (17,559) $ (3,824) $ 14,547 $ (10,723) $ (17,559)
Adjustment for discontinued
operation ..................... 15,214 3,454 (18,259) 14,805 15,214
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations .................... (2,345) (370) (3,712) 4,082 (2,345)
Adjustments to reconcile income
(loss) from continuing
operations to net cash provided
(used) by operating activities:
Depreciation and amortization . 1,554 3,856 7,473 12,883
Deferred income taxes ......... -- -- 7,228 7,228
Gains from sale of assets ..... -- (118) (9) (127)
Unrealized foreign currency
losses ...................... -- (399) 789 390
Other ......................... 218 553 (692) 79
Changes in operating assets and
liabilities:
Accounts receivable ......... 301 1,734 973 3,008
Inventory ................... 95 (3,719) 3,102 (522)
Prepaid expenses and other .. (702) 363 (2,838) (3,177)
Other assets ................ (3,171) 1,131 (592) (2,632)
Intercompany ................ 13,064 (9,046) 64 (4,082) --
Accounts payable ............ 2,280 13,256 5,012 20,548
Accrued expenses and other .. 1,415 2,421 (5,298) (1,462)
Cash provided (used) by
discontinued operations ....... (238) (1,928) 2,952 786
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities ........ 12,471 7,734 14,452 -- 34,657
------------ ------------ ------------ ------------ ------------
Investing Activities:
Capital expenditures ............ (2) (2,923) (6,120) (9,045)
Proceeds from sale of assets .... -- 2,530 36 2,566
Other investing ................. -- -- 724 724
Discontinued operations ......... -- (493) 2,277 1,784
------------ ------------ ------------ ------------ ------------
Net cash (used) by
investing activities ........ (2) (886) (3,083) -- (3,971)
------------ ------------ ------------ ------------ ------------
Financing Activities:
Cash overdraft .................. (226) (4,175) (1,680) (6,081)
Net (decrease) in short term
debt .......................... (5,844) -- (416) (6,260)
Proceeds from long term debt .... -- -- 2,000 2,000
Payments of long term debt ...... (6,813) (526) (8,698) (16,037)
------------ ------------ ------------ ------------ ------------
Net cash (used) by
financing activities ........ (12,883) (4,701) (8,794) -- (26,378)
------------ ------------ ------------ ------------ ------------
Effect of exchange rate
changes on cash ................. -- 9 443 452
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents ....... (414) 2,156 3,018 -- 4,760
Cash and cash equivalents at
beginning of period ............. 457 130 5,832 6,419
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period .......................... $ 43 $ 2,286 $ 8,850 $ -- $ 11,179
============ ============ ============ ============ ============
F-28
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2002
-------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents ... $ 457 $ 130 $ 5,832 $ 6,419
Trade receivables ........... 3,150 25,493 29,336 57,979
Other receivables ........... 392 746 1,937 3,075
Inventory ................... 2,707 43,400 39,289 85,396
Prepaid expenses and other .. 3,010 2,265 10,050 15,325
Current assets from
discontinued operations ... -- 5,011 11,769 16,780
------------ ------------ ------------ ------------ ------------
Total Current Assets ...... 9,716 77,045 98,213 -- 184,974
------------ ------------ ------------ ------------ ------------
Property, plant & equipment,
net ......................... 409 18,950 46,306 65,665
Intangibles ................... -- -- 9,633 9,633
Investment in subsidiaries .... 82,540 3,621 -- (86,161) --
Intercompany .................. 73,359 (36,074) (5,240) (32,045) --
Other assets .................. 9,770 2,952 1,726 14,448
Other assets from discontinued
operations .................. -- 11,292 10,432 21,724
------------ ------------ ------------ ------------ ------------
$ 175,794 $ 77,786 $ 161,070 $ (118,206) $ 296,444
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Cash overdraft .............. $ 576 $ 5,502 $ 1,689 $ 7,767
Loan payable to banks ....... 37,991 -- 3,544 41,535
Current portion of long term
debt ...................... 3,216 530 5,105 8,851
Accounts payable ............ 1,024 23,159 13,975 38,158
Accrued expenses and other .. 7,579 7,920 14,314 29,813
Current liabilities from
discontinued operations ... -- 1,729 6,660 8,389
------------ ------------ ------------ ------------ ------------
Total Current Liabilities . 50,386 38,840 45,287 -- 134,513
------------ ------------ ------------ ------------ ------------
Long term debt ................ 127,643 (68,271) 109,314 (32,045) 136,641
Other liabilities ............. 2,352 5,958 20,089 28,399
Other liabilities from
discontinued operations ..... -- 198 1,280 1,478
