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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
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(MARK ONE)
[X]*QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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.)
65 Challenger Road, Ridgefield Park, New Jersey 07660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(201) 329-7300
(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 December 31,
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 (Loss)....... 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................................................... 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 40
Item 4. Controls and Procedures................................................................. 40
PART II OTHER INFORMATION
Item 5. Other Information..................................................................... 42
Item 6. Exhibits.............................................................................. 42
SIGNATURES ............................................................................................. 43
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)
DECEMBER 31, JUNE 30,
2004 2004
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,170 $ 5,568
Trade receivables, less allowance for doubtful accounts
of $1,307 at December 31, 2004 and $1,358 at June 30, 2004 56,875 57,658
Other receivables 4,470 2,766
Inventories 97,604 79,910
Prepaid expenses and other current assets 6,914 8,688
--------- ---------
TOTAL CURRENT ASSETS 176,033 154,590
PROPERTY, PLANT AND EQUIPMENT, net 61,111 58,786
INTANGIBLES 11,116 11,695
OTHER ASSETS 16,790 16,298
--------- ---------
$ 265,050 $ 241,369
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 1,787 $ 891
Loans payable to banks 297 10,996
Current portion of long-term debt 4,082 1,351
Accounts payable 46,368 46,972
Accrued expenses and other current liabilities 47,809 40,010
--------- ---------
TOTAL CURRENT LIABILITIES 100,343 100,220
LONG-TERM DEBT 178,630 158,018
OTHER LIABILITIES 23,340 22,286
--------- ---------
TOTAL LIABILITIES 302,313 280,524
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series C preferred stock 22,817 24,678
--------- ---------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 860 860
Accumulated deficit (62,844) (57,964)
Accumulated other comprehensive income (loss):
Gain on derivative instruments 331 9
Cumulative currency translation adjustment 1,050 (7,261)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (60,080) (63,833)
--------- ---------
$ 265,050 $ 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 (LOSS)
(Unaudited)
(In Thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
--------- --------- --------- ---------
NET SALES $ 93,060 $ 92,540 $ 181,335 $ 177,490
COST OF GOODS SOLD (includes Belgium Plant
Transactions costs of $9,536 for the
three months and six months ended
December 31, 2004) 79,191 69,991 144,844 133,781
--------- --------- --------- ---------
GROSS PROFIT 13,869 22,549 36,491 43,709
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 17,759 16,824 34,353 32,609
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (3,890) 5,725 2,138 11,100
OTHER:
Interest expense 5,389 4,549 10,635 8,482
Interest (income) (33) 168 (58) (74)
Other (income) expense, net (791) 127 (767) (458)
Net (gain) on extinguishment of debt -- (23,226) -- (23,226)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (8,455) 24,107 (7,672) 26,376
PROVISION (BENEFIT) FOR INCOME TAXES (884) 2,880 40 3,663
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (7,571) 21,227 (7,712) 22,713
DISCONTINUED OPERATIONS:
Gain (loss) from discontinued operations (net of
income taxes) -- 59 -- (403)
Gain on disposal of discontinued operations
(net of income taxes) -- -- -- 231
--------- --------- --------- ---------
NET INCOME (LOSS) (7,571) 21,286 (7,712) 22,541
OTHER COMPREHENSIVE INCOME:
Change in derivative instruments, net of tax 247 102 322 419
Change in currency translation adjustment 5,304 3,031 8,311 2,172
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (2,020) $ 24,419 $ 921 $ 25,132
========= ========= ========= =========
NET INCOME (LOSS) (7,571) 21,286 (7,712) 22,541
Excess of the reduction of redeemable preferred stock
over total assets divested and costs and liabilities
incurred on the Prince Transactions 973 20,138 973 20,138
Dividends and equity value accreted on Series B and C
redeemable preferred stock 2,541 (2,864) 1,859 (3,851)
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (4,057) $ 38,560 $ (4,880) $ 38,828
========= ========= ========= =========
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 and Six Months Ended December 31, 2004
(In Thousands)
COMMON ACCUMULATED
PREFERRED STOCK OTHER
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)
========= ======= ======= ======= ========== ============= =========
Excess of the reduction in redeemable
preferred stock over total assets
divested and costs and liabilities
incurred on the Prince Transactions 973 973
Dividends on Series C
redeemable preferred stock (667) (667)
Equity value accreted on
Series C redeemable
preferred stock 3,208 3,208
Change in derivative
instruments, net of tax 247 247
Foreign currency translation
adjustment 5,304 5,304
Net (loss) (7,571) (7,571)
--------- ------- ------- ------- ---------- ------------ ---------
Balance, December 31, 2004 $ 521 $ 1 $ 1 $ 860 $ (62,844) $ 1,381 $ (60,080)
========= ======= ======= ======= ========== ============ =========
See notes to unaudited Condensed Consolidated Financial Statements
6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
SIX MONTHS ENDED
DECEMBER 31,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ (7,712) $ 22,541
Adjustment for discontinued operations -- 172
--------- ---------
Income (loss) from continuing operations (7,712) 22,713
Adjustments to reconcile income (loss) from continuing operations to net
cash used by operating activities:
Depreciation and amortization (includes accelerated depreciation from the Belgium
Plant Transactions of $533 for the six months ended December 31, 2004) 7,308 6,544
Deferred income taxes (172) 93
Net gain on extinguishment of debt -- (23,226)
Effects of changes in foreign currency (1,174) (1,166)
Other 366 589
Changes in operating assets and liabilities:
Accounts receivable 1,518 (2,132)
Inventories (11,641) (1,499)
Prepaid expenses and other current assets 1,456 705
Other assets 316 605
Accounts payable (1,600) (6,749)
Accrued expenses and other liabilities (913) 4,516
Accrued costs of non-completed transaction (1,893) --
Accrued costs of the Belgium Plant Transactions 9,003 --
Cash used by discontinued operations -- (1,665)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES (5,138) (672)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (3,676) (2,280)
Proceeds from sale of assets 40 23
Discontinued operations -- 14,397
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (3,636) 12,140
--------- ---------
FINANCING ACTIVITIES:
Net increase in cash overdraft 896 2,204
Net decrease in short-term debt (10,699) (31,453)
Proceeds from long-term debt 26,100 107,500
Payments of long-term debt (1,862) (34,020)
Payment of Pfizer obligations -- (28,300)
Payments relating to the Prince Transactions and transaction costs -- (19,979)
Debt refinancing costs (1,550) (11,496)
Discontinued operations -- 1,391
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 12,885 (14,153)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 491 188
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,602 (2,497)
CASH AND CASH EQUIVALENTS at beginning of period 5,568 11,179
--------- ---------
CASH AND CASH EQUIVALENTS at end of period $ 10,170 $ 8,682
========= =========
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 December 31, 2004 and
its results of operations and cash flows for the three months and six months
ended December 31, 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 the
disclosures presented are adequate to make the information contained herein not
misleading, these financial statements should be read in conjunction with 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 these notes to condensed consolidated financial
statements. 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 all interim periods presented may not be
indicative of results for the full year.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company will adopt the following new accounting pronouncements during
2005:
Statement of Financial Accounting Standards No. 151, "Inventory Costs, an
amendment to Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151").
SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No.
43, Chapter 4, previously stated "...under some circumstances, items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
may be so abnormal as to require treatment as current period charges....". SFAS
No. 151 requires that those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
SFAS No. 151 requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 30, 2005 and the provisions of this statement shall be applied
prospectively. The Company is currently assessing the impact of this statement.
Statement of Financial Accounting Standards No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS
No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after December 2004. The provisions of this statement shall be applied
prospectively. The Company is currently assessing the impact of this statement.
8
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
Statement of Financial Accounting Standards No. 123, "Share-Based Payment
(revised 2004)" ("SFAS No. 123"). This Statement is a revision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" and supercedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or may be settled by the issuance of those equity
instruments. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
This Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in SFAS No. 123 as
originally issued, and it does not address the accounting for employee share
ownership plans. This Statement applies to all awards granted after the
effective date and to awards modified, repurchased, or cancelled after that
date. The cumulative effect of initially applying this Statement, if any, is
recognized as of the required effective date. SFAS No. 123, as revised, is
effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005. The Company is currently assessing the impact
of this statement.
2. RISKS, UNCERTAINTIES, AND LIQUIDITY
The Company's ability to fund its operating plan depends upon the
continued availability of borrowing under its domestic senior credit facility.
The Company believes that it will be able to comply with the terms of its
covenants under the domestic 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 expects adequate liquidity throughout 2005, with periods of reduced
availability around the dates of the semi-annual interest payments due June 1
and December 1 related to its Senior Secured Notes 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. There can be no assurance the Company will
be successful in any of the above-noted actions.
