================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
----------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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
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 March 31, 2005:
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
================================================================================
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................. 30
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 44
Item 4. Controls and Procedures................................ 45
PART II OTHER INFORMATION
Item 5. Other Information...................................... 46
Item 6. Exhibits and Reports on Form 8-K....................... 46
SIGNATURES .............................................................. 47
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)
MARCH 31, JUNE 30,
2005 2004
--------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,405 $ 5,568
Trade receivables, less allowance for doubtful accounts
of $1,223 at March 31, 2005 and $1,358 at June 30, 2004 53,204 57,217
Other receivables 4,326 2,766
Inventories 99,059 78,562
Prepaid expenses and other current assets 6,641 8,591
Current assets from discontinued operations 2,150 1,886
-------- --------
TOTAL CURRENT ASSETS 172,785 154,590
PROPERTY, PLANT AND EQUIPMENT, net 52,520 55,381
INTANGIBLES 10,674 11,695
OTHER ASSETS 16,863 16,298
OTHER ASSETS FROM DISCONTINUED OPERATIONS 3,329 3,405
-------- --------
$256,171 $241,369
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 2,821 $ 891
Loans payable to banks 3,947 10,996
Current portion of long-term debt 2,250 1,351
Accounts payable 33,954 46,764
Accrued expenses and other current liabilities 55,796 39,380
Current liabilities from discontinued operations 998 838
-------- --------
TOTAL CURRENT LIABILITIES 99,766 100,220
LONG-TERM DEBT 176,645 158,018
OTHER LIABILITIES 19,840 22,286
-------- --------
TOTAL LIABILITIES 296,251 280,524
-------- --------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series C preferred stock -- 24,678
-------- --------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 27,260 860
Accumulated deficit (68,010) (57,964)
Accumulated other comprehensive income (loss):
Gain on derivative instruments 304 9
Cumulative currency translation adjustment (157) (7,261)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT (40,080) (63,833)
-------- --------
$256,171 $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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
NET SALES $90,255 $85,976 $269,169 $261,582
COST OF GOODS SOLD (includes Belgium Plant Transactions costs
of $4,372 and $13,908 for the three months and nine months
ended March 31, 2005, respectively) 71,504 63,246 214,682 195,663
------- ------- -------- --------
GROSS PROFIT 18,751 22,730 54,487 65,919
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,885 16,004 51,901 48,292
------- ------- -------- --------
OPERATING INCOME 866 6,726 2,586 17,627
OTHER:
Interest expense 5,891 4,918 16,526 13,400
Interest (income) (19) (43) (77) (117)
Other (income) expense, net 77 (134) (691) (594)
Net (gain) on extinguishment of debt -- -- -- (23,226)
------- ------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (5,083) 1,985 (13,172) 28,164
PROVISION FOR INCOME TAXES 773 2,126 699 5,745
------- ------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (5,856) (141) (13,871) 22,419
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations
(net of income taxes) 272 (254) 575 (504)
Gain on disposal of discontinued operations
(net of income taxes) -- -- -- 231
------- ------- -------- --------
NET INCOME (LOSS) (5,584) (395) (13,296) 22,146
OTHER COMPREHENSIVE INCOME:
Change in derivative instruments, net of tax (27) (383) 295 36
Change in currency translation adjustment (1,207) (92) 7,104 2,080
------- ------- -------- --------
COMPREHENSIVE INCOME (LOSS) $(6,818) $ (870) $ (5,897) $ 24,262
======= ======= ======== ========
NET INCOME (LOSS) (5,584) (395) (13,296) 22,146
Excess of the reduction of Series B and C preferred stock
over total assets divested and costs and liabilities
incurred on the Prince Transactions 4,000 -- 4,973 20,138
Dividends and equity value accreted on Series B and C
preferred stock (3,582) (4,223) (1,723) (8,074)
------- ------- -------- --------
NET INCOME AVAILABLE (LOSS ATTRIBUTABLE)
TO COMMON SHAREHOLDERS $(5,166) $(4,618) $(10,046) $ 34,210
======= ======= ======== ========
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 NINE MONTHS ENDED MARCH 31, 2005
(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
preferred stock (668) (668)
Equity value accreted on
Series C 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 Series C
preferred stock over total assets
divested and costs and liabilities
incurred on the Prince Transactions 973 973
Dividends on Series C
preferred stock (667) (667)
Equity value accreted on
Series C 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)
==== === === ======= ======== ======= ========
Capital contribution from
PAHC Holdings Corporation 26,400 26,400
Excess of the reduction in Series C
preferred stock over total assets
divested and costs and liabilities
incurred on the Prince Transactions 4,000 4,000
Dividends on Series C
preferred stock (478) (478)
Equity value accreted on
Series C preferred stock (3,104) (3,104)
Change in derivative
instruments, net of tax (27) (27)
Foreign currency translation
adjustment (1,207) (1,207)
Net (loss) (5,584) (5,584)
---- --- --- ------- -------- ------- --------
Balance, March 31, 2005 $521 $1 $1 $27,260 $(68,010) $ 147 $(40,080)
==== === === ======= ======== ======= ========
See notes to unaudited Condensed Consolidated Financial Statements
6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $(13,296) $ 22,146
Adjustment for discontinued operations (575) 273
-------- --------
Income (loss) from continuing operations (13,871) 22,419
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 $3,628 for the nine months ended March 31, 2005) 13,716 9,483
Deferred income taxes (202) 263
Net gain on extinguishment of debt -- (23,226)
Effects of changes in foreign currency (760) (168)
Other (359) (290)
Changes in operating assets and liabilities:
Accounts receivable 4,460 (3,014)
Inventories (16,378) (1,579)
Prepaid expenses and other current assets 1,647 (979)
Other assets (618) 977
Accounts payable (11,378) (13,497)
Accrued expenses and other liabilities 9,120 8,794
Accrued costs of non-completed transaction (3,970) --
Accrued costs of the Belgium Plant Transactions 10,280 --
Cash provided (used) by discontinued operations 808 (598)
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (7,505) (1,415)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (5,098) (3,986)
Proceeds from sale of assets 1,353 1,079
Other investing (119) (1)
Discontinued operations (93) 14,807
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (3,957) 11,899
-------- --------
FINANCING ACTIVITIES:
Net increase in cash overdraft 1,930 2,354
Net decrease in short-term debt (7,049) (30,023)
Proceeds from long-term debt 24,292 109,622
Proceeds from capital contribution by PAHC Holdings Corporation 26,400 --
Payments of long-term debt (3,913) (34,612)
Redemption of Series C preferred stock (26,400) --
Payment of Pfizer obligations -- (28,300)
Payments relating to the Prince Transactions and transaction costs -- (21,023)
Debt refinancing costs (2,027) (14,945)
Discontinued operations -- 1,135
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,233 (15,792)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 66 319
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,837 (4,989)
CASH AND CASH EQUIVALENTS at beginning of period 5,568 11,179
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 7,405 $ 6,190
======== ========
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 March 31, 2005 and its
results of operations and cash flows for the three months and nine months ended
March 31, 2005 and 2004.
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"), La Cornubia S.A.
(France) ("La Cornubia") and Wychem Limited (U.K.) ("Wychem") 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 June 15, 2005. 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 annual reporting period that begins
after December 31, 2005. The Company is currently assessing the impact of this
statement.
FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations" ("FIN No. 47"). FIN No. 47 clarifies that the term "conditional
asset retirement obligation" as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations ("ARO")" refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
Thus, the timing and/or method of settlement may be conditional on a future
event. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional ARO if the fair value of the liability can be reasonably
estimated. The fair value of a liability for the conditional ARO should be
recognized when incurred; generally upon acquisition, construction, or
development and/or through the normal operation of the asset. Uncertainty about
the timing and/or method of settlement of a conditional ARO should be factored
into the measurement of the liability when sufficient information exists. FIN
No. 47 also clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an ARO. FIN No. 47 is effective no later
than the end of fiscal years ending after December 15, 2005. The Company
anticipates that the adoption of FIN No. 47 will not result in a material impact
on the Company's financial statements.
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.
9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and subsidiaries are subject to a wide
variety of complex and stringent federal, state, local and foreign environmental
laws and regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
materials and wastes, the remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters.
3. REFINANCING
ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES:
On December 21, 2004, the Company completed a private placement pursuant to
which the Company (the "Parent Issuer") 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 Parent
Issuer (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 March 9, 2005, the Company completed the exchange of its privately
placed 127,491 units of 13% Senior Secured Notes due 2007 with new units of 13%
Senior Secured Notes due 2007 that have been registered with the Securities and
Exchange Commission (the "SEC").
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 Phibro Saude International 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 March 31, 2005
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 ($8,025), 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 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 700 ($906) 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 ($1,942) within six months from the
closing date, EUR 1,500 ($1,942) within eighteen months from the closing date,
EUR 1,500 ($1,942) within thirty months from the closing date, and EUR 500
($647) within forty-two months from the closing date; (v) PAH Belgium retaining
certain excess land (valued at approximately EUR 400 ($518)) 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 10,200
($13,203), of which an amount estimated to be approximately EUR 4,200 ($5,436)
would be payable at or around the closing and an aggregate amount so estimated
to be approximately EUR 6,000 ($7,766) 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 ($3,197) as of the projected
closing date of November 30, 2005. The Company recorded incremental depreciation
expense of EUR 2,755 ($3,628) during the three months ended March 31, 2005 and
will record an additional EUR 6,301 ($8,156) 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 recorded
additional expense of EUR 976 ($1,277) during the three months ended March 31,
2005 and estimates it will record additional expense of EUR 2,574 ($3,332)
ratably through November 2005 for severance, retention agreements and other
costs. The incremental depreciation expense of $3,628 and severance expense of
$10,280 recorded through March 2005 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
March 31, 2005 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 March 31, 2005 virginiamycin inventories were
approximately $43,000 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 February 2005, PAHC Holdings Corporation ("Holdings") was formed to
hold the capital stock of the Company, except for its Series C Preferred Stock.
On February 10, 2005, Holdings issued $29,000 aggregate principal amount of its
15% Senior Secured Notes due 2010 (the "HoldCo Notes") in a private placement.
