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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X|*QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 333-64641
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Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction (I.R.S. Employer
of 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)
----------------------------------------------------
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Number of shares of each class of common stock outstanding as of September 30,
2004:
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 subject to such filing requirements and not required to file this Quarterly
Report, but has provided all such reports as if so required during the preceding
12 months.
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PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Financial Statements ........... 3
Condensed Consolidated Balance Sheets ................. 4
Condensed Consolidated Statements of
Operations and Comprehensive Income ................. 5
Condensed Consolidated Statements of
Changes in Stockholders' Deficit .................... 6
Condensed Consolidated Statements of Cash Flows ....... 7
Notes to Condensed Consolidated Financial Statements .. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................... 30
Item 4. Controls and Procedures ............................... 30
PART II OTHER INFORMATION
Item 5. Other Information ..................................... 31
Item 6. Exhibits ............................................. 31
SIGNATURES ........................................................... 32
2
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2004
and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this
Form 10-Q under the caption "Certain Factors Affecting Future Operating
Results." Unless the context otherwise requires, references in this report to
the "Company" or to "we" or "our" refers to Phibro Animal Health Corporation
and/or one or more of its subsidiaries, as applicable.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
September 30, June 30,
2004 2004
-------------- ----------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 5,778 $ 5,568
Trade receivables, less allowance for
doubtful accounts of $1,344 at
September 30, 2004 and $1,358
at June 30, 2004 52,721 57,658
Other receivables 3,440 2,766
Inventories 87,122 79,910
Prepaid expenses and other current assets 7,707 8,688
-------- --------
TOTAL CURRENT ASSETS 156,768 154,590
PROPERTY, PLANT AND EQUIPMENT, net 59,818 58,786
INTANGIBLES 11,354 11,695
OTHER ASSETS 15,611 16,298
-------- --------
$243,551 $241,369
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ 654 $ 891
Loans payable to banks 11,268 10,996
Current portion of long-term debt 953 1,351
Accounts payable 38,892 46,972
Accrued expenses and other current liabilities 47,331 40,010
--------- ---------
TOTAL CURRENT LIABILITIES 99,098 100,220
LONG-TERM DEBT 157,992 158,018
OTHER LIABILITIES 22,676 22,286
--------- ---------
TOTAL LIABILITIES 279,766 280,524
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series C preferred stock 25,359 24,678
--------- ---------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 860 860
Accumulated deficit (58,787) (57,964)
Accumulated other comprehensive income (loss):
Gain on derivative instruments 84 9
Cumulative currency translation adjustment (4,254) (7,261)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (61,574) (63,833)
--------- ---------
$ 243,551 $ 241,369
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
4
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended September 30, 2004 and 2003
(In Thousands)
2004 2003
---------- ----------
NET SALES $ 88,275 $ 84,950
COST OF GOODS SOLD 65,653 63,790
-------- --------
GROSS PROFIT 22,622 21,160
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 16,594 15,785
-------- --------
OPERATING INCOME 6,028 5,375
OTHER:
Interest expense 5,246 3,933
Interest (income) (25) (242)
Other (income) expense, net 24 (585)
-------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 783 2,269
PROVISION FOR INCOME TAXES 924 783
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (141) 1,486
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations
(net of income taxes) -- (462)
Gain on disposal of discontinued operations
(net of income taxes) -- 231
-------- --------
NET INCOME (LOSS) (141) 1,255
OTHER COMPREHENSIVE INCOME (LOSS):
Change in derivative instruments, net of tax 75 317
Change in currency translation adjustment 3,007 (859)
-------- --------
COMPREHENSIVE INCOME $ 2,941 $ 713
======== ========
NET INCOME (LOSS) (141) 1,255
Dividends and equity value accreted on Series B and C
redeemable preferred stock (682) (987)
-------- --------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (823) $ 268
======== ========
See notes to unaudited Condensed Consolidated Financial Statements
5
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Unaudited)
For the Three Months Ended September 30, 2004
(In Thousands)
Accumulated
Preferred Common Other
Stock Stock Paid-in Accumulated Comprehensive
--------------------
Series A Class A Class B Capital Deficit Income (Loss) Total
----------- --------- --------- ---------- ----------- ------------- ----------
Balance, June 30, 2004 $ 521 $ 1 $ 1 $ 860 $(57,964) $ (7,252) $(63,833)
Dividends on Series C
redeemable preferred stock (668) (668)
Equity value accreted on
Series C redeemable
preferred stock (14) (14)
Change in derivative
instruments, net of tax 75 75
Foreign currency translation
adjustment 3,007 3,007
Net (loss) (141) (141)
-------- -------- -------- -------- -------- -------- --------
Balance, September 30, 2004 $ 521 $ 1 $ 1 $ 860 $(58,787) $ (4,170) $(61,574)
======== ======== ======== ======== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements
6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended September 30, 2004 and 2003
(In Thousands)
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (141) $ 1,255
Adjustment for discontinued operations -- 231
-------- --------
Income (loss) from continuing operations (141) 1,486
Adjustments to reconcile income (loss)
from continuing operations to net
cash provided (used) by operating activities:
Depreciation and amortization 3,355 3,168
Deferred income taxes 68 53
Effects of changes in foreign currency (122) (1,364)
Other 47 153
Changes in operating assets and liabilities:
Accounts receivable 4,689 832
Inventories (4,602) (4,126)
Prepaid expenses and other current assets 1,077 7
Other assets (1) (375)
Accounts payable (8,580) (5,483)
Accrued expenses and other liabilities 7,695 7,293
Accrued costs of non-completed transaction (1,100) --
Cash provided (used) by discontinued operations -- (376)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,385 1,268
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (1,748) (852)
Proceeds from sale of assets 12 12
Discontinued operations -- 14,049
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1,736) 13,209
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in cash overdraft (237) 731
Net increase (decrease) in short-term debt 272 (280)
Proceeds from long-term debt 445 1,500
Payments of long-term debt (872) (944)
Discontinued operations -- 86
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (392) 1,093
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (47) 168
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 210 15,738
CASH AND CASH EQUIVALENTS at beginning of period 5,568 11,179
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 5,778 $ 26,917
======== ========
See notes to unaudited Condensed Consolidated Financial Statements
7
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
1. General
Principles of Consolidation and Basis of Presentation:
In the opinion of Phibro Animal Health Corporation (the "Company" or
"PAHC"), the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly its financial position as of September 30, 2004 and
its results of operations and cash flows for the three months ended September
30, 2004 and 2003.
The condensed consolidated balance sheet as of June 30, 2004 was derived
from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States. Additionally
it should be noted the accompanying condensed consolidated financial statements
and notes thereto have been prepared in accordance with accounting standards
appropriate for interim financial statements. While the Company believes that
the disclosures presented are adequate to make the information contained herein
not misleading, it is suggested that these financial statements be read in
conjunction the Company's audited consolidated financial statements as found in
the Company's annual report filed on Form 10-K for the year ended June 30, 2004.