Redeemable Securities:
Series B and C preferred
stock ....................... 56,602 -- -- 56,602
Stockholders' Equity (Deficit):
Series A preferred stock ...... 521 -- -- 521
Common stock .................. 2 32 -- (32) 2
Paid in capital ............... 740 110,885 8,166 (119,051) 740
Accumulated deficit ........... (49,652) (10,271) (9,852) 20,123 (49,652)
Accumulated other comprehensive
income (loss): --
gain on derivative
instruments ............... 1,062 384 678 (1,062) 1,062
cumulative currency
translation adjustment .... (13,862) 31 (13,892) 13,861 (13,862)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity
(Deficit) ............... (61,189) 101,061 (14,900) (86,161) (61,189)
------------ ------------ ------------ ------------ ------------
$ 175,794 $ 77,786 $ 161,070 $ (118,206) $ 296,444
============ ============ ============ ============ ============
F-29
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2002
--------------------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
Net sales ..................... $ 25,692 $ 191,479 $ 134,422 $ (11,044) $ 340,549
Cost of goods sold ............ 20,837 146,364 102,398 (11,044) 258,555
------------ ------------ ------------ ------------ ------------
Gross profit ................ 4,855 45,115 32,024 -- 81,994
Selling, general and
administrative expenses ..... 16,786 34,614 20,877 72,277
------------ ------------ ------------ ------------ ------------
Operating income (loss) ..... (11,931) 10,501 11,147 -- 9,717
Other:
Interest expense ............ 2,394 2,075 13,689 18,158
Interest (income) ........... (15) -- (341) (356)
Other expense (income) ...... 499 (876) 3,481 3,104
(Gains) from sale of
assets ................... -- -- (18) (18)
Intercompany allocation ..... (15,070) 15,070 -- --
Loss (profit) relating to
subsidiaries ............. 16,202 -- -- (16,202) --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income
taxes .................... (15,941) (5,768) (5,664) 16,202 (11,171)
Provision for income taxes .... 10,059 4,229 541 14,829
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations ............... (26,000) (9,997) (6,205) 16,202 (26,000)
Discontinued operations:
Profit (loss) relating to
discontinued operations .. (25,770) -- -- 25,770 --
(Loss) from discontinued
operations (net of income
taxes) ................... -- (2,930) (22,840) (25,770)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........ $ (51,770) $ (12,927) $ (29,045) $ 41,972 $ (51,770)
============ ============ ============ ============ ============
F-30
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2002
--------------------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
Operating Activities:
Net income (loss) ................. $ (51,770) $ (12,927) $ (29,045) $ 41,972 $ (51,770)
Adjustment for discontinued
operation ....................... 25,770 2,930 22,840 (25,770) 25,770
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations ...................... (26,000) (9,997) (6,205) 16,202 (26,000)
Adjustments to reconcile income
(loss) from continuing operations
to net cash provided (used) by
operating activities:
Depreciation and amortization ... 1,049 4,400 7,231 12,680
Deferred income taxes ........... 8,021 4,890 (399) 12,512
Gains from sale of assets ....... -- -- (18) (18)
Change in redemption amount of
redeemable common stock ....... (378) -- -- (378)
Unrealized foreign currency
losses ........................ -- -- 2,120 2,120
Other ........................... 1,233 897 45 2,175
Changes in operating assets and
liabilities:
Accounts receivable ........... 1,299 2,210 6,247 9,756
Inventory ..................... 606 (1,750) (12,709) (13,853)
Prepaid expenses and other .... 210 (1,707) (1,283) (2,780)
Other assets .................. (1,335) 2,520 1,482 2,667
Intercompany .................. 1,262 6,917 8,023 (16,202) --
Accounts payable .............. (719) 616 (7,955) (8,058)
Accrued expenses and other .... (119) (4,163) 11,504 7,222
Cash (used) by discontinued
operations ...................... -- (2,437) (353) -- (2,790)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
operating activities ............ (14,871) 2,396 7,730 -- (4,745)
------------ ------------ ------------ ------------ ------------
Investing Activities:
Capital expenditures .............. (119) (3,214) (5,344) (8,677)
Acquisition of a business ......... -- -- (7,182) (7,182)
Proceeds from property damage
claim ........................... -- 411 -- 411
Proceeds from sale of assets ...... -- -- 80 80
Other investing ................... 613 -- (33) 580
Discontinued operations ........... -- (1,832) (741) (2,573)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities ............ 494 (4,635) (13,220) -- (17,361)