Interest is payable at the option of Holdings in cash or pay-in-kind HoldCo
Notes in its sole discretion. The Company is not obligated for the HoldCo Notes.
The Company's ability to make payments to 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 were used by Holdings to
make a capital contribution to the Company to contemporaneously finance the
redemption of the Company's Series C Preferred Stock in the amount of $26,400 on
February 28, 2005.
On May 16, 2005, Holdings completed the exchange of its privately placed
HoldCo Notes with new HoldCo Notes that have been registered with the SEC.
Holdings was formed by the holders of all of the Company's capital stock,
other than the holders of the Company's 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 all of his shares of Class A Common
Stock, for the same number and class of shares of Holdings, having the same
designations, relative rights, privileges and limitations as the Company's
shares of such class (except to the extent that Holdings is a Delaware
corporation and the Company is a New York corporation). Holdings owns all the
outstanding capital stock of all classes of the Company, and Mr. Bendheim, Mr.
Sussman and trusts for the benefit of Mr. Bendheim's family own the same number
and class of shares of Holdings as they previously owned of the Company, and
having the same designations, relative rights, privileges and limitations as the
Company's shares of such class.
The HoldCo Notes are collateralized by all of Holdings' assets (now
consisting substantially of all the outstanding capital stock of the Company).
The HoldCo Notes and such security interest are effectively subordinated to all
liabilities, including the Company's and its subsidiaries' trade payables, as
well as the Company's indenture indebtedness.
6. REDEMPTION OF SERIES C PREFERRED STOCK
In connection with the redemption of the Company's Series C Preferred
Stock, the Company, Palladium Equity Partners II, LP ("Palladium"), PAHC
Holdings and the principal stockholders of PAHC Holdings entered into an
agreement with respect to (i) the redemption price (consisting of $19,600 of
liquidation preference and $6,800 of equity value), (ii) amending the terms of
the post-redemption redemption price adjustment set forth in the certificate of
incorporation of the Company (a) from an amount payable upon occurrence of
certain capital stock transactions determined with respect to the value of the
Company upon the occurrence of such capital stock transaction, to a liquidated
amount of $4,000, payable only after the occurrence of certain capital stock
transactions and the receipt by the current stockholders of the Company, on a
cumulative basis, of an aggregate of $24,000 of dividends and distributions in
respect of such capital stock transactions, and (b) to remove the one year time
period for such adjustment of the redemption price, and (iii) eliminating the
backstop indemnification obligation of up to $4,000 of the Company to Palladium
incurred in connection with the sale by the Company to Palladium in December
2003 of The Prince Manufacturing Company ("PMC"). The excess of the redemption
price over the carrying value of the Series C Preferred Stock and the
elimination of the backstop indemnification obligation have been reflected as
adjustments to stockholder's deficit on the condensed consolidated balance sheet
at March 31, 2005. The Company has determined the fair value of the liability
for the post-redemption redemption price adjustment to be insignificant to the
consolidated financial statements, due to the uncertainty of the ultimate timing
of such payment, if any. Future changes in the fair value of the liability for
the post-redemption redemption price adjustment will be recorded through
earnings in the period in which such change occurs.
12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
7. 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 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.
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC were:
NINE MONTHS ENDED
MARCH 31, 2004
-----------------
Net sales $11,118
Operating income 2,278
Depreciation and amortization 487
8. 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
-------------------------------
MARCH 31, 2005 JUNE 30, 2004
--------------- -------------
Raw materials $24,207 $16,038
Work-in-process 605 1,468
Finished goods 74,247 61,056
------- -------
Total inventory $99,059 $78,562
======= =======
9. INTANGIBLES
Product intangible cost arising from the acquisition of the medicated feed
additive business of Pfizer, Inc. and the acquisition of the rights to sell
amprolium was $14,931 and $14,925 at March 31, 2005 and June 30, 2004,
respectively, with related accumulated amortization of $4,257 and $3,230 at
March 31, 2005 and June 30, 2004, respectively. Amortization expense was $375
and $313 for the three months ended March 31, 2005 and 2004, respectively, and
$1,121 and $921 for the nine months ended March 31, 2005 and 2004, respectively.
13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
10. DISCONTINUED OPERATIONS
WYCHEM:
On April 29, 2005, the Company sold the shares of Wychem, an indirect
wholly-owned subsidiary, for cash proceeds of $4,750, to an investor group that
included the former head of the Company's Specialty Chemicals Group, who retired
in August 2004, and the Managing Director of Wychem. The Company owned Wychem
through its subsidiaries: Koffolk (1949), Ltd. (Israel) which owned 75% and
Ferro Metal and Chemical Corporation Limited (U.K.) which owned 25%. The Company
anticipates that it will record a gain on the sale of Wychem of approximately
$1,500 in the quarter ending June 30, 2005. Wychem was included in the Company's
All Other segment.
Operating results and balance sheet items of Wychem were:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- -------------------------------
MARCH 31, 2005 MARCH 31, 2004 MARCH 31, 2005 MARCH 31, 2004
--------------- -------------- -------------- --------------
OPERATING RESULTS:
Net sales $1,487 $1,061 $3,908 $2,945
Cost of goods sold 924 597 2,590 1,961
Selling, general and administrative
expenses 174 161 511 482
Other expense 5 3 6 5
------ ------ ------ ------
Income before income taxes 384 300 801 497
Provision for income taxes 112 83 226 127
------ ------ ------ ------
Income from operations $ 272 $ 217 $ 575 $ 370
====== ====== ====== ======
Depreciation and amortization $ 105 $ 105 $ 309 $ 318
====== ====== ====== ======
AS OF
------------------------------
MARCH 31, 2005 JUNE 30, 2004
-------------- -------------
BALANCE SHEET:
Trade receivables $ 704 $ 441
Inventories 1,271 1,348
Prepaid expenses and other current assets 175 97
------ ------
Current assets from discontinued operations $2,150 $1,886
====== ======
Property, plant & equipment - net $3,329 $3,405
------ ------
Other assets from discontinued operations $3,329 $3,405
====== ======
Accounts payable $ 252 $ 208
Accrued expenses and other current liabilities 746 630
------ ------
Current liabilities from discontinued operations $ 998 $ 838
====== ======
14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
MRT AND LA CORNUBIA:
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:
NINE MONTHS ENDED
MARCH 31, 2004
-----------------
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
========
Operating results of La Cornubia were:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2004
------------------ -----------------
OPERATING RESULTS:
Net sales $4,161 $9,884
Cost of goods sold 4,050 9,465
Selling, general and administrative expenses 474 1,262
Other (income) expense 68 (175)
Interest expense 22 64
------ ------
(Loss) before income taxes (453) (732)
Provision for income taxes 18 18
------ ------
(Loss) from operations $ (471) $ (750)
====== ======
Depreciation and amortization $ 101 $ 302
====== ======
11. DEBT
LOANS PAYABLE TO BANKS
At March 31, 2005, loans payable to banks included $3,913 under the
domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted
average interest rate at March 31, 2005 was 5.77%. At March 31, 2005, the
Company had $13,587 of borrowings available under the working capital facility
that is provided under the domestic senior credit facility. The Company's
Koffolk (Israel) subsidiary also had $34 included in loans payable to banks at
March 31, 2005.
15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
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 Phibro Saude Animal International
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.
As of March 31, 2005, 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
------------------------------
MARCH 31, 2005 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 3,375 6,237
Capitalized lease obligations and other -- 103
-------- --------
178,895 159,369
Less: current maturities 2,250 1,351
-------- --------
$176,645 $158,018
======== ========
The Company's Koffolk (Israel) subsidiary has aggregate credit lines of
$10,500. At March 31, 2005, Koffolk (Israel) had $7,091 of borrowings available
under these credit lines.
16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
12. EMPLOYEE BENEFIT PLANS
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible domestic nonunion employees who meet
certain requirements of age, length of service and hours worked per year. The
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 NINE MONTHS ENDED
------------------------------- -------------------------------
MARCH 31, 2005 MARCH 31, 2004 MARCH 31, 2005 MARCH 31, 2004
-------------- -------------- -------------- --------------
DOMESTIC PENSION EXPENSE
Service cost - benefits earned during the year $ 291 $ 288 $ 915 $ 971
Interest cost on benefit obligation 228 217 707 673
Expected return on plan assets (218) (213) (676) (633)
Amortization of initial unrecognized
net transition (asset) (1) -- (3) (2)
Amortization of prior service costs (35) (35) (107) (117)
Amortization of net actuarial loss (gain) -- 2 -- 23
Curtailment benefit -- -- -- (64)
----- ----- ----- -----
NET PERIODIC PENSION COST - DOMESTIC $ 265 $ 259 $ 836 $ 851
===== ===== ===== =====
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
MARCH 31, 2005 MARCH 31, 2004 MARCH 31, 2005 MARCH 31, 2004
-------------- -------------- -------------- --------------
INTERNATIONAL PENSION EXPENSE
Service cost - benefits earned during the year $131 $123 $ 367 $ 350
Interest cost on benefit obligation 105 98 314 280
Expected return on plan assets (84) (79) (263) (225)
Amortization of net actuarial loss (gain) 6 6 7 17
---- ---- ----- -----
NET PERIODIC PENSION COST - INTERNATIONAL $158 $148 $ 425 $ 422
==== ==== ===== =====
The Company has contributed $720 to its domestic pension plans during
fiscal 2005 for its 2004 pension plan year. Beginning in fiscal 2006, the
Company will be required by ERISA regulations to accelerate the funding of its
domestic pension plans. Accordingly, contributions are expected to aggregate
$1,411 during fiscal 2006 for the Company's 2005 and 2006 domestic pension plan
years.
13. 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. The Consent Order provided for
a period of due diligence investigation of the property owned by Chevron and
upon completion of the review of the results of the investigation, a decision
was to be made whether to opt out of the settlement or proceed. Negotiations
with Chevron regarding its allocation of responsibility and associated costs
under the Consent Order reached an impasse and it became necessary for the
Company and another defendant, Vulcan Materials Company, to opt out of the
settlement on April 21, 2005. It is expected that the litigation will resume.
While the costs and liabilities cannot be estimated with any degree of certainty
at this time, the Company believes that insurance recoveries will be available
to offset most of those costs.