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain 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.
9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
3. REFINANCING
ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES:
On December 21, 2004, the Company completed a private placement pursuant
to which the Company and Philipp Brothers Netherlands III B.V., an indirect
wholly-owned subsidiary of the Company (the "Dutch Issuer" and together with the
Company, the "Issuers") issued and sold 22,491 additional units consisting of
$18,207 13% Senior Secured Notes due 2007 of the Company (the "U.S. Notes") and
$4,284 13% Senior Secured Notes due 2007 of the Dutch Issuer (the "Dutch Notes"
and together with the U.S. Notes, the "Additional Notes"), from which they
received gross proceeds of $23,391. The proceeds were used to refinance
indebtedness outstanding under the Company's domestic senior credit facility.
The Company incurred financing costs of $2,275 in connection with the issuance
of the Additional Notes. The Additional Notes were issued under the Indenture
dated October 21, 2003, as amended and supplemented (the "Indenture") under
which the Issuers previously issued 105,000 units consisting of $85,000
aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount
of Dutch Notes.
On January 14, 2005, the Company and its domestic subsidiaries filed a
registration statement with the Securities and Exchange Commission (the "SEC")
on Form S-4 with respect to an exchange offer for all its senior secured notes,
comprised of 105,000 units sold on October 21, 2003 and 22,491 additional units
sold on December 21, 2004. On February 4, 2005, such registration statement was
declared effective.
AMENDMENT TO THE DOMESTIC SENIOR CREDIT FACILITY:
On December 21, 2004, concurrent with the completion of the offering of
the Additional Notes, the Company amended its domestic senior credit facility
to: (i) amend the EBITDA definition to exclude charges and expenses related to
the sale of the Belgium Plant in an aggregate amount not to exceed $26,800 for
purposes of calculating a certain financial covenant; (ii) amend the Indenture
reserve definition to include scheduled payments of interest due on the
Additional Notes; (iii) amend the maximum aggregate amount of borrowing
available under the working capital facility to permit a temporary increase to
$22,500 and for its reduction to $17,500 on such borrowings being refinanced by
the proceeds of the Additional Notes; (iv) amend the Permitted Investments
definition to include investments in connection with the sale of the Belgium
Plant and transfer of certain equipment, together with other assets and rights
related to the production of virginiamycin, to Philipp Brothers Brasil Holdings
Ltda, ("PAH Brazil") or in connection with alternative production arrangements;
and (v) provide for the issuance of the Additional Notes and the sale of the
Belgium Plant and related transactions.
10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
4. BELGIUM PLANT TRANSACTIONS
On December 16, 2004, Phibro Animal Health SA, ("PAH Belgium") entered
into an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK
substantially all of PAH Belgium's facilities in Rixensart, Belgium (the
"Belgium Plant"). Such sale, when completed (the "Belgium Plant Transactions"),
will include the following elements (U.S. dollar amounts at the December 31,
2004 exchange rate): (i) the transfer of substantially all of the land and
buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as
the industrial activities and intellectual property relating to certain solvent
technology of PAH Belgium for a purchase price of EUR 6,200 ($8,394), payable at
closing; (ii) the transfer to GSK of a majority of the employees of the Belgium
Plant and the corresponding responsibility for statutory severance obligations;
(iii) GSK agreeing to be responsible cleaning-up, by demolition or otherwise,
certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up
to a maximum of EUR 700 ($948) for such cleaning-up costs; (iv) in recognition
of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to
pay to GSK EUR 1,500 ($2,031) within six months from the closing date, EUR 1,500
($2,031) within eighteen months from the closing date, EUR 1,500 ($2,031) within
thirty months from the closing date, and EUR 500 ($677) within forty-two months
from the closing date; (v) PAH Belgium retaining certain excess land (valued at
approximately EUR 400 ($542)) and being able to sell such land for its own
account; (vi) PAH Belgium being responsible for certain plant closure costs and
legally required severance indemnities in connection with workforce reductions,
estimated in total to be EUR 9,100 ($12,320), of which an amount estimated to be
approximately EUR 4,600 ($6,227) would be payable at or around the closing and
an aggregate amount so estimated to be approximately EUR 4,500 ($6,092) would be
payable over periods up to thirteen years; and (vii) PAH Belgium retaining any
or all equipment at the Belgium Plant, and being able to sell such equipment for
the account of PAH Belgium or transfer such equipment, together with other
assets and rights related to the production of virginiamycin, to PAH Brazil
which owns a facility in Guarulhos, Brazil or in connection with alternative
production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur on November 30, 2005, but in no event earlier than July 1,
2005 or later than June 30, 2006.
The Dutch Notes and related guarantees are collateralized by a mortgage on
the Belgium Plant which will be released in connection with the closing of the
sale of the Belgium Plant to GSK.
As a result of the above agreement, the Company will depreciate the
Belgium plant to its estimated salvage value of EUR 2,470 ($3,344) as of the
projected closing date of November 30, 2005. The Company recorded incremental
depreciation expense of EUR 394 ($533) in December 2004 and will record an
additional EUR 8,662 ($11,727) of incremental depreciation expense ratably
through November 2005. The Company recorded severance expense of EUR 6,650
($9,003) in December 2004 for the estimated minimum severance amounts indicated
by law, contract, and/or past practice. The Company estimates it will record
additional expense of EUR 2,450 ($3,317) ratably through November 2005 for
severance, retention agreements and other costs. The incremental depreciation
expense of $533 and severance expense of $9,003 recorded in December 2004 are
included in cost of goods sold on the Company's condensed consolidated
statements of operations and comprehensive income (loss).
The Company has determined that the carrying amount of the Belgium Plant
at December 31, 2004 is recoverable based on the estimated future cash flows
arising from the use of the assets.
In anticipation of transferring production of virginiamycin from the
Belgium plant to an alternative production location, the Company has been
increasing inventory levels of virginiamycin to ensure adequate supplies during
the transfer period. At December 31, 2004 virginiamycin inventories were
approximately $40,000 and are expected to continue to increase through November
2005, based on current production rates.
11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
5. HOLDING COMPANY AND HOLDCO NOTES
During January 2005, PAHC Holdings Corporation ("PAHC Holdings") was
formed to hold the capital stock of the Company, except for its Series C
Preferred Stock. On February 10, 2005, PAHC Holdings issued $29,000 of its 15%
Senior Secured Notes due 2010 (the "HoldCo Notes") in a private placement.
Interest is payable at the option of PAHC Holdings in cash or pay-in-kind HoldCo
Notes. The Company is not obligated for the HoldCo Notes. The Company's ability
to make payments to PAHC Holdings is subject to the terms of the Company's
Senior Secured Notes, its Senior Subordinated Notes, and its domestic senior
credit facility, and to applicable law.
The proceeds from the sale of the HoldCo Notes, upon release from escrow,
will be used, directly or indirectly, to redeem the Company's Series C Preferred
Stock either by PAHC Holdings (i) making a capital contribution to the Company
to contemporaneously finance the redemption of the Company's Series C Preferred
Stock, or (ii) purchasing a new series of the Company's preferred stock,
referred to as Series D Preferred Stock, that may be issued by the Company to
finance the redemption of the Company's Series C Preferred Stock. It is
contemplated that such redemption will occur on or before February 28, 2005. On
March 1, 2005, the applicable percentage for determining the equity value
component of the redemption price increases, as currently provided in the
Company's certificate of incorporation, from 18% to 22%. If on March 1, 2005,
the Company has not redeemed its Series C Preferred Stock from escrow, PAHC
Holdings will be required to redeem the HoldCo Notes, primarily with the
proceeds of the HoldCo Notes placed in escrow.
PAHC Holdings was formed by the holders of all of the Company's capital
stock, other than the holders of Series C Preferred Stock. In particular, Jack
Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his
family exchanged all of their shares of Series A Preferred Stock and Class B
Common Stock and Mr. Bendheim exchanged fifty percent (50%) of his shares of
Class A Common Stock, for the same number and class of shares of PAHC Holdings,
having the same designations, relative rights, privileges and limitations as the
Company's shares of such class (except to the extent that PAHC Holdings is a
Delaware corporation and the Company is a New York corporation).
The HoldCo Notes are to be secured by all of PAHC Holdings' assets (now
consisting solely of the Company's capital stock and, until disbursed, the
proceeds of the HoldCo Notes in escrow). Currently, such pledge covers all of
the Company's Series A Preferred Stock and Class B Common Stock, the Company's
non-voting classes of stock. In connection with the release of the proceeds of
the HoldCo Notes from escrow and following the redemption of the Company's
Series C Preferred Stock, Mr. Bendheim will contribute to PAHC Holdings the
balance of the Company's outstanding Class A Common Stock, and all of the
Company's outstanding Class A Common Stock, the Company's voting stock, will be
pledged as security for the HoldCo Notes.