The Company's Mineral Resource Technologies, Inc. ("MRT") and La Cornubia
S.A. (France) ("La Cornubia") businesses have been classified as discontinued
operations as discussed in Note 6. The Company's condensed consolidated
financial statements have been reclassified to report separately the financial
position, operating results and cash flows of the discontinued operations. These
footnotes present information only for continuing operations, unless otherwise
noted.
The results of operations for the three months ended September 30, 2004
may not be indicative of results for the full year.
New Accounting Pronouncements:
The Company has reviewed the Statements of Financial Accounting Standards
and the FASB Interpretations of the Financial Accounting Standards Board and has
determined that no new statements or interpretations have been issued which
would apply to the Company's financial statements or disclosures.
2. Risks, Uncertainties, and Liquidity
The Company's ability to fund its operating plan depends upon the
continued availability of borrowing under its senior credit facility. The
Company believes that it will be able to comply with the terms of its covenants
under the senior credit facility based on its forecasted operating plan. In the
event of adverse operating results and/or violation of covenants under this
facility, there can be no assurance that the Company would be able to obtain
waivers or amendments on favorable terms, if at all. The Company's fiscal 2005
operating plan projects adequate liquidity throughout the year, with periods of
reduced availability around the dates of the semi-annual interest payments due
November 1, 2004 and June 1, 2005 related to its senior secured and senior
subordinated notes. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that likely would be available. The Company also has undertaken a
strategic review of its manufacturing capabilities, and is currently increasing
inventory levels of certain products to enhance future supply flexibility and
reduce costs. There can be no assurance the Company will be successful in any of
the above-noted actions.
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
8
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
The testing, manufacturing, and marketing of certain of the Company's
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.
3. 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. Obsolete
and unsaleable inventories are reflected at estimated net realizable value.
Inventory costs include materials, direct labor and manufacturing overhead.
Inventories are comprised of:
As of
----------------------
September June
20, 2004 30, 2004
----------- ----------
Raw materials $16,651 $16,313
Work-in-process 1,329 1,764
Finished goods 69,142 61,833
------- -------
Total inventory $87,122 $79,910
======= =======
4. Intangibles
Product intangible cost arising from the acquisition of the medicated feed
additive business of Pfizer, Inc. and the acquisition of the rights to sell
amprolium was $14,832 and $14,925 at September 30, 2004 and June 30, 2004,
respectively, with related accumulated amortization of $3,478 and $3,230 at
September 30, 2004 and June 30, 2004, respectively. Amortization expense was
$371 and $304 for the three months ended September 30, 2004 and 2003
respectively.
5. Prince Transactions
Effective December 26, 2003, the Company completed the divestiture of
substantially all of the business and assets of Prince Quincy, Inc. (f/k/a The
Prince Manufacturing Company ("PMC")), to a company ("Buyer") formed by
Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium
Investors"), and the related reduction of the Company's preferred stock held by
the Palladium Investors (collectively, the "Prince Transactions").
The divestiture of PMC has not been reflected as a discontinued operation
due to the existence of the Backstop Indemnification Amount and continuing
supply and service agreements.
9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC were:
Three Months Ended
September 30,
2003
------------------
Net sales $5,683
Operating income 1,213
Depreciation and amortization 243
6. Discontinued Operations
The Company divested MRT and shutdown La Cornubia during fiscal 2004.
These businesses have been classified as discontinued operations.
Operating results and gain on sale of MRT were:
Three Months Ended
September 30,
2003
------------------
OPERATING RESULTS:
Net sales $ 3,327
Cost of goods sold 3,135
Selling, general and
administrative expenses 316
--------
Loss before income taxes (124)
Provision for income taxes --
--------
(Loss) from operations $ (124)
========
GAIN ON SALE:
Current assets $ (5,813)
Property, plant & equipment - net
and other assets (10,703)
Current liabilities 2,911
Net proceeds of sale 13,836
--------
Gain on sale $ 231
========
10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Operating results of La Cornubia were:
Three Months Ended
September 30,
2003
------------------
OPERATING RESULTS:
Net sales $ 2,220
Cost of goods sold 2,216
Selling, general and
administrative expenses 376
Other (income) (50)
Interest expense 16
-------
Loss before income taxes (338)
Provision for income taxes --
-------
Loss from operations $ (338)
=======
Depreciation and amortization $ 100
=======
7. Debt
Loans Payable to Banks
At September 30, 2004, loans payable to banks included $11,268 under the
senior credit facility with Wells Fargo Foothill, Inc. The weighted average
interest rate under the senior credit facility during the three months ended
September 30, 2004 was 4.5%.
As of September 24, 2004, the Company amended its senior credit facility
to: (i) increase the aggregate amount of borrowings available under such working
capital and letter of credit facilities from $27,500 to $32,500; the amount of
aggregate borrowings available under the working capital facility remained
unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and
expenses related to unsuccessful acquisitions and related financings in an
aggregate amount not to exceed $5,300 for the period beginning January 1, 2004
and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness
to exclude advances under the working capital facility; (iv) amend the
definition of Permitted Investments to allow other investments made during the
period from January 1, 2004 through June 30, 2004 in an aggregate amount not to
exceed $336; and (v) establish covenant EBITDA levels for the periods after June
30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and
(iii); effective January 1, 2004 for item (iv); and effective September 24, 2004
for item (v).
As of September 30, 2004, the Company was in compliance with the financial
covenants of its senior credit facility. The senior credit facility requires,
among other things, the maintenance of certain levels of trailing consolidated
and domestic EBITDA (earnings before interest, taxes, depreciation and
amortization) calculated on a monthly basis, and an acceleration clause should
an event of default (as defined in the agreement) occur. In addition, there are
certain restrictions on additional borrowings, additional liens on the Company's
assets, guarantees, dividend payments, redemption or purchase of the Company's
stock, sale of subsidiaries' stock, disposition of assets, investments, and
mergers and acquisitions.
The senior credit facility contains a lock-box requirement and a material
adverse change clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the consolidated balance sheet.
11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Long-Term Debt
As of
---------------------------
September 30, June 30,
2004 2004
--------------- -----------
Senior secured notes due December 1, 2007 $105,000 $105,000
Senior subordinated notes due June 1, 2008 48,029 48,029
Foreign bank loans 5,912 6,237
Capitalized lease obligations and other 4 103
-------- --------
158,945 159,369
Less: current maturities 953 1,351
-------- --------
$157,992 $158,018
======== ========
8. Employee Benefit Plans
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible domestic nonunion employees who meet
certain requirements of age, length of service and hours worked per year. The
Company's Belgium subsidiary maintains a defined contribution and defined
benefit plan for eligible employees.