17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
The Company's subsidiary, Phibro-Tech, Inc. ("Phibro-Tech"), 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
March 31, 2005. 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 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 and the DTSC are currently negotiating the settlement of
certain alleged technical permit violations from 2003. A preliminary assessment
of penalties in the amount of $49 has been made. Phibro-Tech, Inc. believes this
amount will be reduced.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 in full
settlement.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company has investigated the
matter, which relates to events in the 1950's and 1960's, and management does
not believe that the Company has any liability in this matter.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of the Resource
Conservation and Recovery Act relating to possible discharges into Turkey Creek
in Sumter, South Carolina. The Company has submitted 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.
By letter dated February 22, 2005, Phibro-Tech has been advised by the
adjoining property owner of Phibro-Tech's Powder Springs, Georgia property, of a
potential claim for property damage as a result of certain alleged environmental
conditions on Phibro-Tech's Powder Springs property. No specific claim was made
nor was any specific amount alleged. The Company is presently investigating this
matter but does not, at this time, believe there will be any material liability
resulting therefrom.
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.
18
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
ENVIRONMENTAL REMEDIATION:
The Company's operations, properties and subsidiaries are subject to a wide
variety of complex and stringent federal, state, local and foreign environmental
laws and regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
materials and wastes, the remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters. Under certain circumstances, the Company or any of
its subsidiaries might be required to curtail operations until a particular
problem is remedied. Known costs and expenses under environmental laws
incidental to ongoing operations are generally included within operating
results. Potential costs and expenses may also be incurred in connection with
the repair or upgrade of facilities to meet existing or new requirements under
environmental laws or to investigate or remediate potential or actual
contamination and from time to time the Company establishes reserves for such
contemplated investigation and remediation costs. In many instances, the
ultimate costs under environmental laws and the time period during which such
costs are likely to be incurred are difficult to predict.
The Company's subsidiaries have, from time to time, implemented procedures
at their facilities designed to respond to obligations to comply with
environmental laws. The Company believes that its operations are currently in
material compliance with such environmental laws, although at various sites its
subsidiaries are engaged in continuing investigation, remediation and/or
monitoring efforts to address contamination associated with their historic
operations.
The nature of the Company's and its subsidiaries' current and former
operations exposes the Company and its subsidiaries to the risk of claims with
respect to environmental matters and the Company cannot assure it will not incur
material costs and liabilities in connection with such claims. Based upon its
experience to date, the Company believes that the future cost of compliance with
existing environmental laws, and liability for known environmental claims
pursuant to such environmental laws, will not have a material adverse effect on
the Company's financial position.
Based upon information available, the Company estimates the cost of
litigation proceedings described above and the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, and closure costs for closed sites to be
approximately $2,756, which is included in current and long-term liabilities in
the March 31, 2005 condensed consolidated balance sheet (approximately $2,933 at
June 30, 2004).
14. 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.
The Company established a $1,000 letter of credit escrow through December
2005 to collateralize certain indemnification obligations relating to the Prince
Transactions.
19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
15. 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 &
NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- -------
THREE MONTHS ENDED MARCH 31, 2005
Net sales $69,005 $8,871 $7,838 $4,541 $ -- $90,255
Operating income (loss) 3,420 957 895 414 (4,820) 866
Depreciation and amortization 5,303 374 6 -- 929 6,612
The Animal Health and Nutrition segment includes Belgium Plant Transaction
costs of $1,277 of severance expense and $3,095 of depreciation expense
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- -------
THREE MONTHS ENDED MARCH 31, 2004
Net sales $64,819 $10,000 $7,916 $3,241 $ -- $85,976
Operating income (loss) 8,370 1,136 789 254 (3,823) 6,726
Depreciation and amortization 2,086 403 3 -- 660 3,152
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------- ----------- --------
NINE MONTHS ENDED MARCH 31, 2005
Net sales $205,519 $24,950 $23,603 $15,097 $ -- $269,169
Operating income/(loss) 9,715 2,385 2,555 1,156 (13,225) 2,586
Depreciation and amortization 10,203 1,190 14 -- 2,309 13,716
The Animal Health and Nutrition segment includes Belgium Plant Transaction
costs of $10,280 of severance expense and $3,628 of depreciation expense
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------- ----------- --------
NINE MONTHS ENDED MARCH 31, 2004
Net sales $193,347 $33,661 $23,511 $11,063 $ -- $261,582
Operating income/(loss) 22,925 2,736 2,322 1,381 (11,737) 17,627
Depreciation and amortization 6,174 1,691 10 -- 1,608 9,483
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE &
NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL
--------- ---------- ------------ ------ ----------- --------
IDENTIFIABLE ASSETS OF CONTINUING
OPERATIONS
At March 31, 2005 $198,962 $24,940 $7,356 $730 $18,704 $250,692
At June 30, 2004 185,601 26,146 7,715 405 16,211 236,078
20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
16. CONSOLIDATING FINANCIAL STATEMENTS
The units of Senior Secured Notes due 2007, consisting of U.S. Notes issued
by the Parent Issuer and Dutch Notes issued by the Dutch Issuer, are guaranteed
by certain subsidiaries. The Parent Issuer and its U.S. subsidiaries ("U.S.
Guarantor Subsidiaries"), excluding PMC, Prince MFG, LLC and MRT (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 Notes. The Dutch Issuer and the Belgium Guarantor do not
guarantee the U.S. 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 Parent Issuer
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 Parent Issuer'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 Parent Issuer including: CP Chemicals, Inc.; Phibro-Tech,
Inc.; Prince Agriproducts, Inc.; PMC; Prince MFG, LLC; MRT (until divested);
Phibrochem, Inc.; Phibro Chemicals, Inc.; Western Magnesium Corp.; Phibro Animal
Health Holdings, Inc.; and Phibro Animal Health U.S., Inc.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent Issuer,
Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium
Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S.
Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor
Subsidiaries are directly or indirectly wholly owned as to voting stock by the
Company.
Investments in subsidiaries are accounted for by the Parent Issuer using
the equity method. Income tax expense (benefit) is allocated among the
consolidating entities based upon taxable income (loss) by jurisdiction within
each group. The principal consolidation adjustments are to eliminate investments
in subsidiaries and intercompany balances and transactions.
21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2005
Parent Unrestricted U.S. Guarantor Dutch
Issuer Subsidiaries Subsidiaries Issuer
-------- ------------ -------------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67 $-- $ 985 $ 16
Trade receivables 3,054 -- 25,115 --
Other receivables 628 -- 1,190 --
Inventory 2,422 -- 35,485 --
Prepaid expenses and other 1,281 -- 575 --
Current assets from discontinued operations -- -- -- --
-------- --- -------- --------
TOTAL CURRENT ASSETS 7,452 -- 63,350 16
-------- --- -------- --------
Property, plant & equipment, net 920 -- 13,191 --
Intangibles -- -- 3,933 --
Investment in subsidiaries 103,603 -- -- (8,355)
Intercompany 12,163 -- 92,602 30,308
Other assets 14,683 -- 1,108 --
Other assets from discontinued operations -- -- -- --
-------- --- -------- --------
$138,821 $-- $174,184 $ 21,969
======== === ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ -- $-- $ 2,821 $ --
Loan payable to banks 3,913 -- -- --
Current portion of long-term debt -- -- -- --
Accounts payable 1,324 -- 19,881 --
Accrued expenses and other 12,903 -- 9,192 866
Current liabilities from
discontinued operations -- -- -- --
-------- --- -------- --------
TOTAL CURRENT LIABILITIES 18,140 -- 31,894 866
-------- --- -------- --------
Long-term debt 151,236 -- -- 24,284
Intercompany debt -- -- 27,191 5,044
Other liabilities 9,525 -- 5,415 --
-------- --- -------- --------
TOTAL LIABILITIES 178,901 -- 64,500 30,194
-------- --- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 521 -- -- --
Common stock 2 -- 33 --
Paid-in capital 27,260 -- 108,383 21
Retained earnings (accumulated deficit) (68,010) -- 1,259 (14,274)
Accumulated other comprehensive
income (loss):
Gain on derivative instruments 304 -- 304 --
Cumulative currency translation
adjustment (157) -- (295) 6,028
-------- --- -------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (40,080) -- 109,684 (8,225)
-------- --- -------- --------
$138,821 $-- $174,184 $ 21,969
======== === ======== ========
Belgium Non-Guarantor Consolidation Consolidated
Guarantor Subsidiaries Adjustments Balance
--------- ------------- ------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 393 $ 5,944 $ -- $ 7,405
Trade receivables 3,344 21,691 -- 53,204
Other receivables 1,321 1,187 -- 4,326