6. 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.
On December 29, 2004, the Company and the Buyer reached agreement
regarding the post-closing working capital adjustment, which resulted in a final
$227 payment to the Company from the Buyer. The Company reassessed the accruals
relating to the Prince Transactions and adjusted the accruals accordingly. The
adjustments resulted in a net gain of $973 which was recorded as a decrease to
accumulated deficit on the Company's condensed consolidated balance sheet as of
December 31, 2004.
12
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 SIX MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2003
------------------ -----------------
Net sales $5,435 $11,118
Operating income 1,065 2,278
Depreciation and amortization 244 487
7. 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
--------------------------------------
DECEMBER 31, 2004 JUNE 30, 2004
----------------- -------------
Raw materials $21,349 $16,313
Work-in-process 1,782 1,764
Finished goods 74,473 61,833
------- -------
Total inventory $97,604 $79,910
======= =======
8. 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 $15,033 and $14,925 at December 31, 2004 and June 30, 2004,
respectively, with related accumulated amortization of $3,917 and $3,230 at
December 31, 2004 and June 30, 2004, respectively. Amortization expense was $375
and $304 for the three months ended December 31, 2004 and 2003, respectively,
and $746 and $608 for the six months ended December 31, 2004 and 2003,
respectively.
9. 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:
SIX MONTHS ENDED
DECEMBER 31, 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
========
13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
Operating results of La Cornubia were:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2003 DECEMBER 31, 2003
------------------ -----------------
OPERATING RESULTS:
Net sales $ 3,503 $ 5,723
Cost of goods sold 3,199 5,415
Selling, general and administrative expenses 412 788
Other (income) (193) (243)
Interest expense 26 42
------- -------
Income (loss) before income taxes 59 (279)
Provision for income taxes - -
Income (loss) from operations
------- -------
$ 59 $ (279)
======= =======
Depreciation and amortization $ 101 $ 201
======= =======
10. DEBT
LOANS PAYABLE TO BANKS
At December 31, 2004, loans payable to banks included $297 under the
domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted
average interest rate at December 31, 2004 was 5.75%. At December 31, 2004, the
Company had $17,203 of borrowings available under the working capital facility
that is provided under the domestic senior credit facility.
As of September 24, 2004, the Company amended its domestic 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 EBITDA covenant 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).
On December 21, 2004, concurrent with the completion of the offering of
the Additional Notes, the Company amended its domestic senior credit facility
to: (i) amend the EBITDA definition to exclude charges and expenses related to
the sale of the Belgium Plant in an aggregate amount not to exceed $26,800 for
purposes of calculating a certain financial covenant; (ii) amend the Indenture
reserve definition to include scheduled payments of interest due on the
Additional Notes; (iii) amend the maximum aggregate amount of borrowing
available under the working capital facility to permit a temporary increase to
$22,500 and for its reduction to $17,500 on such borrowings being refinanced by
the proceeds of the Additional Notes; (iv) amend the Permitted Investments
definition to include investments in connection with the sale of the Belgium
Plant and transfer of certain equipment, together with other assets and rights
related to the production of virginiamycin, to Philipp Brothers Brasil Holdings
Ltda, ("PAH Brazil") or in connection with alternative production arrangements;
and (v) provide for the issuance of the Additional Notes and the sale of the
Belgium Plant and related transactions.
14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
As of December 31, 2004, the Company was in compliance with the financial
covenants of its domestic senior credit facility. The domestic 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 domestic senior credit facility contains a lock-box requirement and a
material adverse change clause should an event of default (as defined in the
agreement) occur. Accordingly, the amounts outstanding have been classified as
short-term and are included in loans payable to banks in the consolidated
balance sheet.
LONG-TERM DEBT
As of
-----------------------------------------
December 31, 2004 June 30, 2004
----------------- -------------
Senior secured notes due December 1, 2007 $127,491 $105,000
Senior subordinated notes due June 1, 2008 48,029 48,029
Foreign bank loans 7,192 6,237
Capitalized lease obligations and other - 103
-------- --------
182,712 159,369
Less: current maturities $ 4,082 $ 1,351
-------- --------
178,630 158,018
======== ========
The Company's foreign subsidiaries have aggregate credit lines of $11,075.
At December 31, 2004, the Company had $3,883 of borrowings available under these
credit lines.
11. 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 Six Months Ended
December 31, December 31,
DOMESTIC PENSION EXPENSE 2004 2003 2004 2003
----- ----- ----- -----
Service cost - benefits earned during the year $ 337 $ 321 $ 624 $ 683
Interest cost on benefit obligation 315 226 479 456
Expected return on plan assets (308) (210) (458) (420)
Amortization of initial unrecognized net transition
(asset) (2) (1) (2) (2)
Amortization of prior service costs (55) (41) (72) (82)
Amortization of net actuarial loss (gain) (2) 5 - 21
Curtailment Benefit - (64) - (64)
----- ----- ----- -----
$ 285 $ 236 $ 571 $ 592
NET PERIODIC PENSION COST - DOMESTIC ===== ===== ===== =====
15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
INTERNATIONAL PENSION EXPENSE 2004 2003 2004 2003
----- ----- ----- -----
Service cost - benefits earned during the year $ 114 $ 117 $ 236 $ 227
Interest cost on benefit obligation 111 94 209 182
Expected return on plan assets (100) (75) (179) (146)
Amortization of net actuarial loss (gain) (5) 5 1 11
----- ----- ----- -----
NET PERIODIC PENSION COST - INTERNATIONAL $ 120 $ 141 $ 267 $ 274
===== ===== ===== =====
12. 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 December 31, 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 ("DTSC") and has
reached an agreement to pay $425 over a six year period ending October 2008. The
annual payments required under this agreement are not expected to have any
material adverse impact on the Company.
Phibro-Tech, Inc. and the DTSC are currently negotiating the settlement of
certain alleged technical permit violations from 2003. Phibro-Tech, Inc.
believes most, if not all, of the alleged violations will be withdrawn. In the
event penalties are assessed, they are not expected to exceed $50.
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.
16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
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 or results of operations.
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 $2,777, which is included in current and long-term liabilities in
the December 31, 2004 condensed consolidated balance sheet (approximately $2,933
at June 30, 2004).
13. GUARANTEES
As part of the Prince Transactions (as discussed in these notes to
condensed consolidated financial statements), 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.
17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
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 certain indemnification obligations relating to the Prince
Transactions.
14. 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 DECEMBER 31, 2004 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------- ----------- --------
Net sales $ 70,708 $7,686 $8,104 $ 6,562 $ - $ 93,060
Operating income (loss)
(1,520) 655 796 455 (4,276) (3,890)
Depreciation and amortization
2,705 413 6 104 725 3,953
The Animal Health and Nutrition segment includes Belgium Plant
Transactions costs of $9,003 of severance expense and $533 of depreciation
expense.
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
THREE MONTHS ENDED DECEMBER 31, 2003 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- -------
Net sales $68,687 $11,679 $7,656 $4,518 $ - $92,540
Operating income (loss) 7,655 778 692 657 (4,057) 5,725
Depreciation and amortization 2,059 639 4 98 576 3,376
18
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
SIX MONTHS ENDED DECEMBER 31, 2004 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- -------
Net sales $136,514 $16,079 $15,765 $ 12,977 $ - $181,335
Operating income/(loss)
6,295 1,428 1,660 1,160 (8,405) 2,138
Depreciation and amortization
4,900 816 8 204 1,380 7,308
The Animal Health and Nutrition segment includes Belgium Plant
Transactions costs of $9,003 of severance expense and $533 of depreciation
expense.
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
SIX MONTHS ENDED DECEMBER 31, 2003 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- -------
Net sales $128,528 $23,661 $15,595 $ 9,706 $ - $177,490
Operating income/(loss)
14,555 1,600 1,533 1,326 (7,914) 11,100
Depreciation and amortization
4,088 1,288 7 213 948 6,544
ANIMAL
IDENTIFIABLE ASSETS OF HEALTH & INDUSTRIAL ALL CORPORATE &
CONTINUING OPERATIONS NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- -------
At December 30, 2004 $209,126 $26,123 $7,775 $5,946 $16,080 $265,050
At June 30, 2004 185,601 26,146 7,715 5,696 16,211 241,369
15. 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.
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.
19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
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.