Components of net periodic pension expense were:
Three Months Ended
September 30,
Domestic Pension Expense 2004 2003
------- --------
Service cost - benefits earned during the year $ 287 $ 362
Interest cost on benefit obligation 164 230
Expected return on plan assets (150) (210)
Amortization of initial unrecognized net transition (asset) -- (1)
Amortization of prior service costs (17) (41)
Amortization of net actuarial loss (gain) 2 16
----- -----
Net periodic pension cost - domestic $ 286 $ 356
===== =====
Three Months Ended
September 30,
International Pension Expense 2004 2003
------- -------
Service cost - benefits earned during the year $ 122 $ 110
Interest cost on benefit obligation 98 88
Expected return on plan assets (79) (71)
Amortization of net actuarial loss 6 6
----- -----
Net periodic pension cost - international $ 147 $ 133
===== =====
12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
9. Contingencies
Litigation:
On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and
the Company were served with a complaint filed by Chevron U.S.A. Inc.
("Chevron") in the United States District Court for the District of New Jersey,
alleging that the operations of CP at its Sewaren plant affected adjoining
property owned by Chevron and alleging that the Company, as the parent of CP, is
also responsible to Chevron. In July 2002, a phased settlement agreement was
reached and a Consent Order entered by the Court. That settlement is in the
process of being implemented. The Company's and CP's portion of the settlement
for past costs and expenses through the entry of the Consent Order was $495 and
was included in selling, general and administrative expenses in fiscal 2002 and
was paid in fiscal 2003. The Consent Order then provides for a period of due
diligence investigation of the property owned by Chevron. The investigation has
been conducted and the results are under review. The investigation costs are
being split with one other defendant, Vulcan Materials Company. Upon completion
of the review of the results of the investigation, a decision will be made
whether to opt out of the settlement or proceed. If no party opts out of the
settlement, the Company and CP will take title to the adjoining Chevron
property, probably through the use of a three-member New Jersey limited
liability company. In preparation to move forward, a limited liability company
has been formed, with Vulcan Materials Company as the third member. The Company
also has commenced negotiations with Chevron regarding its allocation of
responsibility and associated costs under the Consent Order. While the costs
cannot be estimated with any degree of certainty at this time, the Company
believes that insurance recoveries will be available to offset some of those
costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency ("the EPA"),
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which such subsidiary agreed to
contribute up to $900 of which $635 has been paid as of September 30, 2004. Some
recovery from insurance and other sources is expected but has not been recorded.
The Company also has accrued its best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
agreement to pay $425 over a six year period ending October 2008.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 in full
settlement.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company has investigated the
matter, which relates to events in the 1950's and 1960's, and management does
not believe that the Company has any liability in this matter.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes that,
because its Sumter, South Carolina facility is distant from Turkey Creek and
does not discharge into Turkey Creek, the likelihood of liability associated
with this matter is remote.
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.
13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
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 $2,870, which is included in current and long-term liabilities in
the September 30, 2004 condensed consolidated balance sheet (approximately
$2,933 at June 30, 2004).
10. Guarantees
As part of the Prince Transactions (Note 5), as is normal for such
transactions, the Company has agreed to indemnify the Palladium Investors for
losses arising out of breach of representations, warranties and covenants. The
Company's maximum liability under such indemnification is limited to $15,000.
The Company agreed to indemnify the Palladium Investors for a portion, at
the rate of $0.65 for every dollar, of the amount they receive in respect of the
disposition of the Buyer for less than $21,000, up to a maximum payment by the
Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop
Indemnification Amount would be payable on the earlier to occur of July 1, 2008
or six months after the redemption date of all of the Company's Senior Secured
Notes due 2007 if such a disposition closes prior to such redemption and six
months after the closing of any such disposition if the disposition closes after
any such redemption. The Company's obligations with respect to the Backstop
Indemnification Amount will cease if the Palladium Investors do not close the
disposition of the Buyer by January 1, 2009. The maximum potential Backstop
Indemnification Amount is included in other liabilities on the Company's
condensed consolidated balance sheet.
The Company established a $1,000 letter of credit escrow for two years to
collateralize its working capital adjustment and certain other indemnification
obligations relating to the Prince Transactions.
14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
11. Business Segments
The Company's reportable segments are Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets more than 500 formulations
and concentrations of medicated feed additives and nutritional feed additives
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products. The Industrial Chemicals segment manufactures and markets a number of
chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, and aerospace industries. The Distribution segment
markets and distributes a variety of industrial, specialty and fine organic
chemicals and intermediates produced primarily by third parties. The All Other
segment manufactures and markets a variety of specialty custom chemicals and
copper-based fungicides. Intersegment sales and transfers were not significant.
The following segment data includes information only for continuing operations.
Animal
Health & Industrial All Corporate &
Three Months Ended September 30, 2004 Nutrition Chemicals Distribution Other Other Total
------------ ------------ ------------- ----------- ------------ ---------
Net sales $65,806 $ 8,393 $ 7,661 $ 6,415 $ -- $88,275
Operating income/(loss) 7,815 773 864 705 (4,129) 6,028
Depreciation and amortization 2,195 403 2 100 655 3,355
Animal
Health & Industrial All Corporate &
Three Months Ended September 30, 2003 Nutrition Chemicals Distribution Other Other Total
------------ ------------ ------------- ----------- ------------ ---------
Net sales $59,841 $11,982 $ 7,939 $ 5,188 $ -- $84,950
Operating income/(loss) 6,900 822 841 669 (3,857) 5,375
Depreciation and amortization 2,029 649 3 115 372 3,168
Animal
Health & Industrial All Corporate &
Identifiable Assets Nutrition Chemicals Distribution Other Other Total
------------ ------------ ------------- ----------- ------------ ---------
At September 30, 2004 $188,620 25,632 $ 8,607 $ 5,818 $ 14,874 $243,551
At June 30, 2004 185,601 26,146 7,715 5,696 16,211 241,369
12. Consolidating Financial Statements
The units of Senior Secured Notes due 2007, consisting of US Senior Notes
issued by the Company (the "Parent Issuer") and Dutch Senior Notes issued by
Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are guaranteed by
certain subsidiaries. The Company and its U.S. subsidiaries ("U.S. Guarantor
Subsidiaries"), excluding PMC, Prince MFG, LLC and MRT (until divested) (the
"Unrestricted Subsidiaries", as defined in the indenture), fully and
unconditionally guarantee all of the Senior Secured Notes on a joint and several
basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of
Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally
guarantee the Dutch Senior Notes. The Dutch issuer and the Belgium Guarantor do
not guarantee the US Senior Notes. Other foreign subsidiaries ("Non-Guarantor
Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S.
Guarantor Subsidiaries include all domestic subsidiaries of the Company other
than the Unrestricted Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech,
Inc., Prince Agriproducts, Inc, Phibrochem, Inc., Phibro Chemicals, Inc.,
Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal
Health U.S., Inc.