------------ ------------ ------------ ------------ ------------
Financing Activities:
Cash overdraft .................... 563 1,331 1,544 3,438
Net increase (decrease) in short
term debt ....................... 13,520 -- (864) 12,656
Proceeds from long term debt ...... 2,000 322 -- 2,322
Payments of long term debt ........ (2,541) (494) (1,704) (4,739)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities ............ 13,542 1,159 (1,024) -- 13,677
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on
cash .............................. -- -- 3 3
------------ ------------ ------------ ------------ ------------
Net (decrease) in cash and cash
equivalents ....................... (835) (1,080) (6,511) -- (8,426)
Cash and cash equivalents at
beginning of period ............... 1,292 1,210 12,343 14,845
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period ............................ $ 457 $ 130 $ 5,832 $ -- $ 6,419
============ ============ ============ ============ ============
F-31
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2001
--------------------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
Net sales ................. $ 33,350 $ 183,723 $ 127,073 $ (24,482) $ 319,664
Cost of goods sold ........ 27,936 144,030 102,821 (24,482) 250,305
------------ ------------ ------------ ------------ ------------
Gross profit ............ 5,414 39,693 24,252 -- 69,359
Selling, general and
administrative
expenses ................ 14,686 33,970 15,269 63,925
------------ ------------ ------------ ------------ ------------
Operating income
(loss) ............... (9,272) 5,723 8,983 -- 5,434
Other:
Interest expense ........ 12,623 45 5,629 18,297
Interest (income) ....... (117) (10) (439) (566)
Other expense ........... 407 260 188 855
Loss (gain) from sale of
assets ............... -- (1,790) 333 (1,457)
Intercompany
allocation ........... (16,216) 12,487 3,729 --
Loss (profit) relating to
subsidiaries ......... 5,458 -- -- (5,458) --
------------ ------------ ------------ ------------ ------------
Income (loss) from
continuing operations
before income taxes .. (11,427) (5,269) (457) 5,458 (11,695)
Provision (benefit) for
income taxes ............ (113) (720) 452 (381)
------------ ------------ ------------ ------------ ------------
Income (loss) from
continuing
operations ........... (11,314) (4,549) (909) 5,458 (11,314)
Discontinued operations:
Profit (loss) relating to
discontinued
operations ........... (3,581) -- -- 3,581 --
(Loss) from discontinued
operations (net of
income taxes ......... -- (873) (2,708) (3,581)
------------ ------------ ------------ ------------ ------------
Net income (loss) .... $ (14,895) $ (5,422) $ (3,617) $ 9,039 $ (14,895)
============ ============ ============ ============ ============
F-32
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
PHIBRO ANIMAL HEALTH CORPORATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2001
--------------------------------
FOREIGN
U.S. GUARANTOR SUBSIDIARIES CONSOLIDATION CONSOLIDATED
PARENT SUBSIDIARIES NON-GUARANTORS ADJUSTMENTS BALANCE
------ ------------ -------------- ----------- -------
(IN THOUSANDS)
Operating Activities:
Net income (loss) ............... $ (14,895) $ (5,422) $ (3,617) $ 9,039 $ (14,895)
Adjustment for discontinued
operation ..................... 3,581 873 2,708 (3,581) 3,581
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations .................... (11,314) (4,549) (909) 5,458 (11,314)
Adjustments to reconcile income
(loss) from continuing
operations to net cash provided
(used) by operating activities:
Depreciation and amortization . 782 4,638 4,985 10,405
Deferred income taxes ......... (2,591) 233 (3,373) (5,731)
Loss (gain) from sale of
assets ...................... -- (1,790) 333 (1,457)
Change in redemption amount of
redeemable common stock ..... (1,512) (356) (1,623) (3,491)
Other ......................... (1,043) 1,113 714 784
Changes in operating assets and
liabilities:
Accounts receivable ......... 1,549 9,565 (12,721) (1,607)
Inventory ................... 552 (12,478) 10,356 (1,570)
Prepaid expenses and other .. 2,179 6,122 (2,326) 5,975
Other assets ................ 1,281 (526) 2,027 2,782
Intercompany ................ 25,520 (26,301) 6,239 (5,458) --
Accounts payable ............ (397) 7,831 10,809 18,243
Accrued expenses and other .. (2,186) 557 4,354 2,725
Cash (used) by discontinued
operations .................... -- (1,234) (1,369) -- (2,603)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
operating activities ........ 12,820 (17,175) 17,496 -- 13,141
------------ ------------ ------------ ------------ ------------
Investing Activities:
Capital expenditures ............ (251) (4,006) (2,353) (6,610)