Inventory 34,663 26,489 99,059
Prepaid expenses and other 1,115 3,670 -- 6,641
Current assets from discontinued operations -- 2,150 2,150
-------- -------- --------- --------
TOTAL CURRENT ASSETS 40,836 61,131 -- 172,785
-------- -------- --------- --------
Property, plant & equipment, net 13,461 24,948 -- 52,520
Intangibles 1,496 5,245 -- 10,674
Investment in subsidiaries -- -- (95,248) --
Intercompany (3,773) (15,363) (115,937) --
Other assets -- 1,072 -- 16,863
Other assets from discontinued operations -- 3,329 3,329
-------- -------- --------- --------
$ 52,020 $ 80,362 $(211,185) $256,171
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Cash overdraft $ -- $ -- $ -- $ 2,821
Loan payable to banks -- 34 -- 3,947
Current portion of long-term debt -- 2,250 -- 2,250
Accounts payable 2,252 10,497 -- 33,954
Accrued expenses and other 22,154 10,681 55,796
Current liabilities from
discontinued operations -- 998 998
-------- -------- --------- --------
TOTAL CURRENT LIABILITIES 24,406 24,460 -- 99,766
-------- -------- --------- --------
Long-term debt -- 1,125 -- 176,645
Intercompany debt 34,916 48,786 (115,937) --
Other liabilities 1,053 3,847 -- 19,840
-------- -------- --------- --------
TOTAL LIABILITIES 60,375 78,218 (115,937) 296,251
-------- -------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock -- -- -- 521
Common stock -- -- (33) 2
Paid-in capital 52 1,537 (109,993) 27,260
Retained earnings (accumulated deficit) (14,435) 6,496 20,954 (68,010)
Accumulated other comprehensive
income (loss):
Gain on derivative instruments -- -- (304) 304
Cumulative currency translation
adjustment 6,028 (5,889) (5,872) (157)
-------- -------- --------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (8,355) 2,144 (95,248) (40,080)
-------- -------- --------- --------
$ 52,020 $ 80,362 $(211,185) $256,171
======== ======== ========= ========
22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
Parent Unrestricted U.S. Guarantor Dutch
Issuer Subsidiaries Subsidiaries Issuer
-------- ------------ -------------- --------
NET SALES $ 6,169 $-- $55,191 $ --
NET SALES - INTERCOMPANY 44 -- -- --
COST OF GOODS SOLD (includes Belgium Plant
Transactions costs of $4,372) 4,724 -- 40,903 --
------- --- ------- -------
GROSS PROFIT 1,489 -- 14,288 --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,610 -- 7,705 8
------- --- ------- -------
OPERATING INCOME (LOSS) (4,121) -- 6,583 (8)
OTHER:
Interest expense 4,913 -- -- 652
Interest (income) (3) -- -- --
Other (income) expense, net -- -- 587 --
Intercompany interest and other (6,847) -- 5,176 (797)
(Profit) loss relating to subsidiaries 3,492 -- -- 3,505
------- --- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (5,676) -- 820 (3,368)
PROVISION (BENEFIT) FOR INCOME TAXES 180 -- 171 --
------- --- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (5,856) -- 649 (3,368)
DISCONTINUED OPERATIONS:
Income relating to discontinued operations 272 -- -- --
Income from discontinued operations (net of
income taxes) -- -- -- --
------- --- ------- -------
NET INCOME (LOSS) $(5,584) $-- $ 649 $(3,368)
======= === ======= =======
Belgium Non-Guarantor Consolidation Consolidated
Guarantor Subsidiaries Adjustments Balance
--------- ------------- ------------- ------------
NET SALES $ 3,328 $25,567 $ -- $90,255
NET SALES - INTERCOMPANY 9,787 2,115 (11,946) --
COST OF GOODS SOLD (includes Belgium Plant
Transactions costs of $4,372) 14,492 23,331 (11,946) 71,504
------- ------- -------- -------
GROSS PROFIT (1,377) 4,351 -- 18,751
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 736 3,826 -- 17,885
------- ------- -------- -------
OPERATING INCOME (LOSS) (2,113) 525 -- 866
OTHER:
Interest expense 15 311 -- 5,891
Interest (income) -- (16) -- (19)
Other (income) expense, net 301 (811) -- 77
Intercompany interest and other 1,095 1,373 -- --
(Profit) loss relating to subsidiaries -- -- (6,997) --
------- ------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,524) (332) 6,997 (5,083)
PROVISION (BENEFIT) FOR INCOME TAXES (19) 441 -- 773
------- ------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,505) (773) 6,997 (5,856)
DISCONTINUED OPERATIONS:
Income relating to discontinued operations -- -- (272) --
Income from discontinued operations (net of
income taxes) -- 272 -- 272
------- ------- -------- -------
NET INCOME (LOSS) $(3,505) $ (501) $ 6,725 $(5,584)
======= ======= ======== =======
23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2005
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-------- ------------ ------------ -------- --------- ------------- ------------- ------------
NET SALES $ 18,345 $-- $169,657 $ -- $ 7,556 $ 73,611 $ -- $269,169
NET SALES - INTERCOMPANY 137 -- 131 -- 20,447 5,532 (26,247) --
COST OF GOODS SOLD (includes
Belgium Plant Transactions
costs of $13,908) 14,378 -- 125,895 -- 35,276 65,380 (26,247) 214,682
-------- --- -------- -------- -------- -------- -------- --------
GROSS PROFIT 4,104 -- 43,893 -- (7,273) 13,763 -- 54,487
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 15,828 -- 22,054 14 2,102 11,903 -- 51,901
-------- --- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (11,724) -- 21,839 (14) (9,375) 1,860 -- 2,586
OTHER:
Interest expense 13,850 -- -- 1,951 38 687 -- 16,526
Interest (income) (5) -- (4) -- -- (68) -- (77)
Other (income) expense,
net 4 -- 213 -- 90 (998) -- (691)
Intercompany interest and
other (20,781) -- 15,562 (2,113) 2,976 4,356 -- --
(Profit) loss relating to
subsidiaries 8,385 -- -- 11,009 -- -- (19,394) --
-------- --- -------- -------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES (13,177) -- 6,068 (10,861) (12,479) (2,117) 19,394 (13,172)
PROVISION (BENEFIT) FOR
INCOME TAXES 694 -- 470 -- (1,470) 1,005 -- 699
-------- --- -------- -------- -------- -------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (13,871) -- 5,598 (10,861) (11,009) (3,122) 19,394 (13,871)
DISCONTINUED OPERATIONS:
Income relating to
discontinued operations 575 -- -- -- -- -- (575) --
Income from discontinued
operations (net of
income taxes) -- -- -- -- -- 575 -- 575
-------- --- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $(13,296) $-- $ 5,598 $(10,861) $(11,009) $ (2,547) $ 18,819 $(13,296)
======== === ======== ======== ======== ======== ======== ========
24
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2005
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-------- ------------ ------------ -------- --------- ------------- ------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $(13,296) $ -- $ 5,598 $(10,861) $(11,009) $(2,547) $ 18,819 $(13,296)
Adjustment for
discontinued operations (575) -- -- -- -- (575) 575 (575)
-------- ---- ------- -------- -------- ------- -------- --------
Income (loss) from
continuing operations (13,871) -- 5,598 (10,861) (11,009) (3,122) 19,394 (13,871)
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 $3,628) 2,309 -- 2,113 -- 5,880 3,414 -- 13,716
Deferred income taxes -- -- -- -- -- (202) -- (202)
Net gain from sales of
assets -- -- (777) -- -- (12) -- (789)
Effects of changes in
foreign currency -- -- (554) -- (87) (119) -- (760)
Other 289 -- 37 -- -- 104 -- 430
Changes in operating
assets and liabilities:
Accounts receivable (392) -- 2,066 -- (575) 3,361 -- 4,460
Inventory (428) -- 2,772 -- (9,857) (8,865) -- (16,378)
Prepaid expenses and
other 1,656 -- 631 -- (1,277) 637 -- 1,647
Other assets (2) -- (241) -- -- (375) -- (618)
Intercompany 2,274 5 (5,707) 5,926 7,605 9,291 (19,394) --
Accounts payable (1,610) 6 (8,579) -- (152) (1,043) -- (11,378)
Accrued expenses and
other 4,707 (1) 1,286 650 237 2,241 -- 9,120
Accrued costs of non-
completed
transaction (3,970) -- -- -- -- -- -- (3,970)
Accrued costs of the
Belgium Plant
Transactions -- -- -- -- 10,280 -- -- 10,280
Cash provided by
discontinued operations -- -- -- -- -- 808 -- 808
-------- ---- ------- -------- -------- ------- -------- --------
NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES (9,038) 10 (1,355) (4,285) 1,045 6,118 -- (7,505)
-------- ---- ------- -------- -------- ------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (909) -- (1,626) -- (726) (1,837) -- (5,098)
Proceeds from sale of
assets -- -- 1,320 -- -- 33 -- 1,353
Other investing (119) -- -- -- (154) 154 -- (119)
Discontinued operations -- -- -- -- -- (93) -- (93)
-------- ---- ------- -------- -------- ------- -------- --------
NET CASH (USED) BY
INVESTING ACTIVITIES (1,028) -- (306) -- (880) (1,743) -- (3,957)
-------- ---- ------- -------- -------- ------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in
cash overdraft -- (10) 1,940 -- -- -- -- 1,930
Net increase (decrease) in
short-term debt (7,083) -- -- -- -- 34 -- (7,049)
Proceeds from long-term
debt 19,107 -- -- 4,284 -- 901 -- 24,292
Proceeds from capital
contribution from
PAHC Holdings
Corporation 26,400 -- -- -- -- -- -- 26,400
Redemption of Series C
preferred stock (26,400) -- -- -- -- -- -- (26,400)
Payments of long-term debt -- -- (103) -- -- (3,810) -- (3,913)
Debt refinancing costs (2,027) -- -- -- -- -- -- (2,027)
-------- ---- ------- -------- -------- ------- -------- --------
NET CASH PROVIDED
(USED) BY FINANCING
ACTIVITIES 9,997 (10) 1,837 4,284 -- (2,875) -- 13,233
-------- ---- ------- -------- -------- ------- -------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH -- -- 8 -- 16 42 66
-------- ---- ------- -------- -------- ------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (69) -- 184 (1) 181 1,542 -- 1,837
CASH AND CASH EQUIVALENTS
at beginning of period 136 -- 801 17 212 4,402 5,568
-------- ---- ------- -------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS
at end of period $ 67 $ -- $ 985 $ 16 $ 393 $ 5,944 $ -- $ 7,405
======== ==== ======= ======== ======== ======= ======== ========
25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004
U.S. Non-
Parent Unrestricted Guarantor Dutch Belgium 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 24,959 -- 57,217
Other receivables 317 414 1,195 -- 72 768 -- 2,766
Inventory 1,994 -- 37,890 -- 23,159 15,519 78,562
Prepaid expenses and other 3,195 110 565 -- 1,018 3,703 -- 8,591
Current assets from
discontinued operations -- -- -- -- -- 1,886 -- 1,886
-------- ------- -------- ------- ------- -------- --------- --------