15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc., PMC, Prince MFG, LLC, MRT (until divested), Phibrochem,
Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health
Holdings, Inc., and Phibro Animal Health U.S., Inc.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent Issuer,
Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium
Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S.
Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor
Subsidiaries are directly or indirectly wholly owned as to voting stock by the
Company.
Investments in subsidiaries are accounted for by the Parent Issuer using
the equity method. Income tax expense (benefit) is allocated among the
consolidating entities based upon taxable income (loss) by jurisdiction within
each group. The principal consolidation adjustments are to eliminate investments
in subsidiaries and intercompany balances and transactions.
16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 184 $ -- $ 568 $ -- $ 202 $ 4,824 $ -- $ 5,778
Trade receivables 2,828 -- 27,208 -- 2,015 20,670 -- 52,721
Other receivables 338 -- 1,942 -- 133 1,027 -- 3,440
Inventory 3,316 -- 36,410 -- 29,112 18,284 -- 87,122
Prepaid expenses and other 2,278 -- 691 -- 863 3,875 -- 7,707
------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,944 -- 66,819 -- 32,325 48,680 -- 156,768
------------------------------------------------------------------------------------------------
Property, plant &
equipment, net 136 -- 14,052 -- 17,270 28,360 -- 59,818
Intangibles -- -- 4,146 -- 1,544 5,664 -- 11,354
Investment in subsidiaries 107,628 -- 3,619 1,304 -- -- (112,551) --
Intercompany 8,802 -- 59,723 20,853 (1,833) (9,222) (78,323) --
Other assets 14,051 -- 833 -- -- 727 -- 15,611
------------------------------------------------------------------------------------------------
$ 139,561 $ -- $ 149,192 $ 22,157 $ 49,306 $ 74,209 $(190,874) $ 243,551
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ -- $ -- $ 654 $ -- $ -- $ -- $ -- $ 654
Loan payable to banks 11,268 -- -- -- -- -- -- 11,268
Current portion of
long-term debt -- -- 3 -- -- 950 -- 953
Accounts payable 3,985 -- 24,014 -- 1,567 9,326 -- 38,892
Accrued expenses and other 15,328 -- 9,083 867 13,766 8,287 -- 47,331
------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 30,581 -- 33,754 867 15,333 18,563 -- 99,098
------------------------------------------------------------------------------------------------
Long-term debt 133,029 -- 1 20,000 -- 4,962 -- 157,992
Intercompany debt -- -- -- -- 31,720 46,603 (78,323) --
Other liabilities 12,166 -- 5,054 -- 949 4,507 -- 22,676
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 175,776 -- 38,809 20,867 48,002 74,635 (78,323) 279,766
------------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Series C preferred stock 25,359 -- -- -- -- -- -- 25,359
------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 521 -- -- -- -- -- -- 521
Common stock 2 -- 31 -- -- -- (31) 2
Paid-in capital 860 -- 112,004 21 52 1,537 (113,614) 860
Retained earnings
(accumulated deficit) (58,787) -- (1,484) (3,500) (3,517) 6,807 1,694 (58,787)
Accumulated other
comprehensive
income (loss):
Gain on derivative
instruments 84 -- 84 -- -- -- (84) 84
Cumulative currency
translation adjustment (4,254) -- (252) 4,769 4,769 (8,770) (516) (4,254)
------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (61,574) -- 110,383 1,290 1,304 (426) (112,551) (61,574)
------------------------------------------------------------------------------------------------
$ 139,561 $ -- $ 149,192 $ 22,157 $ 49,306 $ 74,209 $(190,874) $ 243,551
================================================================================================
17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Three Months Ended September 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
----------------------------------------------------------------------------------------------
NET SALES $ 5,929 $-- $ 56,675 $ -- $ 1,668 $ 24,003 $ -- $ 88,275
NET SALES - INTERCOMPANY 56 -- 93 -- 6,204 1,075 (7,428) --
COST OF GOODS SOLD 4,620 -- 41,634 -- 4,699 22,128 (7,428) 65,653
----------------------------------------------------------------------------------------------
GROSS PROFIT 1,365 -- 15,134 -- 3,173 2,950 -- 22,622
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,903 -- 6,956 6 553 4,176 -- 16,594
----------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (3,538) -- 8,178 (6) 2,620 (1,226) -- 6,028
OTHER:
Interest expense 4,352 -- (2) 650 11 235 -- 5,246
Interest (income) (1) -- -- -- -- (24) -- (25)
Other (income) expense, net 1 -- (228) -- (59) 310 -- 24
Intercompany interest and other (7,527) -- 5,449 (660) 939 1,799 -- --
(Profit) loss relating
to subsidiaries (532) -- -- (1,567) -- -- 2,099 --
----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 169 -- 2,959 1,571 1,729 (3,546) (2,099) 783
PROVISION FOR INCOME TAXES 310 -- 104 -- 162 348 -- 924
----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (141) -- 2,855 1,571 1,567 (3,894) (2,099) (141)
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations -- -- -- -- -- -- -- --
(Loss) from discontinued
operations
(net of income taxes) -- -- -- -- -- -- -- --
Gain (loss) from disposal of
discontinued operations
(net of income taxes) -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (141) $-- $ 2,855 $ 1,571 $ 1,567 $ (3,894) $ (2,099) $ (141)
==============================================================================================
18
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended September 30, 2004
Parent Unrestricted U.S.Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
----------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (141) $ -- $ 2,855 $ 1,571 $ 1,567 $(3,894) $(2,099) $ (141)
Adjustment for discontinued
operations -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Income (loss) from continuing
operations (141) -- 2,855 1,571 1,567 (3,894) (2,099) (141)
Adjustments to reconcile
income (loss)
from continuing operations
to net cash provided (used)
by operating activities:
Depreciation and amortization 655 -- 703 -- 713 1,284 -- 3,355
Deferred income taxes -- -- -- -- -- 68 -- 68
Net gain from sales of assets -- -- -- -- -- (1) -- (1)
Effects of changes in
foreign currency -- -- (227) -- (59) 164 -- (122)
Other 3 -- 31 -- -- 14 -- 48
Changes in operating assets
and liabilities:
Accounts receivable (161) -- 216 -- 618 4,016 -- 4,689
Inventory (1,322) -- 3,251 -- (5,409) (1,122) -- (4,602)
Prepaid expenses and other 896 -- (267) -- 107 341 -- 1,077
Other assets (175) -- 173 -- -- 1 -- (1)
Intercompany (2,988) 5 (2,153) (2,238) 2,450 2,825 2,099 --
Accounts payable (749) 6 (4,441) -- (724) (2,288) -- (8,196)
Accrued expenses and other 3,813 (1) 781 650 997 (29) -- 6,211
--------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (169) 10 922 (17) 260 1,379 -- 2,385
--------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (55) -- (834) -- (274) (585) -- (1,748)
Proceeds from sale of assets -- -- -- -- -- 12 -- 12
--------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (55) -- (834) -- (274) (573) -- (1,736)
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) in cash overdraft -- (10) (227) -- -- -- -- (237)
Net (decrease) in short-term debt 272 -- -- -- -- -- -- 272
Proceeds from long-term debt -- -- -- -- -- 445 -- 445
Payments of long-term debt -- -- (99) -- -- (773) -- (872)
--------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 272 (10) (326) -- -- (328) -- (392)
--------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH -- -- 5 -- 4 (56) -- (47)
--------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 48 -- (233) (17) (10) 422 -- 210