20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------ ------------ ------------ ------ --------- ------------ ----------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13 $ -- $ 968 $ 2 $ 5,369 $ 3,818 $ -- $ 10,170
Trade receivables 2,821 -- 28,004 -- 2,170 23,880 -- 56,875
Other receivables 693 -- 2,066 -- 766 945 -- 4,470
Inventory 2,867 -- 35,276 -- 34,888 24,573 97,604
Prepaid expenses and other 1,360 -- 64 -- 1,516 3,974 -- 6,914
-------- ---- -------- -------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 7,754 -- 66,378 2 44,709 57,190 -- 176,033
-------- ---- -------- -------- --------- --------- --------- ---------
Property, plant &
equipment, net 743 -- 13,821 -- 17,743 28,804 -- 61,111
Intangibles -- -- 4,039 -- 1,621 5,456 -- 11,116
Investment in subsidiaries 108,057 -- -- (3,728) -- -- (104,329) --
Intercompany 9,366 -- 68,136 26,903 (5,194) (11,407) (87,804) --
Other assets 15,191 -- 1,142 -- -- 457 -- 16,790
-------- ---- -------- -------- --------- --------- --------- ---------
$141,111 $ -- $153,516 $ 23,177 $ 58,879 $ 80,500 $(192,133) $ 265,050
======== ==== ======== ======== ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ -- $ -- $ 1,787 $ -- $ -- $ -- $ -- $ 1,787
Loan payable to banks 297 -- -- -- -- -- -- 297
Current portion of
long-term debt -- -- -- -- -- 4,082 -- 4,082
Accounts payable 4,011 -- 28,077 -- 2,561 11,719 -- 46,368
Accrued expenses
and other 9,397 -- 9,071 217 21,734 7,390 47,809
-------- ---- -------- -------- --------- --------- --------- ---------
TOTAL CURRENT
LIABILITIES 13,705 -- 38,935 217 24,295 23,191 -- 100,343
-------- ---- -------- -------- --------- --------- --------- ---------
Long-term debt 151,236 -- -- 24,284 -- 3,110 -- 178,630
Intercompany debt -- -- -- 2,411 37,881 47,512 (87,804) --
Other liabilities 13,433 -- 5,522 -- 431 3,954 -- 23,340
-------- ---- -------- -------- --------- --------- --------- ---------
TOTAL LIABILITIES 178,374 -- 44,457 26,912 62,607 77,767 (87,804) 302,313
-------- ---- -------- -------- --------- --------- --------- ---------
REDEEMABLE SECURITIES:
Series C preferred stock 22,817 -- -- -- -- -- -- 22,817
-------- ---- -------- -------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY
(DEFICIT):
Series A preferred stock 521 -- -- -- -- -- -- 521
Common stock 2 -- 33 -- -- -- (33) 2
Paid-in capital 860 -- 108,383 21 52 1,537 (109,993) 860
Retained earnings
(accumulated deficit) (62,844) -- 610 (10,906) (10,930) 6,997 14,229 (62,844)
Accumulated other
comprehensive --
income (loss):
Gain on derivative
instruments 331 -- 331 -- -- -- (331) 331
Cumulative currency
translation adjustment 1,050 -- (298) 7,150 7,150 (5,801) (8,201) 1,050
-------- ---- -------- -------- --------- --------- --------- ---------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (60,080) -- 109,059 (3,735) (3,728) 2,733 (104,329) (60,080)
-------- ---- -------- -------- --------- --------- --------- ---------
$141,111 $ -- $153,516 $ 23,177 $ 58,879 $ 80,500 $(192,133) $ 265,050
======== ==== ======== ======== ========= ========= ========= =========
21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------ ------------ ------------ ------ --------- ------------ ----------- -------
NET SALES $ 6,247 $-- $ 57,791 $ -- $ 2,560 $ 26,462 $ -- $ 93,060
NET SALES - INTERCOMPANY 37 -- 38 -- 4,456 2,342 (6,873) --
COST OF GOODS SOLD
(includes Belgium
Plant Transactions
costs of $9,536) 5,034 -- 43,358 -- 16,085 21,587 (6,873) 79,191
-------- --- -------- -------- -------- -------- -------- --------
GROSS PROFIT 1,250 -- 14,471 -- (9,069) 7,217 -- 13,869
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,315 -- 7,393 -- 813 4,238 -- 17,759
-------- --- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (4,065) -- 7,078 -- (9,882) 2,979 -- (3,890)
OTHER:
Interest expense 4,585 -- 2 649 12 141 -- 5,389
Interest (income) (1) -- (4) -- -- (28) -- (33)
Other (income) expense,
net 3 -- (146) -- (152) (496) -- (791)
Intercompany interest
and other (6,407) -- 4,937 (656) 942 1,184 -- --
(Profit) loss relating
to subsidiaries 5,122 -- -- 9,071 -- -- (14,193) --
-------- --- -------- -------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES (7,367) -- 2,289 (9,064) (10,684) 2,178 14,193 (8,455)
PROVISION (BENEFIT)
FOR INCOME TAXES 204 -- 195 -- (1,613) 330 -- (884)
-------- --- -------- -------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (7,571) -- 2,094 (9,064) (9,071) 1,848 14,193 (7,571)
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) $ (7,571) $-- $ 2,094 $ (9,064) $ (9,071) $ 1,848 $ 14,193 $ (7,571)
======== === ======== ======== ======== ======== ======== ========
22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------ ------------ ------------ ------ --------- ------------ ----------- -------
NET SALES $ 12,176 $-- $ 114,466 $ -- $ 4,228 $ 50,465 $ -- $ 181,335
NET SALES - INTERCOMPANY 93 -- 131 -- 10,660 3,417 (14,301) --
COST OF GOODS SOLD
(includes Belgium Plant
Transactions costs
of $8,287) 9,654 -- 84,992 -- 20,784 43,715 (14,301) 144,844
--------- --- --------- ------- -------- --------- --------- ---------
GROSS PROFIT 2,615 -- 29,605 -- (5,896) 10,167 -- 36,491
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,218 -- 14,349 6 1,366 8,414 -- 34,353
--------- --- --------- ------- -------- --------- --------- ---------
OPERATING INCOME (LOSS) (7,603) -- 15,256 (6) (7,262) 1,753 -- 2,138
OTHER:
Interest expense 8,937 -- -- 1,299 23 376 -- 10,635
Interest (income) (2) -- (4) -- -- (52) -- (58)
Other (income)
expense, net 4 -- (374) -- (211) (186) -- (767)
Intercompany interest
and other (13,934) -- 10,386 (1,316) 1,881 2,983 -- --
(Profit) loss relating
to subsidiaries 4,590 -- -- 7,504 -- -- (12,094) --
--------- --- --------- ------- -------- --------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES (7,198) -- 5,248 (7,493) (8,955) (1,368) 12,094 (7,672)
PROVISION (BENEFIT) FOR
INCOME TAXES 514 -- 299 -- (1,451) 678 -- 40
--------- --- --------- ------- -------- --------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (7,712) -- 4,949 (7,493) (7,504) (2,046) 12,094 (7,712)
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) $ (7,712) $-- $ 4,949 $(7,493) $ (7,504) $ (2,046) $ 12,094 $ (7,712)
========= === ========= ======= ======== ========= ========= =========
23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 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) $ (7,712) $ -- $ 4,949 $ (7,493) $ (7,504) $ (2,046) $ 12,094 $ (7,712)
Adjustment for
discontinued
operations -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations (7,712) -- 4,949 (7,493) (7,504) (2,046) 12,094 (7,712)
Adjustments to reconcile
income (loss) from
continuing operations
to net cash provided
(used) by operating
activities:
Depreciation
and amortization
(includes accelerated
depreciation from the
Belgium Plant
Transactions of $533) 1,380 -- 1,435 -- 2,008 2,485 -- 7,308
Deferred income taxes -- -- -- -- -- (172) -- (172)
Effects of changes in
foreign currency -- -- (411) -- (211) (552) -- (1,174)
Other 286 -- 85 -- -- (5) -- 366
Changes in operating
assets and
liabilities: --
Accounts receivable (156) -- (857) -- 660 1,871 -- 1,518
Inventory (873) -- 3,580 -- (8,513) (5,835) -- (11,641)
Prepaid expenses and
other 1,512 -- 233 -- (1,029) 740 -- 1,456
Other assets 255 -- (189) -- -- 250 -- 316
Intercompany 1,276 5 (9,084) 3,193 11,918 4,786 (12,094) --
Accounts payable (1,171) 6 (386) -- 47 (96) -- (1,600)
Accrued expenses and
other 801 (1) 1,170 1 (965) (1,919) -- (913)
Accrued costs of
non-completed
transaction (1,893) -- -- -- -- -- -- (1,893)
Accrued costs of the
Belgium Plant
Transactions -- -- -- -- 9,003 -- -- 9,003
-------- -------- -------- -------- -------- -------- -------- --------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES (6,295) 10 525 (4,299) 5,414 (493) -- (5,138)
-------- -------- -------- -------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (686) -- (1,184) -- (459) (1,347) -- (3,676)
Proceeds from sale of
assets -- -- 16 -- -- 24 -- 40
Other investing -- -- -- -- (182) 182 -- --
-------- -------- -------- -------- -------- -------- -------- --------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (686) -- (1,168) -- (641) (1,141) -- (3,636)
-------- -------- -------- -------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease)
in cash overdraft -- (10) 906 -- -- -- -- 896
Net (decrease) in
short-term debt (10,699) -- -- -- -- -- -- (10,699)
Proceeds from long-term
debt 19,107 -- -- 4,284 -- 2,709 -- 26,100
Payments of long-term
debt -- -- (103) -- -- (1,759) -- (1,862)
Debt refinancing costs (1,550) -- -- -- -- -- -- (1,550)
-------- -------- -------- -------- -------- -------- -------- --------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 6,858 (10) 803 4,284 -- 950 -- 12,885