TOTAL CURRENT ASSETS 8,312 524 67,447 17 27,053 51,237 -- 154,590
-------- ------- -------- ------- ------- -------- --------- --------
Property, plant & equipment,
net 105 -- 13,730 -- 17,321 24,225 -- 55,381
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
Other assets from discontinued
operations -- -- -- -- -- 3,405 -- 3,405
-------- ------- -------- ------- ------- -------- --------- --------
$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 11,329 -- 46,764
Accrued expenses and other 11,857 159 8,306 216 12,022 6,820 39,380
Current liabilities from
discontinued operations -- -- -- -- -- 838 -- 838
-------- ------- -------- ------- ------- -------- --------- --------
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
======== ======= ======== ======= ======= ======== ========= ========
26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
U.S. Non-
Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-------- ------------ ------------ ------ --------- ------------ ------------- ------------
NET SALES $ 5,331 $-- $55,374 $ -- $1,162 $24,109 $ -- $85,976
NET SALES - INTERCOMPANY 16 -- 32 -- 7,534 418 (8,000) --
COST OF GOODS SOLD 4,176 -- 40,301 -- 6,461 20,308 (8,000) 63,246
------- --- ------- ----- ------ ------- ------- -------
GROSS PROFIT 1,171 -- 15,105 -- 2,235 4,219 -- 22,730
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,868 -- 6,476 2 776 3,882 -- 16,004
------- --- ------- ----- ------ ------- ------- -------
OPERATING INCOME (LOSS) (3,697) -- 8,629 (2) 1,459 337 -- 6,726
OTHER:
Interest expense 4,179 -- -- 650 60 29 -- 4,918
Interest (income) (1) -- -- -- -- (42) -- (43)
Other (income) expense, net 112 -- (350) -- 118 (14) -- (134)
Net (gain) on extinguishment
of debt -- -- -- -- -- -- -- --
Intercompany interest and
other (4,407) -- 2,345 (657) 943 1,776 -- --
(Profit) loss relating to
subsidiaries (3,439) -- -- 2 -- -- 3,437 --
------- --- ------- ----- ------ ------- ------- -------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES (141) -- 6,634 3 338 (1,412) (3,437) 1,985
PROVISION FOR
INCOME TAXES -- -- 211 -- 340 1,575 -- 2,126
------- --- ------- ----- ------ ------- ------- -------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (141) -- 6,423 3 (2) (2,987) (3,437) (141)
DISCONTINUED OPERATIONS:
(Loss) relating to
discontinued operations (254) -- -- -- -- -- 254 --
(Loss) from discontinued
operations (net of income
taxes) -- -- -- -- (254) -- (254)
------- --- ------- ----- ------ ------- ------- -------
NET INCOME (LOSS) $ (395) $-- $ 6,423 $ 3 $ (2) $(3,241) $(3,183) $ (395)
======= === ======= ===== ====== ======= ======= =======
27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantors Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-------- ------------ ------------ ------- --------- -------------- ------------- ------------
NET SALES $ 16,453 $11,118 $158,070 $ -- $ 3,402 $72,539 $ -- $261,582
NET SALES - INTERCOMPANY 113 2,598 425 -- 20,530 2,593 (26,259) --
COST OF GOODS SOLD 12,995 10,139 117,520 -- 20,432 60,836 (26,259) 195,663
-------- ------- -------- ------- ------- ------- -------- --------
GROSS PROFIT 3,571 3,577 40,975 -- 3,500 14,296 -- 65,919
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,936 1,299 18,851 4 1,860 11,342 48,292
-------- ------- -------- ------- ------- ------- --------
OPERATING INCOME (LOSS) (11,365) 2,278 22,124 (4) 1,640 2,954 -- 17,627
OTHER:
Interest expense 11,920 18 -- 1,156 79 227 13,400
Interest (income) (4) -- -- -- -- (113) (117)
Other (income) expense,
net 640 -- (626) -- (294) (314) (594)
Net (gain) on
extinguishment
of debt (23,226) -- -- -- -- -- (23,226)
Intercompany interest
and other (16,152) 1,892 7,833 (1,167) 2,389 5,205 --
(Profit) loss relating
to subsidiaries (8,913) -- -- 534 -- -- 8,379 --
-------- ------- -------- ------- ------- ------- -------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 24,370 368 14,917 (527) (534) (2,051) (8,379) 28,164
PROVISION FOR
INCOME TAXES 1,951 96 883 -- -- 2,815 5,745
-------- ------- -------- ------- ------- ------- --------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 22,419 272 14,034 (527) (534) (4,866) (8,379) 22,419
DISCONTINUED OPERATIONS:
(Loss) relating to
discontinued
operations (504) -- -- -- -- -- 504 --
(Loss) from discontinued
operations (net of
income taxes) -- (124) -- -- -- (380) (504)
Gain on disposal of
discontinued
operations (net of
income taxes) 231 -- -- -- -- -- 231
-------- ------- -------- ------- ------- ------- -------- --------
NET INCOME (LOSS) $ 22,146 $ 148 $ 14,034 $ (527) $ (534) $(5,246) $ (7,875) $ 22,146
======== ======= ======== ======= ======= ======= ======== ========
28
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
-------- ------------ ------------ -------- --------- ------------- ------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ 22,146 $ 148 $ 14,034 $ (527) $ (534) $(5,246) $(7,875) $ 22,146
Adjustment for
discontinued operations 273 124 -- -- -- 380 (504) 273
-------- -------- -------- -------- ------- ------- ------- --------
Income (loss) from
continuing operations 22,419 272 14,034 (527) (534) (4,866) (8,379) 22,419
Adjustments to reconcile
income (loss) from
continuing operations
to net cash provided
(used) by operating
activities:
Depreciation and
amortization 1,608 487 1,864 -- 1,900 3,624 9,483
Deferred income taxes -- -- -- -- -- 263 263
Net gain from sales
of assets -- -- (689) -- -- (2) (691)
Net gain on
extinguishment
of debt (23,226) -- -- -- -- -- (23,226)
Effects of changes in
foreign currency -- -- 63 -- (1,177) 946 (168)
Other 391 -- 20 -- -- (10) 401
Changes in operating
assets and
liabilities:
Accounts receivable 156 336 (5,405) -- 260 1,639 (3,014)
Inventory 504 (543) 2,052 -- (5,238) 1,646 (1,579)
Prepaid expenses
and other 1,190 188 (1,163) -- (35) (1,159) (979)
Other assets 1,020 -- (4) -- -- (39) 977
Intercompany (2,263) 17,358 (13,553) (20,610) 13,145 (2,456) 8,379 --
Accounts payable (2,613) (332) (7,045) -- (2,751) (756) (13,497)
Accrued expenses
and other 5,033 (276) 6,317 1,156 3,849 (7,285) 8,794
Cash provided (used)
by discontinued
operations 231 (652) -- -- -- (177) (598)
-------- -------- -------- -------- ------- ------- ------- --------
NET CASH PROVIDED
(USED) BY
OPERATING
ACTIVITIES 4,450 16,838 (3,509) (19,981) 9,419 (8,632) -- (1,415)
-------- -------- -------- -------- ------- ------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures (44) (62) (1,334) -- (1,163) (1,383) (3,986)
Proceeds from sale of
assets -- -- 1,057 -- -- 22 1,079
Other investing -- -- -- -- -- (1) (1)
Discontinued operations 14,351 -- -- -- -- 456 14,807
-------- -------- -------- -------- ------- ------- ------- --------
NET CASH PROVIDED
(USED) BY INVESTING
ACTIVITIES 14,307 (62) (277) -- (1,163) (906) -- 11,899
-------- -------- -------- -------- ------- ------- ------- --------
FINANCING ACTIVITIES:
Net increase (decrease)
in cash overdraft (350) (274) 2,987 -- -- (9) 2,354
Net increase (decrease)
in short-term debt (29,874) -- -- -- -- (149) (30,023)
Proceeds from long-term
debt 85,000 -- -- 20,000 -- 4,622 109,622
Payments of long-term
debt (32,679) (13) (960) -- -- (960) (34,612)
Payment of Pfizer
obligations (20,075) -- -- -- (8,225) -- (28,300)
Payments relating to the
Prince
Transactions and
transaction costs (4,415) (16,608) -- -- -- -- (21,023)
Debt refinancing costs (14,945) -- -- -- -- -- (14,945)
Discontinued operations -- -- -- -- -- 1,135 1,135
-------- -------- -------- -------- ------- ------- ------- --------
NET CASH PROVIDED
(USED) BY
FINANCING
ACTIVITIES (17,338) (16,895) 2,027 20,000 (8,225) 4,639 -- (15,792)
-------- -------- -------- -------- ------- ------- ------- --------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH -- -- 1 -- 13 305 319
-------- -------- -------- -------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS 1,419 (119) (1,758) 19 44 (4,594) -- (4,989)
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 $ 1,462 $ -- $ 409 $ 19 $ 229 $ 4,071 $ -- $ 6,190
======== ======== ======== ======== ======= ======= ======= ========
29
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 Wychem, MRT and LaCornubia businesses have been classified as
discontinued operations. This discussion presents information only for
continuing operations, unless otherwise indicated. Phibro Animal Health
Corporation (the "Company" or "PAHC") 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.
Holding Company and HoldCo Notes
During February 2005, PAHC Holdings Corporation ("Holdings") was formed to
hold the capital stock of the Company, except for its Series C Preferred Stock.
On February 10, 2005, Holdings issued $29.0 million aggregate principal amount
of its 15% Senior Secured Notes due 2010 (the "HoldCo Notes") in a private
placement. Interest is payable at the option of Holdings in cash or pay-in-kind
HoldCo Notes in its sole discretion. The Company is not obligated for the HoldCo
Notes. The Company's ability to make payments to 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 were used to make a capital
contribution to the Company to finance the redemption of the Company's Series C
Preferred Stock in the amount of $26.4 million on February 28, 2005.
Holdings was formed by the holders of all of the Company's capital stock,
other than the holders of the Company's 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 all of his shares of Class A Common
Stock, for the same number and class of shares of Holdings, having the same
designations, relative rights, privileges and limitations as the Company's
shares of such class (except to the extent that Holdings is a Delaware
corporation and the Company is a New York corporation). Holdings owns all the
outstanding capital stock of all classes of the Company.
The HoldCo Notes are collateralized by all of Holdings' assets (now
consisting substantially of all the outstanding capital stock of the Company).
The HoldCo Notes and such security interest are effectively subordinated to all
liabilities, including the Company's and its subsidiaries' trade payables, as
well as the Company's indenture indebtedness.
On May 16, 2005, Holdings completed the exchange of its privately placed
HoldCo Notes with new HoldCo Notes that have been registered with the Securities
and Exchange Commission (the "SEC").