CASH AND CASH EQUIVALENTS
at beginning of period 136 -- 801 17 212 4,402 -- 5,568
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
at end of period $ 184 $ -- $ 568 $ -- $ 202 $ 4,824 $ -- $ 5,778
============================================================================================
19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 $ -- $ 5,568
Trade receivables 2,670 -- 26,996 -- 2,592 25,400 -- 57,658
Other receivables 317 414 1,195 -- 72 768 -- 2,766
Inventory 1,994 -- 37,890 -- 23,159 16,867 -- 79,910
Prepaid expenses and other 3,195 110 565 -- 1,018 3,800 -- 8,688
-----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,312 524 67,447 17 27,053 51,237 -- 154,590
-----------------------------------------------------------------------------------------------------
Property, plant &
equipment, net 105 -- 13,730 -- 17,321 27,630 -- 58,786
Intangibles -- -- 4,252 -- 1,569 5,874 -- 11,695
Investment in subsidiaries 125,355 -- 3,619 1,604 -- -- (130,578) --
Intercompany (14,995) 20,995 60,030 20,181 1,630 (12,497) (75,344) --
Other assets 14,506 -- 1,056 -- -- 736 -- 16,298
-----------------------------------------------------------------------------------------------------
$ 133,283 $ 21,519 $ 150,134 $ 21,802 $ 47,573 $ 72,980 $(205,922) $ 241,369
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ -- $ 10 $ 881 $ -- $ -- $ -- $ -- $ 891
Loan payable to banks 10,996 -- -- -- -- -- -- 10,996
Current portion of
long-term debt -- -- 101 -- -- 1,250 -- 1,351
Accounts payable 4,734 9 28,434 -- 2,258 11,537 -- 46,972
Accrued expenses and other 11,857 159 8,306 216 12,022 7,450 -- 40,010
-----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 27,587 178 37,722 216 14,280 20,237 -- 100,220
-----------------------------------------------------------------------------------------------------
Long-term debt 133,029 -- 2 20,000 -- 4,987 -- 158,018
Intercompany debt -- -- -- -- 30,553 44,791 (75,344) --
Other liabilities 11,822 -- 4,897 -- 1,136 4,431 -- 22,286
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 172,438 178 42,621 20,216 45,969 74,446 (75,344) 280,524
-----------------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Series C preferred stock 24,678 -- -- -- -- -- -- 24,678
-----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 521 -- -- -- -- -- -- 521
Common stock 2 1 31 -- -- -- (32) 2
Paid-in capital 860 -- 112,004 21 52 1,537 (113,614) 860
Retained earnings
(accumulated deficit) (57,964) 21,340 (4,339) (2,744) (2,757) 8,374 (19,874) (57,964)
Accumulated other
comprehensive --
income (loss):
Gain on derivative
instruments 9 -- 9 -- -- -- (9) 9
Cumulative currency
translation adjustment (7,261) -- (192) 4,309 4,309 (11,377) 2,951 (7,261)
-----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (63,833) 21,341 107,513 1,586 1,604 (1,466) (130,578) (63,833)
-----------------------------------------------------------------------------------------------------
$ 133,283 $ 21,519 $ 150,134 $ 21,802 $ 47,573 $ 72,980 $(205,922) $ 241,369
=====================================================================================================
20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Three Months Ended September 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantors Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-------------------------------------------------------------------------------------------------
NET SALES $ 5,697 $ 5,683 $ 48,095 $ -- $ 992 $ 24,483 $ -- $ 84,950
NET SALES - INTERCOMPANY 45 1,339 209 -- 9,269 770 (11,632) --
COST OF GOODS SOLD 4,508 5,134 35,893 -- 9,196 20,691 (11,632) 63,790
------------------------------------------------------------------------------------------------
GROSS PROFIT 1,234 1,888 12,411 -- 1,065 4,562 -- 21,160
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,673 675 6,221 -- 524 3,692 -- 15,785
------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (3,439) 1,213 6,190 -- 541 870 -- 5,375
OTHER:
Interest expense 3,712 11 -- -- -- 210 -- 3,933
Interest (income) -- -- -- -- (30) (212) -- (242)
Other (income) expense, net 228 -- (242) -- (978) 407 -- (585)
Intercompany interest and other (5,992) 1,082 2,539 -- 696 1,675 -- --
(Profit) loss relating
to subsidiaries (2,874) -- -- -- -- -- 2,874 --
------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,487 120 3,893 -- 853 (1,210) (2,874) 2,269
PROVISION FOR INCOME TAXES 1 16 218 -- 333 215 -- 783
------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 1,486 104 3,675 -- 520 (1,425) (2,874) 1,486
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations (462) -- -- -- -- -- 462 --
(Loss) from discontinued
operations
(net of income taxes) -- (124) -- -- -- (338) -- (462)
Gain from disposal of
discontinued operations
(net of income taxes) 231 -- -- -- -- -- 231
------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,255 $ (20) $ 3,675 $ -- $ 520 $ (1,763) $ (2,412) $ 1,255
================================================================================================
21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended September 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,255 $ (20) $ 3,675 $ -- $ 520 $ (1,763) $ (2,412) $ 1,255
Adjustment for discontinued
operations 231 124 -- -- -- 338 (462) 231
------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 1,486 104 3,675 -- 520 (1,425) (2,874) 1,486
Adjustments to reconcile
income (loss)
from continuing operations
to net cash
provided (used) by operating
activities:
Depreciation and amortization 372 243 630 -- 632 1,291 3,168
Deferred income taxes -- -- -- -- -- 53 53
Net gain from sales of assets -- -- -- -- -- 1 1
Effects of changes in foreign
currency -- -- (164) -- (913) (287) (1,364)
Other 126 -- 319 -- -- (293) 152
Changes in operating assets
and liabilities:
Accounts receivable 119 83 (1,351) -- 544 1,437 832
Inventory (778) (1,305) (9,995) -- 6,828 1,124 (4,126)
Prepaid expenses and other 433 404 (955) -- 441 (316) 7
Other assets (530) 1 78 -- -- 76 (375)
Intercompany (11,621) 523 7,744 -- (7,853) 8,333 2,874 --
Accounts payable (1,176) 289 (996) -- (2,152) (1,448) (5,483)
Accrued expenses and other 4,015 (9) (174) -- 2,641 820 7,293
Cash provided (used)
by discontinued
operations 231 (652) -- -- -- 45 (376)
------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (7,323) (319) (1,189) -- 688 9,411 -- 1,268
------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures -- (32) (286) -- (226) (308) (852)
Proceeds from sale of assets -- -- -- -- -- 12 12
Discontinued operations 13,788 -- -- -- -- 261 14,049
------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 13,788 (32) (286) -- (226) (35) -- 13,209
------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) in cash overdraft 18 277 365 -- -- 71 731
Net (decrease) in short-term debt (6,280) -- -- -- -- 6,000 (280)
Proceeds from long-term debt -- -- -- -- -- 1,500 1,500
Payments of long-term debt (203) (12) (143) -- -- (586) (944)
Discontinued operations -- -- -- -- -- 86 86
------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (6,465) 265 222 -- -- 7,071 -- 1,093
------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH -- -- 2 -- 16 150 168
------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS -- (86) (1,251) -- 478 16,597 -- 15,738
CASH AND CASH EQUIVALENTS
at beginning of period 43 119 2,167 -- 185 8,665 11,179
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
at end of period $ 43 $ 33 $ 916 $ -- $ 663 $ 25,262 $ -- $ 26,917
================================================================================================
22
Item 2. 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
MRT and LaCornubia businesses have been classified as discontinued operations.