Acquisition of a business ....... (51,700) -- -- (51,700)
Proceeds from sale of assets .... -- 25,418 -- 25,418
Other investing ................. (50) -- (270) (320)
Discontinued operations ......... -- (5,195) (1,742) (6,937)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
investing activities ........ (52,001) 16,217 (4,365) -- (40,149)
------------ ------------ ------------ ------------ ------------
Financing Activities:
Cash overdraft .................. (145) 2,905 (106) 2,654
Net (decrease) in short term
debt .......................... (3,969) -- (4,037) (8,006)
Proceeds from long term debt .... 3,800 24 5,539 9,363
Proceeds from issuance of
redeemable preferred stock .... 45,000 -- -- 45,000
Payments of long term debt ...... (32) (862) (4,030) (4,924)
Other financing ................. (4,192) -- -- (4,192)
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by
financing activities ........ 40,462 2,067 (2,634) -- 39,895
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on
cash ............................ -- 2 (447) (445)
------------ ------------ ------------ ------------ ------------
Net increase in cash and cash
equivalents ..................... 1,281 1,111 10,050 -- 12,442
Cash and cash equivalents at
beginning of period ............. 11 99 2,293 2,403
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period .......................... $ 1,292 $ 1,210 $ 12,343 $ -- $ 14,845
============ ============ ============ ============ ============
F-33
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.
PHILIPP BROTHERS CHEMICALS, INC.
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 29 , 2003 Date: September 29, 2003
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 29, 2003
---------------------------------------
Gerald K. Carlson
Chief Executive Officer
(Principal Executive Officer)
/s/ Jack C. Bendheim September 29, 2003
---------------------------------------
Jack C. Bendheim
Director, Chairman of the Board
/s/ Richard G. Johnson September 29, 2003
- ----------------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Marvin S. Sussman September 29, 2003
---------------------------------------
Marvin S. Sussman
Director
/s/ James O. Herlands September 29, 2003
- ----------------------------------------
James O. Herlands
Director
II-1
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Composite Certificate of Incorporation of Registrant (10)
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)
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, 2003. For a description of such indebtedness, see Note 8 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 Amended and Restated Revolving Credit, Capital Expenditure
Line and Security Agreement, dated November 30, 2000, among
Registrant, the Guarantors thereunder and PNC Bank,
National Association ("PNC") (4)
10.1.1 First Amendment to Amended and Restated Revolving Credit, Capital
Expenditure Line and Security Agreement, dated September 28, 2001 and
effective June 30, 2001, among Registrant, the Guarantors thereunder
and PNC (7)
10.1.2 Second Amendment to Amended and Restated Revolving
Credit, Capital Expenditure Line and Security Agreement,
dated October 18, 2002 among Registrant, the Guarantors
thereunder and PNC (8)
10.1.3 Third Amendment to Amended and Restated Revolving
Credit, Capital Expenditure Line and Security Agreement,
dated August 8, 2003 among Registrant, the Guarantors
thereunder and PNC (10)
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
1
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 Separation Agreement among Registrant, Phibro Tech, Inc. and
Nathan Bistricer dated as of
2
October 4, 2000 (3)
10.20 Stock Purchase Agreement between Phibro Tech, Inc. and
Nathan Bistricer dated as of October 4, 2000 (3)
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)++
10.28 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)!
21 List of Subsidiaries (10)
31.1 Certification of Gerald K. Carlson, Chief Executive Officer
required by Rule 15d-14(a) of the Act (10)
31.2 Certification of Jack C. Bendheim, Chairman of the Board
required by Rule 15d-14(a) of the Act (10)
31.3 Certification of Richard G. Johnson, Chief Financial Officer
required by Rule 15d-14(a) of the Act (10)
- ----------
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
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
10 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).
! A request for confidential treatment has been furnished to the SEC 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 an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company submits periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its senior subordinated notes.
4