In connection with the redemption of the Company's Series C Preferred
Stock, the Company, Palladium Equity Partners II, LP ("Palladium"), PAHC
Holdings and the principal stockholders of PAHC Holdings entered into an
agreement with respect to (i) the redemption price (consisting of $19.6 million
of liquidation preference and $6.8 million of equity value), (ii) amending the
terms of the post-redemption redemption price adjustment set forth in the
certificate of incorporation
30
of the Company (a) from an amount payable upon occurrence of certain capital
stock transactions determined with respect to the value of the Company upon the
occurrence of such capital stock transaction, to a liquidated amount of $4.0
million, payable only after the occurrence of certain capital stock transactions
and the receipt by the current stockholders of the Company, on a cumulative
basis, of an aggregate of $24.0 million of dividends and distributions in
respect of such capital stock transactions, and (b) to remove the one year time
period for such adjustment of the redemption price, and (iii) eliminating the
backstop indemnification obligation of up to $4.0 million of the Company to
Palladium incurred in connection with the sale by the Company to Palladium in
December 2003 of The Prince Manufacturing Company ("PMC"). The excess of the
redemption price over the carrying value of the Series C Preferred Stock and the
elimination of the backstop indemnification obligation have been reflected as
adjustments to stockholder's deficit on the condensed consolidated balance sheet
at March 31, 2005. The Company has determined the fair value of the liability
for the post-redemption redemption price adjustment to be insignificant to the
consolidated financial statements, due to the uncertainty of the ultimate timing
of such payment, if any. Future changes in the fair value of the liability for
the post-redemption redemption price adjustment will be recorded through
earnings in the period in which such change occurs.
Discontinued Operations - Wychem
On April 29, 2005, the Company sold the shares of Wychem, an indirect
wholly-owned subsidiary, for cash proceeds of $4.8 million to an investor group
that included the former head of the Company's Specialty Chemicals Group, who
retired in August 2004, and the Managing Director of Wychem. The Company owned
Wychem through its subsidiaries: Koffolk (1949), Ltd. (Israel) which owned 75%
and Ferro Metal and Chemical Corporation Limited (U.K.) which owned 25%. The
Company anticipates that it will record a gain on the sale of Wychem of
approximately $1.5 million in the quarter ending June 30, 2005. Wychem was
included in the Company's All Other segment.
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 March 31, 2005
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 ($8.0
million), 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 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 cleaning-up costs; (iv) in recognition of the benefits to PAHC
from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5
million ($1.9 million) within six months from the closing date, EUR 1.5 million
($1.9 million) within eighteen months from the closing date, EUR 1.5 million
($1.9 million) within thirty months from the closing date, and EUR 0.5 million
($0.6 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 10.2 million ($13.2 million), of which an amount estimated to be
approximately EUR 4.2 million ($5.4 million) would be payable at or around the
closing and an aggregate amount so estimated to be approximately EUR 6.0 million
($7.8 million) 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.
31
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 ($3.1 million) as of the
projected closing date of November 30, 2005. The Company recorded incremental
depreciation expense of EUR 2.8 million, ($3.6 million) during the three months
ended March 31, 2005 and will record an additional EUR 6.3 million ($8.2
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 minimum severance amounts indicated by law, contract,
and/or past practice. The Company recorded additional expense of EUR 1.0 million
($1.3 million) during the three months ended March 31, 2005 and estimates it
will record additional expense of EUR 2.6 million ($3.3 million) ratably through
November 2005 for severance, retention agreements and other costs. The
incremental depreciation expense of $3.6 million and severance expense of $10.3
million recorded through March 2005 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
March 31, 2005 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 March 31, 2005 virginiamycin inventories were
approximately $43.0 million and are expected to continue to increase through
November 2005, based on current production rates.
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
$18.2 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 March 9, 2005, the Company completed the exchange of its privately
placed 127,491 units of its 13% Senior Secured Notes due 2007 with new units of
its 13% Senior Secured Notes due 2007 that have been registered with the SEC.
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 $26.8 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
32
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.
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.
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.
33
SUMMARY CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2005 2004 2005 2004
------- ------- -------- --------
(THOUSANDS) (THOUSANDS)
Net sales $90,255 $85,976 $269,169 $261,582
Gross profit 18,751 22,730 54,487 65,919
Selling, general and administrative 17,885 16,004 51,901 48,292
Operating income 866 6,726 2,586 17,627
Interest expense, net 5,872 4,875 16,449 13,283
Other expense (income), net 77 (134) (691) (594)
Net (gain) on extinguishment of debt -- -- -- (23,226)
Provision (benefit) for income taxes 773 2,126 699 5,745
Income from continuing operations $(5,856) $ (141) $(13,871) $ 22,419
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Net Sales of $90.3 million increased $4.3 million, or 5%. Animal Health and
Nutrition sales of $69.0 million grew $4.2 million, or 7%, due to volume
increases and higher average selling prices. Specialty Chemical Group (comprised
of the Industrial Chemicals, Distribution and All Other segments) sales of $21.3
million increased $0.1 million.
Gross Profit of $18.8 million decreased $4.0 million, to 20.8% of net
sales. The Belgium Plant Transactions increased costs by $4.4 million for the
current quarter. Excluding this charge, Animal Health and Nutrition gross profit
increased due to higher average selling prices offset in part by higher unit
costs. The Specialty Chemical Group's gross profit increased slightly over the
2004 quarter.
Selling, General and Administrative Expenses of $17.9 million increased
$1.9 million. Expenses in the operating segments increased over the prior year
due to higher research and development costs associated with registration
trials, unfavorable foreign exchange rates, advertising and promotion
expenditures and severance costs. Corporate expenses increased due to higher
debt amortization costs, professional fees and reduced PMC advisory fee income.
In addition, the Company recognized additional gains of $0.1 million from the
previous sale of its etchant business during the current fiscal quarter.
Operating Income of $0.9 million decreased $5.9 million from the 2004
quarter. Operating income, excluding the Belgium Plant Transactions, declined by
$0.6 million in Animal Health and Nutrition due to higher selling, general and
administrative expenses offset in part by increased gross profit. Specialty
Chemical Group operating income increased $0.1 million. Corporate expenses
increased by $1.0 million and also contributed to the decline.
Interest Expense, Net of $5.9 million increased $1.0 million from the 2004
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. In addition, the Company recorded a
gain of $0.8 million on the sale of its PhibroTech Wilmington, Illinois
property.
Income Taxes of $0.8 million were recorded on a consolidated pre-tax loss
of $5.1 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.
34
COMPARISON OF NINE MONTHS ENDED MARCH 31, 2005 AND 2004
Net Sales of $269.2 million increased $7.6 million, or 3%. Animal Health
and Nutrition sales of $205.5 million grew $12.2 million, or 6%, due to volume
increases and also higher average selling prices. Specialty Chemical Group
(comprised of the Industrial Chemicals, Distribution and All Other segments)
sales of $63.7 million decreased $4.6 million. Excluding PMC, Specialty Chemical
group sales increased by $6.5 million, or 11%, due to volume increases in each
of the segments. The Specialty Chemical Group included PMC sales of $11.1
million for the 2004 period.
Gross Profit of $54.5 million decreased $11.4 million to 20.2% of net
sales. The Belgium Plant Transactions increased costs by $13.9 million for the
current period. Excluding this charge, Animal Health and Nutrition gross profit
increased due to higher unit volumes and average selling prices offset in part
by higher unit costs. 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 segment. The
Specialty Chemical Group included PMC gross profit of $3.6 million for the 2004
period.
Selling, General and Administrative Expenses of $51.9 million increased
$3.6 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, advertising and
promotion expenditures and severance costs. Corporate expenses increased due to
higher debt amortization charges, professional fees, costs associated with the
relocation of the Company's corporate office and lower PMC advisory fees income
offset in part by the elimination of the Palladium management fee in fiscal
2004. In addition, the Company recognized additional gains of $0.8 million from
the previous sale of its etchant business during the current fiscal year. PMC
expenses were $1.3 million for the 2004 period.
Operating Income of $2.6 million decreased $15.0 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 2004 period offset in part by the elimination
of the $1.1 million Palladium management fee.
Interest Expense, Net of $16.4 million increased $3.2 million from the 2004
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. In addition, the Company recorded a
gain of $0.8 million on the sale of its PhibroTech Wilmington, Illinois
property.
Income Taxes of $0.7 million were recorded on a consolidated pre-tax loss
of $13.2 million. The tax rate reflects income tax provisions in profitable
foreign jurisdictions and for state income taxes. A provision for U.S. federal
income taxes has not been recorded due to the utilization of net operating loss
carryforwards. The Company has recorded valuation allowances related to
substantially all deferred tax assets. The Company will continue to evaluate the
likelihood of recoverability of these deferred tax assets based upon actual and
expected operating performance.
OPERATING SEGMENTS
The Animal Health and Nutrition segment manufactures and markets MFAs and
NFAs to the poultry, swine and cattle markets, and includes the operations of
the Phibro Animal Health business unit, Prince AgriProducts, Koffolk (1949) Ltd.
and Planalquimica. The Industrial Chemicals segment manufacturers and markets
specialty chemicals for use in the pressure treated wood 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 and all other operations. Due to the
divestiture of PMC in December 2003, PMC's results are shown separately for
comparability.
35
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2005 2004 2005 2004
------- ------- -------- --------
(THOUSANDS) (THOUSANDS)
NET SALES
Animal Health & Nutrition $69,005 $64,819 $205,519 $193,347
Industrial Chemicals - ex PMC 8,871 10,000 24,950 22,543
Industrial Chemicals - PMC -- -- -- 11,118
Distribution 7,838 7,916 23,603 23,511
All other 4,541 3,241 15,097 11,063
------- ------- -------- --------
$90,255 $85,976 $269,169 $261,582
======= ======= ======== ========
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2005 2004 2005 2004
------- ------- -------- --------
(THOUSANDS) (THOUSANDS)
OPERATING INCOME
Animal Health & Nutrition $ 3,420 $ 8,370 $ 9,715 $ 22,925
Industrial Chemicals - ex PMC 957 1,136 2,385 458
Industrial Chemicals - PMC -- -- -- 2,278
Distribution 895 789 2,555 2,322
All other 414 254 1,156 1,381
Corporate expenses and adjustments (4,820) (3,823) (13,225) (11,737)
-------- ------ -------- --------
$ 866 $6,726 $ 2,586 $ 17,627
======== ====== ======== ========
OPERATING SEGMENTS COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004
ANIMAL HEALTH AND NUTRITION
NET SALES of $69.0 million increased $4.2 million, or 7%. MFA net sales
increased by $2.7 million. Revenues were higher primarily for antibiotics and
anticoccidials but were offset in part by lower sales of antibacterials. 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 $1.5 million principally due to higher average
selling prices of trace mineral premixes and other feed ingredients.