-------- -------- -------- -------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH -- -- 7 -- 384 100 491
-------- -------- -------- -------- -------- -------- -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS (123) -- 167 (15) 5,157 (584) -- 4,602
CASH AND CASH EQUIVALENTS
at beginning of period 136 -- 801 17 212 4,402 5,568
-------- -------- -------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS
at end of period $ 13 $ -- $ 968 $ 2 $ 5,369 $ 3,818 $ -- $ 10,170
======== ======== ======== ======== ======== ======== ======== ========
24
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 -- -- 1,604 -- -- (126,959) --
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 $146,515 $21,802 $47,573 $ 72,980 $(202,303) $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 33 -- -- -- (34) 2
Paid-in capital 860 -- 108,383 21 52 1,537 (109,993) 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) 21,341 103,894 1,586 1,604 (1,466) (126,959) (63,833)
--------- ------- -------- ------- ------- -------- --------- --------
$ 133,283 $21,519 $146,515 $21,802 $47,573 $ 72,980 $(202,303) $241,369
========= ======= ======== ======= ======= ======== ========= ========
25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantors Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------ ------------ ------------ ------ --------- ------------ ----------- -------
NET SALES $ 5,425 $ 5,435 $54,601 $ -- $ 1,248 $ 25,831 $ -- $ 92,540
NET SALES - INTERCOMPANY 52 1,259 184 -- 3,727 1,405 (6,627) --
COST OF GOODS SOLD 4,311 5,005 41,326 -- 4,774 21,202 (6,627) 69,991
-------- -------- ------- ------- -------- -------- -------- --------
GROSS PROFIT 1,166 1,689 13,459 -- 201 6,034 -- 22,549
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,395 624 6,154 2 561 4,088 16,824
-------- -------- ------- ------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (4,229) 1,065 7,305 (2) (360) 1,946 -- 5,725
OTHER:
Interest expense 4,029 7 -- 506 19 (12) 4,549
Interest (income) (3) -- -- -- 30 141 168
Other (income) expense,
net 300 -- (34) -- 566 (705) 127
Net (gain) on
extinguishment of debt (23,226) -- -- -- -- -- (23,226)
Intercompany interest
and other (5,753) 810 2,949 (510) 750 1,754 --
(Profit) loss relating
to subsidiaries (2,753) -- -- 1,052 -- -- 1,701 --
-------- -------- ------- ------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 23,177 248 4,390 (1,050) (1,725) 768 (1,701) 24,107
PROVISION (BENEFIT) FOR
INCOME TAXES 1,950 80 454 -- (673) 1,069 2,880
-------- -------- ------- ------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 21,227 168 3,936 (1,050) (1,052) (301) (1,701) 21,227
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations 59 -- -- -- -- -- (59) --
Profit from discontinued
operations
(net of income taxes) -- -- -- -- -- 59 59
Gain from disposal of
discontinued operations
(net of income taxes) -- -- -- -- -- -- --
-------- -------- ------- ------- -------- -------- -------- --------
NET INCOME (LOSS) $ 21,286 $ 168 $ 3,936 $(1,050) $ (1,052) $ (242) $ (1,760) $ 21,286
======== ======== ======= ======= ======== ======== ======== ========
26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantors Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------ ------------ ------------ ------ --------- ------------ ----------- -------
NET SALES $ 11,122 $ 11,118 $ 102,696 $ -- $ 2,240 $ 50,314 $ -- $ 177,490
NET SALES - INTERCOMPANY 97 2,598 393 -- 12,996 2,175 (18,259) --
COST OF GOODS SOLD 8,819 10,139 77,219 -- 13,971 41,892 (18,259) 133,781
--------- --------- --------- ----- --------- --------- --------- ---------
GROSS PROFIT 2,400 3,577 25,870 -- 1,265 10,597 -- 43,709
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,068 1,299 12,375 2 1,084 7,781 32,609
--------- --------- --------- ----- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (7,668) 2,278 13,495 (2) 181 2,816 -- 11,100
OTHER:
Interest expense 7,741 18 -- 506 19 198 8,482
Interest (income) (3) -- -- -- -- (71) (74)
Other (income)
expense, net 528 -- (276) -- (412) (298) (458)
Net (gain) on
extinguishment of debt (23,226) -- -- -- -- -- (23,226)
Intercompany interest
and other (11,745) 1,892 5,488 (510) 1,446 3,429 --
(Profit) loss relating
to subsidiaries (5,627) -- -- 532 -- -- 5,095 --
--------- --------- --------- ----- --------- --------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 24,664 368 8,283 (530) (872) (442) (5,095) 26,376
PROVISION (BENEFIT) FOR
INCOME TAXES 1,951 96 672 -- (340) 1,284 3,663
--------- --------- --------- ----- --------- --------- --------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 22,713 272 7,611 (530) (532) (1,726) (5,095) 22,713
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations (403) -- -- -- -- -- 403 --
(Loss) from discontinued
operations
(net of income taxes) -- (124) -- -- -- (279) (403)
Gain from disposal of
discontinued operations
(net of income taxes) 231 -- -- -- -- -- 231
--------- --------- --------- ----- --------- --------- --------- ---------
NET INCOME (LOSS) $ 22,541 $ 148 $ 7,611 $(530) $ (532) $ (2,005) $ (4,692) $ 22,541
========= ========= ========= ===== ========= ========= ========= =========
27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 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) $ 22,541 $ 148 $ 7,611 $ (530) $ (532) $ (2,005) $(4,692) $ 22,541
Adjustment for
discontinued operations 172 124 -- -- -- 279 (403) 172
-------- --------- --------- -------- ------- --------- ------- ---------
Income (loss) from
continuing operations 22,713 272 7,611 (530) (532) (1,726) (5,095) 22,713
Adjustments to reconcile
income (loss) from
continuing operations
to net cash provided
(used) by operating
activities:
Depreciation and
amortization 948 487 1,248 -- 1,857 2,004 6,544
Deferred income taxes -- -- -- -- -- 93 93
Net gain on
extinguishment of debt (23,226) -- -- -- -- -- (23,226)
Effects of changes in
foreign currency -- -- (198) -- (1,380) 412 (1,166)
Other 259 -- 423 -- -- (93) 589
Changes in operating
assets and liabilities:
Accounts receivable 185 329 (3,590) -- 308 636 (2,132)
Inventory (330) (543) 25 -- (2,250) 1,599 (1,499)
Prepaid expenses
and other 1,340 273 (892) -- 289 (305) 705
Other assets 605 -- (4) -- -- 4 605
Intercompany 2,179 16,879 (13,879) (19,955) 9,912 (231) 5,095 --
Accounts payable (2,414) (337) 366 -- (2,647) (1,717) (6,749)
Accrued expenses
and other 2,076 (128) 5,515 506 3,647 (7,100) 4,516
Cash provided (used)
by discontinued
operations 231 (652) -- -- -- (1,244) (1,665)
-------- --------- --------- -------- ------- --------- ------- ---------
NET CASH PROVIDED
(USED) BY
OPERATING ACTIVITIES 4,566 16,580 (3,375) (19,979) 9,204 (7,668) -- (672)
-------- --------- --------- -------- ------- --------- ------- ---------
INVESTING ACTIVITIES:
Capital expenditures -- (62) (648) -- (659) (911) (2,280)
Proceeds from sale of
assets -- -- -- -- -- 23 23
Discontinued operations 13,849 -- -- -- -- 548 14,397
-------- --------- --------- -------- ------- --------- ------- ---------
NET CASH PROVIDED
(USED) BY INVESTING
ACTIVITIES 13,849 (62) (648) -- (659) (340) -- 12,140
-------- --------- --------- -------- ------- --------- ------- ---------
FINANCING ACTIVITIES:
Net increase (decrease)
in cash overdraft (350) (286) 2,849 -- -- (9) 2,204
Net increase (decrease)
in short-term debt (32,194) -- -- -- -- 741 (31,453)
Proceeds from long-term
debt 85,000 -- -- 20,000 -- 2,500 107,500
Payments of long-term
debt (32,679) (13) (867) -- -- (461) (34,020)
Payment of Pfizer
obligations (20,075) -- -- -- (8,225) -- (28,300)
Payments relating
to the Prince
Transactions and
transaction costs (3,667) (16,312) -- -- -- -- (19,979)
Debt refinancing costs (11,496) -- -- -- -- -- (11,496)
Discontinued operations -- -- -- -- -- 1,391 1,391
-------- --------- --------- -------- ------- --------- ------- ---------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES (15,461) (16,611) 1,982 20,000 (8,225) 4,162 -- (14,153)
-------- --------- --------- -------- ------- --------- ------- ---------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH -- -- -- -- 42 146 188
-------- --------- --------- -------- ------- --------- ------- ---------
NET INCREASE (DECREASE)
IN CASH AND
CASH EQUIVALENTS 2,954 (93) (2,041) 21 362 (3,700) -- (2,497)
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 $ 2,997 $ 26 $ 126 $ 21 $ 547 $ 4,965 $ -- $ 8,682
======== ========= ========= ======== ======= ========= ======= =========
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information should be read in conjunction with the condensed
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 feed 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.