This discussion presents information only for continuing operations, unless
otherwise indicated. The Company presents its annual consolidated financial
statements on the basis of its fiscal year ending June 30.
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's ability to fund its operating plan depends upon the
continued availability of borrowing under its senior credit facility. The
Company believes that it will be able to comply with the terms of its covenants
under the senior credit facility based on its forecasted operating plan. In the
event of adverse operating results and/or violation of covenants under this
facility, there can be no assurance that the Company would be able to obtain
waivers or amendments on favorable terms, if at all. The Company's fiscal 2005
operating plan projects adequate liquidity throughout the year, with periods of
reduced availability around the dates of the semi-annual interest payments due
November 1, 2004 and June 1, 2005 related to its senior secured and senior
subordinated notes. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that likely would be available. The Company also has undertaken a
strategic review of its manufacturing capabilities, and is currently increasing
inventory levels of certain products to enhance future supply flexibility and
reduce cost. There can be no assurance the Company will be successful in any of
the above-noted actions.
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
23
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
Three Months Ended September 30,
--------------------------------
2004 2003
---- ----
(Thousands)
Net sales $ 88,275 $ 84,950
Gross profit 22,622 21,160
Selling, general and administrative 16,594 15,785
Operating income 6,028 5,375
Interest expense, net 5,221 3,691
Other (income) expense, net 24 (585)
Provision for income taxes 924 783
Income (loss) from continuing operations $ (141) $ 1,486
Comparison of Three Months Ended September 30, 2004 and 2003
Net Sales of $88.3 million increased $3.3 million, or 4%. Animal Health
and Nutrition sales of $65.8 million grew $6.0 million, or 10%, due to volume
increases offset in part by lower average selling prices. Specialty Chemical
Group (comprised of the Industrial Chemicals, Distribution and All Other
segments) sales of $22.5 million decreased $2.6 million. Excluding PMC,
Specialty Chemical group sales increased by $3.1 million due to volume increases
in Industrial Chemicals and All Other segments. The Specialty Chemical Group
included PMC sales of $5.7 million for the 2003 quarter.
Gross Profit of $22.6 million increased $1.5 million to 25.6% of net
sales, compared with 24.9% in 2003. Animal Health and Nutrition gross profit
increased due to higher sales unit volumes and lower unit costs offset in part
by lower average selling prices. The Specialty Chemical Group also contributed
to the improvement due to expanded sales of the Company's new copper-based wood
treatment products. The Specialty Chemical Group included PMC gross profit of
$1.9 million for the 2003 quarter.
Selling, General and Administrative Expenses of $16.6 million increased
$0.8 million. Expenses in the operating segments, excluding PMC, increased over
the prior year due to severance accruals, higher research and development costs
associated with registration trials, unfavorable foreign exchange rates and
overall higher operating costs. Corporate expenses increased due to higher
depreciation and amortization charges, compensation and severance costs offset
partially by income of $0.2 million from the PMC advisory fee and the
elimination of the Palladium management fee of $0.6 million in 2003. PMC
expenses were $0.7 million for the 2003 quarter.
Operating Income of $6.0 million increased $0.7 million to 6.8% of sales.
Operating income, excluding PMC, improved in both the Animal Health and
Nutrition and Specialty Chemical Group with increased gross profit offset in
part by higher selling, general and administrative expenses. PMC contributed
$1.2 million for the 2003 quarter offset in part by the elimination of the
Palladium management fee.
Interest Expense, Net of $5.2 million increased $1.5 million from the 2003
quarter, primarily due to higher average interest rates and also higher
borrowing levels associated with the issuance of the Company's Senior Secured
Notes.
Other (Income)Expense, Net principally reflects foreign currency
transaction net (gains) losses related to short-term inter-company balances and
foreign currency translation (gains) losses.
24
Income Taxes of $0.9 million were recorded on consolidated pre-tax income
of $0.8 million. The tax rate reflects income tax provisions in profitable
foreign jurisdictions and for state income taxes. A provision for U.S. federal
income taxes has not been recorded due to the utilization of net operating loss
carryforwards. The Company has recorded valuation allowances related to
substantially all deferred tax assets. The Company will continue to evaluate the
likelihood of recoverability of these deferred tax assets based upon actual and
expected operating performance.
Operating Segments
The Animal Health and Nutrition segment manufactures and markets MFAs and
NFAs to the poultry, swine and cattle markets, and includes the operations of
the Phibro Animal Health business unit, Prince AgriProducts, Koffolk (1949) Ltd.
and Planalquimica. The Industrial Chemicals segment manufacturers and markets
specialty chemicals for use in the pressure treated wood, brick, glass, and
chemical industries, and includes Phibro-Tech and PMC. The Distribution segment
markets a variety of specialty chemicals, and includes PhibroChem and Ferro
operations. The All Other segment includes contract manufacturing of crop
protection chemicals, Wychem and all other operations. Due to the divestiture of
PMC in December 2003, PMC's results are shown separately for comparability.