OPERATING INCOME of $3.4 million decreased $5.0 million from the 2004
period. Operating income, excluding costs relating to the Belgium Transactions
of $4.4 million, decreased due to higher selling, general and administrative
expenses and manufacturing costs offset in part by higher average selling
prices.
SPECIALTY CHEMICALS
INDUSTRIAL CHEMICALS net sales of $8.9 million decreased $1.1 million, or
11%. Sales of copper- related products to the wood treatment markets were below
last year, but were partially offset by higher sales of other specialty copper
products arising from capacity expansion. The new copper based wood treatment
product, introduced in the March 2004 quarter, included unusually strong initial
volumes as customers increased inventory levels. Operating income of $1.0
million declined by $0.2 million from the 2004 quarter due to lower sales unit
volumes and changes in product mix.
DISTRIBUTION net sales of $7.8 million decreased $0.1 million, or 1%. Lower
sales volumes in Europe were offset in part by higher domestic unit volumes and
slightly higher average selling prices. Distribution operating income of $0.9
million improved by $0.1 million from the 2004 quarter due to increased sales of
higher margin products. As a percentage of sales, operating income was 11% and
10% in 2005 and 2004, respectively.
36
ALL OTHER net sales of $4.5 million increased $1.3 million. Revenues for
contract manufacturing increased due to higher average selling prices and
increased volumes. Operating income of $0.4 million increased by $0.2 million
over the prior period.
OPERATING SEGMENTS COMPARISON OF NINE MONTHS ENDED MARCH 31, 2005 AND 2004
ANIMAL HEALTH AND NUTRITION
NET SALES of $205.5 million increased $12.2 million, or 6%. MFA net sales
increased by $4.3 million. Revenues were higher primarily for antibiotics but
were offset in part by lower sales of antibacterials and anticoccidials. The
increase in MFA revenues was due to higher unit volumes, higher average selling
prices and favorable currency effect on international sales. NFA net sales
increased by $7.9 million principally due to volume increases and higher average
selling prices in trace mineral premixes and other feed ingredients.
OPERATING INCOME of $9.7 million decreased $13.2 million from the 2004
period. Operating income, excluding costs relating to the Belgium Transactions
of $13.9 million, improved due to higher average selling prices and sales unit
volumes offset in part by higher selling, general and administrative expenses
and manufacturing costs.
SPECIALTY CHEMICALS
INDUSTRIAL CHEMICALS net sales of $25.0 million, excluding PMC, increased
$2.4 million, or 11%. Sales of copper-related products to the wood treatment
markets increased due to the introduction of new copper based wood treatment
products and by higher sales of other specialty copper products arising from
capacity expansion. PMC, divested in December 2003, generated revenues of $11.1
million for the 2004 period. Operating income, excluding PMC, of $2.4 million
improved by $1.9 million from the 2004 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 2004 period.
DISTRIBUTION net sales of $23.6 million increased $0.1 million. Higher
domestic unit volumes and slightly higher average selling prices were offset in
part by lower sales volumes in Europe. Distribution operating income of $2.6
million improved by $0.2 million from the 2004 period due to increased sales of
higher margin products. As a percentage of sales, operating income was 11% and
10% in 2005 and 2004, respectively.
ALL OTHER net sales of $15.1 million increased $4.0 million. Revenues for
contract manufacturing increased due to higher average selling prices and also
increased volumes. Operating income of $1.2 million decreased $0.2 million from
the prior period due to higher manufacturing costs.
DISCONTINUED OPERATIONS
On April 29, 2005, the Company sold the shares of Wychem, an indirect
wholly-owned subsidiary, for cash proceeds of $4.8 million to an investor group
that included the former head of the Company's Specialty Chemicals Group, who
retired in August 2004, and the Managing Director of Wychem. The Company owned
Wychem through its subsidiaries: Koffolk (1949), Ltd. (Israel) which owned 75%
and Ferro Metal and Chemical Corporation Limited (U.K.) which owned 25%. The
Company anticipates that it will record a gain on the sale of Wychem of
approximately $1.5 million in the quarter ending June 30, 2005. Wychem was
included in the Company's All Other segment.
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.
37
THREE MONTHS ENDED MARCH 31, 2005
----------------------------------
MRT LACORNUBIA WYCHEM TOTAL
--- ---------- ------ ------
Net Sales $-- $-- $1,487 $1,487
=== === ====== ======
Operating Income $-- $-- $ 389 $ 389
Other Expense (Income), net -- -- 5 5
Provision (benefit) for income tax -- -- 112 112
--- --- ------ ------
Net Income (loss) from discontinued operations $-- $-- $ 272 $ 272
=== === ====== ======
Depreciation and Amortization $-- $-- $ 105 $ 105
=== === ====== ======
THREE MONTHS MARCH 31, 2004
----------------------------------
MRT LACORNUBIA WYCHEM TOTAL
--- ---------- ------ ------
Net Sales $-- $4,161 $1,061 $5,222
=== ====== ====== ======
Operating Income (Loss) $-- $ (363) $ 303 $ (60)
Interest Expense, net -- 22 -- 22
Other Expense (Income), net -- 68 3 71
Provision (benefit) for income tax -- 18 83 101
--- ------ ------ ------
Net Income (loss) from discontinued operations $-- $ (471) $ 217 $ (254)
=== ====== ====== ======
Depreciation and Amortization $-- $ 101 $ 105 $ 206
=== ====== ====== ======
NINE MONTHS ENDED MARCH 31, 2005
----------------------------------
MRT LACORNUBIA WYCHEM TOTAL
--- ---------- ------ ------
Net Sales $-- $-- $3,908 $3,908
=== === ====== ======
Operating Income $-- $-- $ 807 $ 807
Interest Expense, net -- -- -- --
Other Expense (Income), net -- -- 6 6
Provision (benefit) for income tax -- -- 226 226
--- --- ------ ------
Net Income (loss) from discontinued operations $-- $-- $ 575 $ 575
=== === ====== ======
Depreciation and Amortization $-- $-- $ 309 $ 309
=== === ====== ======
NINE MONTHS ENDED MARCH 31, 2004
--------------------------------------
MRT LACORNUBIA WYCHEM TOTAL
------ ---------- ------ -------
Net Sales $3,327 $9,884 $2,945 $16,156
====== ====== ====== =======
Operating Income (Loss) $ (124) $ (843) $ 502 $ (465)
Interest Expense, net -- 64 -- 64
Other Expense (Income), net -- (175) 5 (170)
Provision (benefit) for income tax -- 18 127 145
------ ------ ------ -------
Net Income (loss) from discontinued operations $ (124) $ (750) $ 370 $ (504)
====== ====== ====== =======
Depreciation and Amortization $ -- $ 302 $ 318 $ 620
====== ====== ====== =======
38
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 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
nine months ended March 31, 2005 and 2004 was ($7.5) million and ($1.4) million,
respectively. Cash used was due to higher working capital requirements. 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. Total inventories increased by $16.4 million in the current
fiscal year. In addition, the Company paid $4.0 million of costs related to a
non-completed transaction that was charged to expense in fiscal 2004.
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for the nine months ended March 31, 2005 and 2004 was
($4.0) million and $11.9 million, respectively. Capital expenditures of $5.1
million and $4.0 million for 2005 and 2004, 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 $14.8 million in 2004.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used)
by financing activities for the nine months ended March 31, 2005 and 2004 was
$13.2 million and ($15.8) 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 primarily funded from proceeds of additional long-term
debt. Payments of long-term debt reflect the repayments of Koffolk Israel
borrowings. The Company used $26.4 million of capital contribution from Holdings
Corporation to redeem for $26.4 million, the remaining Series C preferred stock.
Working Capital and Capital Expenditures. Working capital as of March 31,
2005 was $73.0 million compared to $54.4 million at June 30, 2004, an increase
of $18.6 million. The fiscal 2005 increase in working capital primarily was due
to higher inventory levels and to reduced short-term debt levels 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 March 31, 2005 the amount of credit extended under the
Company's domestic senior credit facility totaled $3.9 million under the working
capital facility and $10.5 million under the letter of credit facility, and the
Company had $13.6 million available under the working capital facility. In
addition, certain of the Company's foreign subsidiaries also had availability
totaling $7.1 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
39
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 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 MARCH 31, 2005
MATURE AS FOLLOWS:
YEARS
---------------------------------------------
WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL
-------- ----------- ----------- ------ ------
Loans payable to banks $ 3.9 $ -- $ -- $ -- $ 3.9
Long-term debt (including current portion) 2.3 128.2 48.4 -- 178.9
Interest payments 22.2 41.6 1.2 -- 65.0
Lease commitments 1.4 2.6 2.0 1.8 7.8
Acquisition of rights 0.5 0.7 0.2 -- 1.4
----- ------ ----- ---- ------
Total contractual obligations $30.3 $173.1 $51.8 $1.8 $257.0
===== ====== ===== ==== ======
40
SUPPLEMENTAL INFORMATION (UNAUDITED)
The Company sold MRT in August 2003, shutdown La Cornubia in June 2004 and
sold Wychem in April 2005. These businesses have been classified as discontinued
operations. The Company's consolidated financial statements have been
reclassified to report separately the operating results, financial position, and
cash flows of the discontinued operations. In addition, the Company completed
the Prince Transactions in December 2003, including the divestiture of PMC and
the termination of management fees to the Palladium Investors.