On December 16, 2004, Phibro Animal Health SA ("PAH Belgium") entered into
an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK
substantially all of PAH Belgium's facilities in Rixensart, Belgium (the
"Belgium Plant"). Such sale, when completed, (the "Belgium Plant Transactions")
will include the following elements (U.S. dollar amounts as of December 31, 2004
exchange rate): (i) the transfer of substantially all of the land and buildings
and certain equipment of PAH Belgium at the Belgium Plant, as well as the
industrial activities and intellectual property relating to certain solvent
technology of PAH Belgium, for a purchase price of EUR 6.2 million ($8.4
million), payable at closing; (ii) the transfer to GSK of a majority of the
employees of PAH Belgium and the corresponding responsibility for statutory
severance obligations; (iii) GSK agreeing to be responsible for cleaning-up, by
demolition or otherwise, certain buildings not to be used by it, but for PAH
Belgium to reimburse GSK up to a maximum of EUR 0.7 million ($0.9 million) for
such clean-up costs; (iv) in recognition of the benefits to the Company from the
proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million ($2.0
million) within six months from the closing date, EUR 1.5 million ($2.0 million)
within eighteen months from the closing date, EUR 1.5 million ($2.0 million)
within thirty months from the closing date, and EUR 0.5 million ($0.7 million)
within forty-two months from the closing date; (v) PAH Belgium retaining certain
excess land (valued at approximately EUR 0.4 million ($0.5 million)) and being
able to sell such land for its own account; (vi) PAH Belgium being responsible
for certain plant closure costs and legally required severance indemnities in
connection with workforce reductions, estimated in total to be EUR 9.1 million
($12.3 million), of which an amount estimated to be approximately EUR 4.6
million ($6.2 million) would be payable at or around the closing and an
aggregate amount so estimated to be approximately EUR 4.5 million ($6.1 million)
would be payable over periods up to thirteen years; and (vii) PAH Belgium
retaining certain equipment at the Belgium Plant, and being able to sell such
equipment for the account of PAH Belgium or transfer such equipment, together
with other assets and rights related to the production of virginiamycin, to
Philipp Brothers Brasil Holdings Ltda. ("PAH Brazil") which owns a facility in
Guarulhos, Brazil or in connection with alternative production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur on November 30, 2005, but in no event earlier than July 1,
2005 or later than June 30, 2006.
The Dutch Notes and related guarantees are collateralized by a mortgage on
the Belgium Plant which will be released in connection with the closing of the
sale of the Belgium Plant to GSK.
As a result of the above agreement, the Company will depreciate the
Belgium plant to its estimated salvage value of EUR 2.5 million ($3.3 million)
as of the projected closing date of November 30, 2005. The Company recorded
incremental depreciation expense of EUR 0.4 million ($0.5 million) in December
2004 and will record an additional EUR 8.7 million ($11.7 million) of
incremental depreciation expense ratably through November 2005. The Company
recorded severance expense of EUR 6.7 million ($9.0 million) in December 2004
for the estimated
29
minimum severance amounts indicated by law, contract, and/or past practice. The
Company estimates it will record additional expense of EUR 2.4 million ($3.2
million) ratably through November 2005 for severance, retention agreements and
other costs. The incremental depreciation expense of $0.5 million and severance
expense of $9.0 million recorded in December 2004 are included in cost of goods
sold on the Company's condensed consolidated statements of operations and
comprehensive income (loss).
The Company has determined that the carrying amount of the Belgium Plant
at December 31, 2004 is recoverable based on the estimated future cash flows
arising from the use of the assets.
In anticipation of transferring production of virginiamycin from the
Belgium Plant to an alternative production location, the Company has been
increasing inventory levels of virginiamycin to ensure adequate supplies during
the transfer period. At December 31, 2004 virginiamycin inventories were
approximately $40.0 million and are expected to continue to increase through
November 2005, based on current production rates.
On December 21, 2004, the Company completed a private placement pursuant
to which the Company and Philipp Brothers Netherlands III B.V., an indirect
wholly-owned subsidiary of the Company (the "Dutch Issuer" and together with the
Company, the "Issuers") issued and sold 22,491 additional units consisting of
$18.2 million 13% Senior Secured Notes due 2007 of the Company (the "U.S.
Notes") and $4.3 million 13% Senior Secured Notes due 2007 of the Dutch Issuer
(the "Dutch Notes" and together with the U.S. Notes, the "Additional Notes"),
from which they received gross proceeds of $23.4 million. The proceeds were used
to refinance indebtedness outstanding under the Company's domestic senior credit
facility. The Company incurred financing costs of $2.3 million in connection
with the issuance of the Additional Notes. The Additional Notes were issued
under the Indenture dated October 21, 2003, as amended and supplemented (the
"Indenture") under which the Issuers previously issued 105,000 units consisting
of $85.0 million aggregate principal amount of U.S. Notes and $20.0 million
aggregate principal amount of Dutch Notes.
On January 14, 2005, the Company and its domestic subsidiaries filed a
registration statement with the Securities and Exchange Commission (the "SEC")
on Form S-4 with respect to an exchange offer for all its Senior Secured Notes,
comprised of 105,000 units sold on October 21, 2003 and 22,491 additional units
sold on December 21, 2004. On February 4, 2005, such registration statement was
declared effective.
On December 21, 2004, concurrent with the completion of the offering of
the Additional Notes, the Company amended its domestic senior credit facility
to: (i) amend the EBITDA definition to exclude charges and expenses related to
the sale of the Belgium Plant in an aggregate amount not to exceed $26.8 million
for purposes of calculating a certain financial covenant; (ii) amend the
Indenture reserve definition to include scheduled payments of interest due on
the Additional Notes; (iii) amend the maximum aggregate amount of borrowing
available under the working capital facility to permit a temporary increase to
$22.5 million and for its reduction to $17.5 million on such borrowings being
refinanced by the proceeds of the Additional Notes; (iv) amend the Permitted
Investments definition to include investments in connection with the sale of the
Belgium Plant and transfer of certain equipment, together with other assets and
rights related to the production of virginiamycin, to PAH Brazil or in
connection with alternative production arrangements; and (v) provide for the
issuance of the Additional Notes and the sale of the Belgium Plant and related
transactions.
During January 2005, PAHC Holdings Corporation ("PAHC Holdings") was
formed to hold the capital stock of the Company, except for its Series C
Preferred Stock. On February 10, 2005, PAHC Holdings issued $29.0 million of its
15% Senior Secured Notes due 2010 (the "HoldCo Notes") in a private placement.
Interest is payable at the option of PAHC Holdings in cash or pay-in-kind HoldCo
Notes. The Company is not obligated for the HoldCo Notes. The Company's ability
to make payments to PAHC Holdings is subject to the terms of the Company's
Senior Secured Notes, its Senior Subordinated Notes, and its domestic senior
credit facility, and to applicable law.