Three Months ended September 30,
--------------------------------
2004 2003
------------ -------------
(Thousands)
Net Sales
Animal Health & Nutrition $65,806 $59,841
Industrial Chemicals - ex PMC 8,393 6,299
Industrial Chemicals - PMC -- 5,683
Distribution 7,661 7,939
All other 6,415 5,188
------- -------
$88,275 $84,950
======= =======
Three Months ended September 30,
--------------------------------
2004 2003
------------ -------------
(Thousands)
Operating Income
Animal Health & Nutrition $ 7,815 $ 6,900
Industrial Chemicals - ex PMC 773 (391)
Industrial Chemicals - PMC -- 1,213
Iistribution 864 841
All other 705 669
Corporate expenses and adjustments (4,129) (3,857)
------- -------
$ 6,028 $ 5,375
======= =======
Operating Segments Comparison of Three Months Ended September 2004 and 2003
Animal Health and Nutrition
Net Sales of $65.8 million increased $6.0 million, or 10%. MFA net sales
increased by $2.4 million. Revenues were higher primarily for antibacterials and
antibiotics but were offset in part by lower sales of anticoccidials. The
increase in MFA revenues was due to higher unit volumes and favorable currency
effect on international sales offset in part by lower average selling prices.
NFA net sales increased by $3.6 million principally due to volume increases in
trace mineral premixes and other feed ingredients.
25
Operating Income of $7.8 million increased $0.9 million, or 13%. Operating
income improved due to higher sales unit volumes and lower unit costs offset in
part by lower average selling prices and increased selling, general and
administrative expenses.
Specialty Chemicals
Industrial Chemicals net sales of $8.4 million, excluding PMC, increased
$2.1 million, or 33%. Sales of copper- related products to the wood treatment
markets increased due to the introduction of new copper based wood treatment
products. PMC, divested in December 2003, generated revenues of $5.7 million for
the 2003 quarter. Operating income, excluding PMC, of $0.8 million improved by
$1.2 million from the 2003 quarter. This improvement was due to new product
introductions and savings from previously implemented headcount reductions and
facility restructurings in Phibro-Tech operations. PMC provided operating income
of $1.2 million for the 2003 quarter.
Distribution net sales of $7.7 million decreased $0.3 million, or 4%.
Lower sales volumes in Europe were offset in part by higher domestic unit
volumes and slightly higher average selling prices. Distribution operating
income of $0.9 million approximated the prior period. As a percentage of sales,
operating income was 11% in both 2004 and 2003 quarters.
All Other net sales of $6.4 million increased $1.2 million, or 24%.
Revenues for contract manufacturing increased $0.7 million due to increased
volumes and average selling prices. Revenues from specialized lab projects and
formulations increased $0.5 million over the prior period. Operating income of
$0.7 million improved slightly from the prior period due to higher margins on
specialized lab projects and formulations.
Discontinued Operations
In August 2003, the Company divested Mineral Resource Technologies, Inc
and shutdown its operations at La Cornubia. These businesses have been
classified as discontinued operations. The Company's consolidated financial
statements have been reclassified to report separately the operating results and
cash flows of the discontinued operations.
Three Months Ended September 30, 2003
-------------------------------------
MRT LaCornubia Total
--- ---------- -----
Net Sales $ 3,327 $ 2,220 $ 5,547
======= ======= =======
Operating Loss $ (124) $ (372) $ (496)
Interest Expense, net -- 16 16
Other Expense (Income), net -- (50) (50)
Provision (benefit) for income tax -- -- --
------- ------- -------
Net Income (loss) from
discontinued operations $ (124) $ (338) $ (462)
======= ======= =======
Depreciation and Amortization $ - $ 100 $ 100
======= ======= =======
Mineral Resource Technologies, Inc. ("MRT"). In August 2003, the Company
divested MRT for net proceeds, after transaction costs, of approximately $13.8
million. MRT was included in the Company's All Other segment.
La Cornubia. On June 30, 2004, one of the Company's French subsidiaries,
La Cornubia SA ("La Cornubia"), filed for bankruptcy under the insolvency laws
of France. The Company believes that, as a result of the bankruptcy filing by La
Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's
parent, a holding company
26
with no assets except for its investment in La Cornubia, may also file for
bankruptcy in France. The Company does not believe that La Cornubia's bankruptcy
filing, nor the possible bankruptcy filing by LC Holding, will have a material
adverse effect on its financial condition or results of operations.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Cash provided by operations for
the three months ended September 30, 2004 and 2003 was $2.4 million and $1.3
million, respectively. Cash provided was due to income from continuing
operations offset in part by working capital requirements. The Company is
currently increasing inventory levels of certain products to enhance future
supply flexibility and reduce cost as part of a strategic review of its
manufacturing capabilities.
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for the three months ended September 30, 2004 and 2003
was ($1.7) million and $13.2 million, respectively. Capital expenditures of $1.7
million and $0.9 million for 2004 and 2003, respectively, were for new product
capacity, for maintaining the Company's existing asset base and for
environmental, health and safety projects. Discontinued operations, primarily
from the sale of MRT, provided funds of $14.0 million in 2003.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used)
by financing activities for the three months ended September 30, 2004 and 2003
was ($0.4) million and $1.1 million, respectively. Short-term debt increased due
to a $0.3 million increase in the senior credit facility. Proceeds from
long-term debt and payments of long-term debt, net used $0.4 million of funds
and primarily reflect the borrowing activity of Koffolk Israel.
Working Capital and Capital Expenditures. Working capital as of September
30, 2004 was $57.7 million compared to $54.4 million at fiscal year end June 30,
2004, an increase of $3.0 million. The Company is currently increasing inventory
levels of certain products to enhance future supply flexibility and reduce cost
as part of a strategic review of its manufacturing capabilities. The fiscal 2005
increase in working capital primarily was due to higher inventory levels.
The Company anticipates spending approximately $8.0 million for capital
expenditures in fiscal 2005, primarily to cover the Company's asset replacement
needs, to improve processes, and for environmental and regulatory compliance,
subject to the availability of funds.
Liquidity. At September 30, 2004, the amount of credit extended under the
Company's senior credit facility totaled $11.3 million under the revolving
credit facility and $8.7 million under the letter of credit facility, and the
Company had $6.2 million available under the credit facility. In addition,
certain of the Company's foreign subsidiaries also had availability totaling
$5.1 million under their respective loan agreements. As of September 24, 2004,
the Company amended its senior credit facility to: (i) increase the aggregate
amount of borrowings available under such working capital and letter of credit
facilities to $32.5 million; the amount of aggregate borrowings available under
the working capital facility remained unchanged at $17.5 million; (ii) amend the
EBITDA definition to exclude charges and expenses related to unsuccessful
acquisitions and related financings in an aggregate amount not to exceed $5.3
million for the period beginning January 1, 2004 and ending June 30, 2004; (iii)
amend the definition of Additional Indebtedness to exclude advances under the
working capital facility; (iv) amend the definition of Permitted Investments to
allow other investments made during the period from January 1, 2004 through June
30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish
covenant EBITDA levels for the periods ending after June 30, 2004. The amendment
was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1,
2004 for item (iv); and effective September 24, 2004 for item (v).