To facilitate quarterly comparisons, the following unaudited statements
present the quarterly operating results of continuing operations, for each
quarter of the Company's current fiscal year and for the year ended June 30,
2004. Amounts are in thousands.
QUARTERS ENDED NINE MONTHS
------------------------------- ENDED
SEPT 30, DEC 31, MARCH 31, MARCH 31,
2004 2004 2005 2005
-------- -------- --------- -----------
Net sales:
Animal Health & Nutrition $65,806 $70,708 $69,005 $205,519
Industrial Chemicals 8,393 7,686 8,871 24,950
Distribution 7,661 8,104 7,838 23,603
All Other 5,037 5,519 4,541 15,097
------- ------- ------- --------
Total net sales 86,897 92,017 90,255 269,169
Cost of goods sold 64,727 68,915 67,132 200,774
Belgium Plant Transactions costs -- 9,536 4,372 13,908
------- ------- ------- --------
Gross profit 22,170 13,566 18,751 54,487
Selling, general and administrative expenses 16,429 17,587 17,885 51,901
------- ------- ------- --------
Operating income (loss):
Animal Health & Nutrition 7,815 8,016 7,792 23,623
Belgium Plant Transactions costs -- (9,536) (4,372) (13,908)
Industrial Chemicals 773 655 957 2,385
Distribution 864 796 895 2,555
All Other 418 324 414 1,156
Corporate Expenses (4,166) (4,565) (4,761) (13,492)
Eliminations 37 289 (59) 267
------- ------- ------- --------
Total operating income (loss) 5,741 (4,021) 866 2,586
Other:
Interest expense 5,246 5,389 5,891 16,526
Interest (income) (25) (33) (19) (77)
Other expense, net 24 (792) 77 (691)
------- ------- ------- --------
Income (loss) from continuing operations
before income taxes 496 (8,585) (5,083) (13,172)
Provision for income taxes 844 (918) 773 699
------- ------- ------- --------
Income/(loss) from continuing operations (348) (7,667) (5,856) (13,871)
Discontinued operations:
Income (loss) from operations 207 96 272 575
Gain (loss) on disposal -- -- -- --
------- ------- ------- --------
Net income/(loss) $ (141) $(7,571) $(5,584) $(13,296)
======= ======= ======= ========
Depreciation and amortization from continuing operations:
Animal Health & Nutrition $ 2,195 $ 2,172 $ 2,208 $ 6,575
Belgium Plant Transactions costs -- 533 3,095 3,628
Industrial Chemicals 403 413 374 1,190
Distribution 2 6 6 14
All Other -- -- -- --
Corporate Expenses 655 725 929 2,309
------- ------- ------- --------
Total depreciation and amortization $ 3,255 $ 3,849 $ 6,612 $ 13,716
======= ======= ======= ========
41
QUARTERS ENDED
------------------------------------------ YEAR ENDED
SEPT 30, DEC 31, MARCH 31, JUNE 30, JUNE 30,
2003 2003 2004 2004 2004
-------- -------- --------- -------- ----------
Net sales:
Animal Health & Nutrition $59,841 $ 68,687 $64,819 $72,074 $265,421
Industrial Chemicals - ex PMC 6,299 6,244 10,000 8,592 31,135
Industrial Chemicals - PMC 5,683 5,435 -- -- 11,118
Distribution 7,939 7,656 7,916 7,350 30,861
All Other 4,280 3,542 3,241 4,786 15,849
------- -------- ------- ------- --------
Total net sales 84,042 91,564 85,976 92,802 354,384
Cost of goods sold 63,016 69,401 63,246 69,554 265,217
------- -------- ------- ------- --------
Gross profit 21,026 22,163 22,730 23,248 89,167
Selling, general and administrative expenses 15,625 16,663 16,004 17,231 65,523
Costs of non-completed transaction -- -- -- 5,261 5,261
------- -------- ------- ------- --------
Operating income (loss):
Animal Health & Nutrition 6,900 7,655 8,370 10,382 33,307
Industrial Chemicals - ex PMC (391) (287) 1,136 163 621
Industrial Chemicals - PMC 1,213 1,065 -- -- 2,278
Distribution 841 692 789 578 2,900
All Other 695 432 254 289 1,670
Corporate Expenses (3,377) (4,132) (4,116) (4,468) (16,093)
Eliminations 82 638 293 (927) 86
Palladium management fee (562) (563) -- -- (1,125)
Costs of non-completed transaction -- -- -- (5,261) (5,261)
------- -------- ------- ------- --------
Total operating income (loss) 5,401 5,500 6,726 756 18,383
Other:
Interest expense 3,933 4,549 4,918 5,218 18,618
Interest (income) (242) 168 (43) (13) (130)
Other expense, net (586) 126 (134) (194) (788)
Net (gain) on extinguishment of debt -- (23,226) -- -- (23,226)
------- -------- ------- ------- --------
Income (loss) from continuing operations
before income taxes 2,296 23,883 1,985 (4,255) 23,909
Provision for income taxes 800 2,819 2,126 2,059 7,804
------- -------- ------- ------- --------
Income/(loss) from continuing operations 1,496 21,064 (141) (6,314) 16,105
Discontinued operations:
Income (loss) from operations (472) 222 (254) (662) (1,166)
Gain (loss) on disposal 231 -- -- (2,320) (2,089)
------- -------- ------- ------- --------
Net income/(loss) $ 1,255 $ 21,286 $ (395) $(9,296) $ 12,850
======= ======== ======= ======= ========
Depreciation and amortization from continuing operations:
Animal Health & Nutrition $ 2,029 $ 2,059 $ 2,086 $ 2,089 $ 8,263
Industrial Chemicals - ex PMC 406 395 403 432 1,636
Industrial Chemicals - PMC 243 244 -- -- 487
Distribution 3 4 3 1 11
All Other -- -- -- -- --
Corporate Expenses 372 576 660 759 2,367
------- -------- ------- ------- --------
Total depreciation and amortization $ 3,053 $ 3,278 $ 3,152 $ 3,281 $ 12,764
======= ======== ======= ======= ========
42
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.
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.
43
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding demand for our products, the expansion of product
offerings geographically or through new applications, the timing and cost of
planned capital expenditures, competitive conditions and general economic
conditions. These assumptions could prove inaccurate. Forward-looking statements
also involve risks and uncertainties, which could cause actual results that
differ materially from those contained in any forward-looking statement. Many of
these factors are beyond our ability to control or predict. Such factors
include, but are not limited to, the following:
- our substantial leverage and potential inability to service our debt
- our dependence on distributions from our subsidiaries
- risks associated with our international operations and significant
foreign assets
- our dependence on our Israeli operations
- competition in each of our markets
- potential environmental liability
- potential legislation affecting the use of medicated feed additives
- extensive regulation by numerous government authorities in the United
States and other countries
- our reliance on the continued operation and sufficiency of our
manufacturing facilities
- our reliance upon unpatented trade secrets
- the risks of legal proceedings and general litigation expenses
- potential operating hazards and uninsured risks
- the risk of work stoppages
- our dependence on key personnel
See also the discussion under "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
44
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.
(b) As of the end of the period covered by this Report there have been no
changes in our internal controls 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.
45
PART II -- OTHER INFORMATION
Item 5. Other Information
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1(a) Certificate of Amendment of Certificate of Incorporation of Phibro
Animal Health Corporation, dated February 28, 2005 (previously
filed as an Exhibit to the Company's Current Report on Form 8-K
dated February 28, 2005).
4.2.3 Third Supplemental Indenture, dated as of March 10, 2005, by and
among Phibro Animal Health Corporation and Philipp Brothers
Netherlands III B.V., as Issuers, the Guarantors named therein,
and HSBC Bank USA, National Association as Trustee and Collateral
Agent.
10.39 Redemption Agreement, dated as of February 28, 2005, among the
Company, PAHC Holdings Corporation, Palladium Capital Management,
L.L.C., Palladium Equity Partners II, L.P., Palladium Equity
Partners II-A, L.P., Palladium Equity Investors II, L.P., Jack C.
Bendheim and Marvin S. Sussman (previously filed as an Exhibit
to the Company's Current Report on Form 8-K dated February 28,
2005).
10.40 Agreement for the Sale and Purchase of the Entire Share Capital in
Wychem Limited dated as of April 29, 2005 among Ferro Metal and
Chemical Corporation Limited, Koffolk (1949) Limited and MRG
Holdings Limited.
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.
32 Section 1350 Certifications of Phibro Animal Health Corporation.
(b) Reports on Form 8-K
On February 15, 2005, the Company furnished a report on Form 8-K reporting
items 7.01 and 9.01.
On March 3, 2005, the Company furnished a report on Form 8-K reporting
items 1.01, 1.02 and 9.01.
On March 8, 2005, the Company furnished a report on Form 8-K reporting
items 7.01 and 9.01.
46
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: May 16, 2005 By: /s/ JACK C. BENDHEIM
------------------------------------
JACK C. BENDHEIM
CHAIRMAN OF THE BOARD
Date: May 16, 2005 By: /S/ GERALD K. CARLSON
------------------------------------
GERALD K. CARLSON
CHIEF EXECUTIVE OFFICER
Date: May 16, 2005 By: /s/ RICHARD G. JOHNSON
------------------------------------
RICHARD G. JOHNSON
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
47
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1(a) Certificate of Amendment of Certificate of Incorporation of Phibro
Animal Health Corporation, dated February 28, 2005 (previously
filed as an Exhibit to the Company's Current Report on Form 8-K
dated February 28, 2005).
4.2.3 Third Supplemental Indenture, dated as of March 10, 2005, by and
among Phibro Animal Health Corporation and Philipp Brothers
Netherlands III B.V., as Issuers, the Guarantors named therein,
and HSBC Bank USA, National Association as Trustee and Collateral
Agent.
10.39 Redemption Agreement, dated as of February 28, 2005, among the
Company, PAHC Holdings Corporation, Palladium Capital Management,
L.L.C., Palladium Equity Partners II, L.P., Palladium Equity
Partners II-A, L.P., Palladium Equity Investors II, L.P., Jack C.
Bendheim and Marvin S. Sussman (previously filed as an Exhibit
to the Company's Current Report on Form 8-K dated February 28,
2005).
10.40 Agreement for the Sale and Purchase of the Entire Share Capital in
Wychem Limited dated as of April 29, 2005 among Ferro Metal and
Chemical Corporation Limited, Koffolk (1949) Limited and MRG
Holdings Limited.
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.
32 Section 1350 Certifications of Phibro Animal Health Corporation.