The proceeds from the sale of the HoldCo Notes, upon release from escrow,
will be used, directly or indirectly, to redeem the Company's Series C Preferred
Stock either by PAHC Holdings (i) making a capital contribution to the Company
to contemporaneously finance the redemption of the Company's Series C Preferred
Stock, or (ii) purchasing a new series of the Company's preferred stock,
referred to as Series D Preferred Stock, that may be issued by the Company to
finance the redemption of the Company's Series C Preferred Stock. It is
contemplated
30
that such redemption will occur on or before February 28, 2005. On March 1,
2005, the applicable percentage for determining the equity value component of
the redemption price increases, as currently provided in the Company's
certificate of incorporation, from 18% to 22%. If on March 1, 2005, the Company
has not redeemed its Series C Preferred Stock from escrow, PAHC Holdings will be
required to redeem the HoldCo Notes, primarily with the proceeds of the HoldCo
Notes placed in escrow.
PAHC Holdings was formed by the holders of all of the Company's capital
stock, other than the holders of Series C Preferred Stock. In particular, Jack
Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his
family exchanged all of their shares of Series A Preferred Stock and Class B
Common Stock and Mr. Bendheim exchanged fifty percent (50%) of his shares of
Class A Common Stock, for the same number and class of shares of PAHC Holdings,
having the same designations, relative rights, privileges and limitations as the
Company's shares of such class (except to the extent that PAHC Holdings is a
Delaware corporation and the Company is a New York corporation).
The HoldCo Notes are to be secured by all of PAHC Holdings' assets (now
consisting solely of the Company's capital stock and, until disbursed, the
proceeds of the HoldCo Notes in escrow). Currently, such pledge covers all of
the Company's Series A Preferred Stock and Class B Common Stock, the Company's
non-voting classes of stock. In connection with the release of the proceeds of
the HoldCo Notes from escrow and following the redemption of the Company's
Series C Preferred Stock, Mr. Bendheim will contribute to PAHC Holdings the
balance of the Company's outstanding Class A Common Stock, and all of the
Company's outstanding Class A Common Stock, the Company's voting stock, will be
pledged as security for the HoldCo Notes.
OTHER RISKS AND UNCERTAINTIES
The Company's ability to fund its operating plan depends upon the
continued availability of borrowing under its domestic senior credit facility.
The Company believes that it will be able to comply with the terms of its
covenants under the domestic 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 expects adequate liquidity throughout 2005, with periods of reduced
availability around the dates of the semi-annual interest payments due June 1
and December 1 related to its Senior Secured Notes 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. There can be no assurance the Company will
be successful in any of the above-noted actions.
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain 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.
31
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
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------ ----------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
(THOUSANDS) (THOUSANDS)
Net sales $ 93,060 $ 92,540 $ 181,335 $ 177,490
Gross profit 13,869 22,549 36,491 43,709
Selling, general and administrative 17,759 16,824 34,353 32,609
Operating income (3,890) 5,725 2,138 11,100
Interest expense, net 5,356 4,717 10,577 8,408
Other expense (income), net (791) 127 (767) (458)
Net (gain) on extinguishment of debt - (23,226) - (23,226)
Provision (benefit) for income
taxes (884) 2,880 40 3,663
Income from continuing operations $ (7,571) $ 21,227 $ (7,712) $ 22,713
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
Net Sales of $93.1 million increased $0.5 million, or 1%. Animal Health
and Nutrition sales of $70.7 million grew $2.0 million, or 3%, 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 $22.4 million decreased $1.5 million. Excluding The Prince
Manufacturing Company ("PMC"), which was divested effective December 26, 2003,
Specialty Chemical Group sales increased by $3.9 million due to volume increases
in Industrial Chemicals and All Other segments. The Specialty Chemical Group
included PMC sales of $5.4 million for the 2003 quarter.
Gross Profit of $13.9 million decreased $8.7 million to 14.9% of net
sales. The Belgium Plant Transactions increased costs by $9.5 million for the
current quarter. Excluding this charge, Animal Health and Nutrition gross profit
increased due to higher 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 product. The Specialty Chemical Group included PMC gross profit of
$1.7 million for the 2003 quarter.
Selling, General and Administrative Expenses of $17.8 million increased
$0.9 million. Expenses in the operating segments, excluding PMC, increased over
the prior year due to higher research and development costs associated with
registration trials, unfavorable foreign exchange rates, costs associated with
the relocation of the Company's corporate office, higher depreciation and
amortization charges and severance costs. Corporate expenses decreased due to
the elimination of the Palladium management fee of $0.6 million in 2003 and
income of $0.3 million from the PMC advisory fee. In addition, the Company
recognized additional gains of $0.4 million from the previous sale of its
etchant business. PMC expenses were $0.6 million for the 2003 quarter.
Operating Income (Loss) of ($3.9) million decreased $9.6 million from the
2003 quarter. Operating income, excluding the Belgium Plant Transactions and
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
32
expenses. PMC contributed $1.1 million for the 2003 quarter offset in part by
the elimination of the $0.6 million Palladium management fee.
Interest Expense, Net of $5.4 million increased $0.6 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.
Income Tax (Benefit) of ($0.9) million were recorded on a consolidated
pre-tax loss of $7.6 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.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
Net Sales of $181.3 million increased $3.8 million, or 2%. Animal Health
and Nutrition sales of $136.5 million grew $8.0 million, or 6%, 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 $44.8 million decreased $4.2 million. Excluding PMC,
Specialty Chemical group sales increased by $7.0 million due to volume increases
in Industrial Chemicals and All Other segments. The Specialty Chemical Group
included PMC sales of $11.1 million for the 2003 period.
Gross Profit of $36.5 million decreased $7.2 million to 20.1% of net
sales. The Belgium Plant Transactions increased costs by $9.5 million for the
current period. Excluding this charge, Animal Health and Nutrition gross profit
increased due to higher 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 product and higher unit volumes in its Distribution and All Other
businesses. The Specialty Chemical Group included PMC gross profit of $3.6
million for the 2003 period.
Selling, General and Administrative Expenses of $34.4 million increased
$1.7 million. Expenses in the operating segments, excluding PMC, increased over
the prior year due to higher research and development costs associated with
registration trials, unfavorable foreign exchange rates, costs associated with
the relocation of the Company's corporate office, higher depreciation and
amortization charges and severance costs. Corporate expenses decreased due to
the elimination of the Palladium management fee of $1.1 million in 2003 and
income of $0.5 million from the PMC advisory fee. In addition, the Company
recognized additional gains of $0.7 million from the previous sale of its
etchant business. PMC expenses were $1.3 million for the 2003 period.
Operating Income of $2.1 million decreased $9.0 million. Operating income,
excluding the Belgium Plant Transactions and 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 $2.3 million for the 2003 period offset in part by the elimination
of the $1.1 million Palladium management fee.
Interest Expense, Net of $10.6 million increased $2.2 million from the
2003 period, 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.
Income Taxes of $0.0 million were recorded on consolidated pre-tax loss of
$7.7 million. The tax rate reflects income tax provisions in profitable foreign
jurisdictions and for state income taxes. A provision for U.S. federal
33
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 and chemical
industries, and includes Phibro-Tech and, until its divestiture, 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 DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------- -----------------------------
2004 2003 2004 2003
-------- ------------ -------- ---------
(THOUSANDS) (THOUSANDS)
NET SALES
Animal Health & Nutrition $70,708 $ 68,687 $136,514 $128,528
Industrial Chemicals - ex PMC 7,686 6,244 16,079 12,543
Industrial Chemicals - PMC - 5,435 - 11,118
Distribution 8,104 7,656 15,765 15,595
All other 6,562 4,518 12,977 9,706
------- -------- -------- ---------
93,060 92,540 $181,335 $177,490
======= ======== ======== =========
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------ -----------------------------
2004 2003 2004 2003
--------- ----------- -------- -------------
OPERATING INCOME (THOUSANDS) (THOUSANDS)
Animal Health & Nutrition $(1,520) $ 7,655 $ 6,295 $ 14,555
Industrial Chemicals - ex PMC 655 (287) 1,428 (678)
Industrial Chemicals - PMC - 1,065 - 2,278
Distribution 796 692 1,660 1,533
All other 455 657 1,160 1,326
Corporate expenses and adjustments (4,276) (4,057) (8,405) (7,914)
------- ------- -------- --------
$(3,890) $ 5,725 $ 2,138 $ 11,100
======= ======= ======== ========
OPERATING SEGMENTS COMPARISON OF THREE MONTHS ENDED DECEMBER 2004 AND 2003
ANIMAL HEALTH AND NUTRITION
NET SALES of $70.7 million increased $2.0 million, or 3%. MFA net sales
decreased by $0.8 million. Revenues were lower primarily for antibacterials and
anticoccidials but were offset in part by higher sales of antibiotics. The
decrease in MFA revenues was due to lower average selling prices offset in part
by higher unit volumes and favorable currency effect on international sales. NFA
net sales increased by $2.8 million principally due to volume increases in trace
mineral premixes and other feed ingredients.