The senior credit facility contains a lock-box requirement and a material
adverse change clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the condensed consolidated balance
sheet.
The Company's ability to fund its operating plan depends upon the
continued availability of borrowing under its senior credit facility. The
Company believes that it will be able to comply with the terms of its covenants
under the senior credit facility based on its forecasted operating plan. In the
event of adverse operating results and/or violation
27
of covenants under this facility, there can be no assurance that the Company
would be able to obtain waivers or amendments on favorable terms, if at all. The
Company's fiscal 2005 operating plan projects adequate liquidity throughout the
year, with periods of reduced availability around the dates of the semi-annual
interest payments due November 1, 2004 and June 1, 2005 related to its senior
secured and senior subordinated notes. The Company is pursuing additional cost
reduction activities, working capital improvement plans, and sales of
non-strategic assets to ensure additional liquidity. The Company also has
availability under foreign credit lines that likely would be available. The
Company also has undertaken a strategic review of its manufacturing
capabilities, and is currently increasing inventory levels of certain products
to enhance future flexibility and reduce cost. There can be no assurance the
Company will be successful in any of the above-noted actions.
The Company's contractual obligations (in millions) at September 30, 2004
mature as follows:
Years
-----------------------------------------
Within 1 Over 1 to 3 Over 3 to 5 Over 5 Total
-------- ----------- ----------- ------ -----
Loans payable to banks $ 11.3 $ -- $ -- $ -- $ 11.3
Long-term debt
(including current portion) 1.0 4.1 153.9 -- 159.0
Interest payments 19.3 38.4 12.7 -- 70.4
Lease commitments 1.4 2.6 2.0 2.2 8.2
Acquisition of rights 0.6 0.8 0.4 -- 1.8
------ ------ ------ ------ ------
Total contractual obligations $ 33.6 $ 45.9 $169.0 $ 2.2 $250.7
====== ====== ====== ====== ======
Critical Accounting Policies
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
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.
The accounting policies and related risk described in our Annual Report on Form
10-K for the year ended June 30, 2004 are those that depend most heavily on
these judgments and estimates. As of September 30, 2004 there have been no
material changes to any of the critical accounting policies contained therein.
New Accounting Pronouncements
There were no new accounting policies issued during the quarter ended
September 30, 2004 which would result in a material impact on the Company's
financial statements.
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
28
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.
For financial market risks related to changes in interest rates, foreign
currency exchange rates and commodity prices, reference is made to Part II, Item
7, Quantitative and Qualitative Disclosure about Market Risk, in our annual
report on Form 10-K for the fiscal year ended June 30, 2004 and to Notes 2 and
17 to our Consolidated Financial Statements included therein.
Certain Factors Affecting Future Operating Results
Forward-Looking Statements
This Report on Form 10-Q contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Statements that are not
historical facts, including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words "may," "could," "would,"
"should," "believe," "expect," "anticipate," "plan," "estimate," "target,"
"project," "intend," or similar expressions. These statements include, among
others, statements regarding our expected business outlook, anticipated
financial and operating results, our business strategy and means to implement
the strategy, our objectives, the amount and timing of capital expenditures, the
likelihood of our success in expanding our business, financing plans, budgets,
working capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding demand for our products, the expansion of product
offerings geographically or through new applications, the timing and cost of
planned capital expenditures, competitive conditions and general economic
conditions. These assumptions could prove inaccurate. Forward-looking statements
also involve risks and uncertainties, which could cause actual results that
differ materially from those contained in any forward-looking statement. Many of
these factors are beyond our ability to control or predict. Such factors
include, but are not limited to, the following:
o our substantial leverage and potential inability to service our debt
o our dependence on distributions from our subsidiaries
o risks associated with our international operations and significant
foreign assets
o our dependence on our Israeli operations
o competition in each of our markets
o potential environmental liability
o potential legislation affecting the use of medicated feed additives
o extensive regulation by numerous government authorities in the
United States and other countries
o our reliance on the continued operation and sufficiency of our
manufacturing facilities
o our reliance upon unpatented trade secrets
o the risks of legal proceedings and general litigation expenses
o potential operating hazards and uninsured risks
29
o the risk of work stoppages
o our dependence on key personnel
See also the discussion under "Other Risks and Uncertainties" in Note 2 of
our Condensed 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 3. Quantitative and Qualitative Disclosures about Market Risk
Information regarding quantitative and qualitative disclosures about
market risk is set forth in Item 2 of this Form 10-Q.
Item 4. Controls and Procedures
(a) Based upon an evaluation, under the supervision and with the
participation of our Principal Executive Officers and our Principal Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, they have concluded that, as of the end of the period
covered by this Report, our disclosure controls and procedures, as defined in
Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, are effective
for gathering, analyzing and disclosing information we are required to disclose
in periodic reports that we furnish to the Securities and Exchange Commission.
(b) During the quarter ended September 30, 2004, the Company remediated
the material weakness in internal control (which was comprised of a combination
of significant deficiencies) discussed in our Annual Report on Form 10K. The
Company completed a review of significant balance sheet accounts related to
September 30, 2004 balances and implemented enhanced supervisory reviews of
these accounts. Additionally, the Company is implementing improvements in
processes and procedures related to the review, substantiation and evaluation of
general ledger account balances. As of the end of the period covered by this
report, other than noted above, there have been no significant changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
It should be noted that any system of internal controls, however well
designed and operated, can provide only reasonable, but not absolute, assurance
that the objectives of the system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its
stated goals under all potential conditions, regardless of how remote.
30
PART II -- OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
Exhibit No. Description
31.1 Certification of Gerald K. Carlson, Chief Executive Officer required
by Rule 15d-14(a) of the Act.
31.2 Certification of Jack C. Bendheim, Chairman of the Board required by
Rule 15d-14(a) of the Act.
31.3 Certification of Richard G. Johnson, Chief Financial Officer
required by Rule 15d-14(a) of the Act.
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 9 7/8% Senior Subordinated Notes due 2008.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHIBRO ANIMAL HEALTH CORPORATION.
Date: November 12, 2004 By: /s/ JACK C. BENDHEIM
-------------------------------
Jack C. Bendheim
Chairman of the Board
Date: November 12, 2004 By: /S/ GERALD K. CARLSON
-------------------------------
Gerald K. Carlson
Chief Executive Officer
Date: November 12, 2004 By: /s/ RICHARD G. JOHNSON
-------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
32
Exhibit Index
Exhibit No. Description
----------- -----------
31.1 Certification of Gerald K. Carlson, Chief Executive Officer
required by Rule 15d-14(a) of the Act.
31.2 Certification of Jack C. Bendheim, Chairman of the Board
required by Rule 15d-14(a) of the Act.
31.3 Certification of Richard G. Johnson, Chief Financial Officer
required by Rule 15d-14(a) of the Act.
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 9 7/8% Senior Subordinated Notes due 2008.