34
OPERATING INCOME (LOSS) of ($1.5) million decreased $9.2 million from the
2003 period. Operating income, excluding costs relating to the Belgium
Transactions of $9.5 million, improved due to higher 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 $7.7 million, excluding PMC, increased
$1.4 million, or 23%. 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 $5.4 million for
the 2003 quarter. Operating income, excluding PMC, of $0.7 million improved by
$0.9 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 $1.1 million for the 2003 quarter.
DISTRIBUTION net sales of $8.1 million increased $0.4 million, or 6%.
Higher domestic unit volumes and slightly higher average selling prices were
offset in part by lower sales volumes in Europe. Distribution operating income
of $0.8 million improved by $0.1 million from the 2003 quarter. As a percentage
of sales, operating income was 10% and 9% in 2004 and 2003, respectively.
ALL OTHER net sales of $6.6 million increased $2.0 million, or 45%.
Revenues for contract manufacturing increased $2.0 million due to increased
volumes. Revenues from specialized lab projects and formulations approximated
the prior period. Operating income of $0.5 million decreased by $0.2 million
from the prior period due to higher manufacturing costs.
OPERATING SEGMENTS COMPARISON OF SIX MONTHS ENDED DECEMBER 2004 AND 2003
ANIMAL HEALTH AND NUTRITION
NET SALES of $136.5 million increased $8.0 million, or 6%. MFA net sales
increased by $1.6 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 $6.4 million principally due to volume increases in
trace mineral premixes and other feed ingredients.
OPERATING INCOME of $6.3 million decreased $8.3 million from the 2003
period. Operating income, excluding costs relating to the Belgium Transactions
of $9.5 million, 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 $16.1 million, excluding PMC, increased
$3.5 million, or 28%. 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 $11.1 million
for the 2003 period. Operating income, excluding PMC, of $1.4 million improved
by $2.1 million from the 2003 period. 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 $2.3 million for the 2003 period.
DISTRIBUTION net sales of $15.8 million increased $0.2 million, or 1%.
Higher domestic unit volumes and slightly higher average selling prices were
offset in part by lower sales volumes in Europe. Distribution operating income
of $1.7 million improved by $0.1 million from the 2003 period. As a percentage
of sales, operating income was 11% and 10% in 2004 and 2003, respectively.
35
ALL OTHER net sales of $13.0 million increased $3.3 million, or 34%.
Revenues for contract manufacturing increased $2.8 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
$1.2 million decreased from the prior period due to higher manufacturing costs.
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 DECEMBER 31, 2003
------------------------------------
MRT LACORNUBIA TOTAL
---- ---------- -------
Net Sales $ - $3,503 $3,503
==== ====== =======
Operating Loss $ - $ (108) $ (108)
Interest Expense, net - 26 26
Other Expense (Income), net - (193) (193)
Provision (benefit) for income tax - - -
---- ------ -------
Net Income (loss) from discontinued operations $ - $59 $ 59
==== ====== =======
Depreciation and Amortization $ - $101 $ 101
==== ====== =======
SIX MONTHS ENDED DECEMBER 31, 2003
-----------------------------------------
MRT LACORNUBIA TOTAL
------- ---------- -------
Net Sales $ 3,327 $ 5,723 $ 9,050
======= ======= =======
Operating Loss $ (124) $ (480) $ (604)
Interest Expense, net - 42 42
Other Expense (Income), net - (243) (243)
Provision (benefit) for income tax - - -
------- ------- -------
Net Income (loss) from discontinued operations $ (124) $ (279) $ (403)
======= ======= =======
Depreciation and Amortization $ - $ 201 $ 201
======= ======= =======
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 with no assets except for its investment in La
Cornubia, may also file for bankruptcy in France. The Company does
36
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 (Used) by Operating Activities. Cash (used) by operations for the
six months ended December 31, 2004 and 2003 was ($5.1) million and ($0.7)
million, respectively. Cash used was due to higher working capital requirements
offset in part by income from continuing operations. The Company is currently
increasing inventory levels of virginiamycin to enhance future supply
flexibility and reduce cost as part of the planned exit of the Belgium Plant.
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for the six months ended December 31, 2004 and 2003 was
($3.6) million and $12.1 million, respectively. Capital expenditures of $3.7
million and $2.3 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 $14.4 million in 2003.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used)
by financing activities for the six months ended December 31, 2004 and 2003 was
$12.9 million and ($14.2) million, respectively. Proceeds from long-term debt
reflect the issuance of additional 13% Senior Secured Notes and borrowings of
Koffolk Israel. The decrease in short-term debt is due to the reduction of the
senior credit facility. Payments of long-term debt reflect the repayments of
Koffolk Israel borrowings.
Working Capital and Capital Expenditures. Working capital as of December
31, 2004 was $75.7 million compared to $54.4 million at June 30, 2004, an
increase of $21.3 million. The fiscal 2005 increase in working capital primarily
was due to higher inventory levels and higher cash balances related to the
issuance of new long-term debt.
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 December 31, 2004 the amount of credit extended under the
Company's domestic senior credit facility totaled $0.3 million under the working
capital facility and $9.8 million under the letter of credit facility, and the
Company had $17.2 million available under the working capital facility. In
addition, certain of the Company's foreign subsidiaries also had availability
totaling $3.9 million under their respective loan agreements.
As of September 24, 2004, the Company amended its domestic 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).
On December 21, 2004, concurrent with the completion of the offering of
the Additional Notes, the Company amended the domestic senior credit facility
to: (i) amend the EBITDA definition to exclude charges and expenses related to
the sale of the Belgium Plant in an aggregate amount not to exceed $26.8 million
for purposes of calculating a certain financial covenant; (ii) amend the
Indenture reserve definition to include scheduled payments of interest due on
the Additional Notes; (iii) amend the maximum aggregate amount of borrowing
available under the working capital facility to permit a temporary increase to
$22.5 million and for its reduction to $17.5 million on such
37
borrowings being refinanced by the proceeds of the Additional Notes; (iv) amend
the Permitted Investments definition to include investments in connection with
the sale of the Belgium Plant and transfer of certain equipment, together with
other assets and rights related to the production of virginiamycin, to PAH
Brazil or in connection with alternative production arrangements; and (v)
provide for the issuance of the Additional Notes and the sale of the Belgium
Plant and related transactions.
The domestic 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 domestic senior credit facility.
The Company believes that it will be able to comply with the terms of its
covenants under the domestic 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 expects adequate liquidity throughout 2005, with periods of reduced
availability around the dates of the semi-annual interest payments due June 1
and December 1 related to its Senior Secured Notes 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. 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 December 31, 2004
mature as follows:
YEARS
-------------------------------------------------
WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL
-------- ----------- ----------- ------ ---------
Loans payable to banks $ 0.3 $ - $ - $ - $ 0.3
Long-term debt (including current portion) 4.1 129.8 48.8 - 182.7
Interest payments 22.3 44.9 2.4 - 69.6
Lease commitments 1.4 2.7 2.0 2.0 8.1
Acquisition of rights 0.5 0.7 0.2 - 1.4
------- -------- ------- ------ ---------
Total contractual obligations $ 28.6 $ 178.1 $ 53.4 $ 2.0 $ 262.1
======= ======== ======= ====== =========
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 December 31, 2004 there have been no
material changes to any of the critical accounting policies contained therein.
38
NEW ACCOUNTING PRONOUNCEMENTS
During the quarter, the Financial Accounting Standards Board released
three new standards. These standards will be adopted by the Company during
fiscal 2005 and are discussed in the notes to condensed consolidated financial
statements included in this report.
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.
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:
- 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
39
- 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 "Risks, Uncertainties and Liquidity" 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 for the
year ended June 30, 2004. 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,
40
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.
41
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. Description
10.33 Purchase Agreement by and between Phibro Animal Health SA and
GlaxoSmithKline Biologicals SA, dated December 16, 2004. *
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.
* A request for confidential treatment has been submitted for portions of such
document. Confidential portions have been omitted and furnished separately to
the SEC in accordance with Rule 24b-2 of the Securities Exchange 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 indentures governing its 13% Senior Secured Notes due 2007 and its
9 7/8% Senior Subordinated Notes due 2008.
42
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: February 18, 2005 By: /s/ JACK C. BENDHEIM
------------------------------------
JACK C. BENDHEIM
CHAIRMAN OF THE BOARD
Date: February 18, 2005 By: /S/ GERALD K. CARLSON
------------------------------------
GERALD K. CARLSON
CHIEF EXECUTIVE OFFICER
Date: February 18, 2005 By: /s/ RICHARD G. JOHNSON
------------------------------------
RICHARD G. JOHNSON
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
43