-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VONSJLK1YmSiUdYpuRAM6J7pNbuZx0CL9J7LWaFOzQqZdumIj014wBCO1vGFcqJT x4NQsOv0pGZ6483fTwL7EA== 0000950123-05-002015.txt : 20050218 0000950123-05-002015.hdr.sgml : 20050218 20050218164805 ACCESSION NUMBER: 0000950123-05-002015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050218 DATE AS OF CHANGE: 20050218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO ANIMAL HEALTH CORP CENTRAL INDEX KEY: 0001069899 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 131840497 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-64641 FILM NUMBER: 05628122 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKET PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 FORMER COMPANY: FORMER CONFORMED NAME: PHILIPP BROTHERS CHEMICALS INC DATE OF NAME CHANGE: 19980908 10-Q 1 y05801e10vq.txt PHIBRO ANIMAL HEALTH CORP. ================================================================================ 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 December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________. Commission File Number 333-64641 ------------------------------------------------- PHIBRO ANIMAL HEALTH CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 13-1840497 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 65 Challenger Road, Ridgefield Park, New Jersey 07660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (201) 329-7300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ---------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]* No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of each class of common stock outstanding as of December 31, 2004: Class A Common Stock, $.10 par value: 12,600.00 Class B Common Stock, $.10 par value: 11,888.50 * By virtue of Section 15(d) of the Securities Act of 1934, the Registrant is not subject to such filing requirements and not required to file this Quarterly Report, but has provided all such reports as if so required during the preceding 12 months. ================================================================================ PHIBRO ANIMAL HEALTH CORPORATION TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION (Unaudited) Item 1. Condensed Consolidated Financial Statements............................................. 3 Condensed Consolidated Balance Sheets................................................. 4 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)....... 5 Condensed Consolidated Statements of Changes in Stockholders' Deficit................. 6 Condensed Consolidated Statements of Cash Flows....................................... 7 Notes to Condensed Consolidated Financial Statements.................................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 40 Item 4. Controls and Procedures................................................................. 40 PART II OTHER INFORMATION Item 5. Other Information..................................................................... 42 Item 6. Exhibits.............................................................................. 42 SIGNATURES ............................................................................................. 43
2 This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2004 and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this Form 10-Q under the caption "Certain Factors Affecting Future Operating Results." Unless the context otherwise requires, references in this report to the "Company" or to "we" or "our" refers to Phibro Animal Health Corporation and/or one or more of its subsidiaries, as applicable. PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In Thousands)
DECEMBER 31, JUNE 30, 2004 2004 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 10,170 $ 5,568 Trade receivables, less allowance for doubtful accounts of $1,307 at December 31, 2004 and $1,358 at June 30, 2004 56,875 57,658 Other receivables 4,470 2,766 Inventories 97,604 79,910 Prepaid expenses and other current assets 6,914 8,688 --------- --------- TOTAL CURRENT ASSETS 176,033 154,590 PROPERTY, PLANT AND EQUIPMENT, net 61,111 58,786 INTANGIBLES 11,116 11,695 OTHER ASSETS 16,790 16,298 --------- --------- $ 265,050 $ 241,369 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Cash overdraft $ 1,787 $ 891 Loans payable to banks 297 10,996 Current portion of long-term debt 4,082 1,351 Accounts payable 46,368 46,972 Accrued expenses and other current liabilities 47,809 40,010 --------- --------- TOTAL CURRENT LIABILITIES 100,343 100,220 LONG-TERM DEBT 178,630 158,018 OTHER LIABILITIES 23,340 22,286 --------- --------- TOTAL LIABILITIES 302,313 280,524 --------- --------- COMMITMENTS AND CONTINGENCIES REDEEMABLE SECURITIES: Series C preferred stock 22,817 24,678 --------- --------- STOCKHOLDERS' DEFICIT: Series A preferred stock 521 521 Common stock 2 2 Paid-in capital 860 860 Accumulated deficit (62,844) (57,964) Accumulated other comprehensive income (loss): Gain on derivative instruments 331 9 Cumulative currency translation adjustment 1,050 (7,261) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (60,080) (63,833) --------- --------- $ 265,050 $ 241,369 ========= =========
See notes to unaudited Condensed Consolidated Financial Statements 4 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In Thousands)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 --------- --------- --------- --------- NET SALES $ 93,060 $ 92,540 $ 181,335 $ 177,490 COST OF GOODS SOLD (includes Belgium Plant Transactions costs of $9,536 for the three months and six months ended December 31, 2004) 79,191 69,991 144,844 133,781 --------- --------- --------- --------- GROSS PROFIT 13,869 22,549 36,491 43,709 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,759 16,824 34,353 32,609 --------- --------- --------- --------- OPERATING INCOME (LOSS) (3,890) 5,725 2,138 11,100 OTHER: Interest expense 5,389 4,549 10,635 8,482 Interest (income) (33) 168 (58) (74) Other (income) expense, net (791) 127 (767) (458) Net (gain) on extinguishment of debt -- (23,226) -- (23,226) --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (8,455) 24,107 (7,672) 26,376 PROVISION (BENEFIT) FOR INCOME TAXES (884) 2,880 40 3,663 --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS (7,571) 21,227 (7,712) 22,713 DISCONTINUED OPERATIONS: Gain (loss) from discontinued operations (net of income taxes) -- 59 -- (403) Gain on disposal of discontinued operations (net of income taxes) -- -- -- 231 --------- --------- --------- --------- NET INCOME (LOSS) (7,571) 21,286 (7,712) 22,541 OTHER COMPREHENSIVE INCOME: Change in derivative instruments, net of tax 247 102 322 419 Change in currency translation adjustment 5,304 3,031 8,311 2,172 --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ (2,020) $ 24,419 $ 921 $ 25,132 ========= ========= ========= ========= NET INCOME (LOSS) (7,571) 21,286 (7,712) 22,541 Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions 973 20,138 973 20,138 Dividends and equity value accreted on Series B and C redeemable preferred stock 2,541 (2,864) 1,859 (3,851) --------- --------- --------- --------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (4,057) $ 38,560 $ (4,880) $ 38,828 ========= ========= ========= =========
See notes to unaudited Condensed Consolidated Financial Statements 5 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) For the Three Months and Six Months Ended December 31, 2004 (In Thousands)
COMMON ACCUMULATED PREFERRED STOCK OTHER STOCK ---------------- PAID-IN ACCUMULATED COMPREHENSIVE SERIES A CLASS A CLASS B CAPITAL DEFICIT INCOME (LOSS) TOTAL --------- ------- ------- ------- ----------- ------------- --------- Balance, June 30, 2004 $ 521 $ 1 $ 1 $ 860 $ (57,964) $ (7,252) $ (63,833) Dividends on Series C redeemable preferred stock (668) (668) Equity value accreted on Series C redeemable preferred stock (14) (14) Change in derivative instruments, net of tax 75 75 Foreign currency translation adjustment 3,007 3,007 Net (loss) (141) (141) --------- ------- ------- ------- ---------- ------------ --------- Balance, September 30, 2004 $ 521 $ 1 $ 1 $ 860 $ (58,787) $ (4,170) $ (61,574) ========= ======= ======= ======= ========== ============= ========= Excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions 973 973 Dividends on Series C redeemable preferred stock (667) (667) Equity value accreted on Series C redeemable preferred stock 3,208 3,208 Change in derivative instruments, net of tax 247 247 Foreign currency translation adjustment 5,304 5,304 Net (loss) (7,571) (7,571) --------- ------- ------- ------- ---------- ------------ --------- Balance, December 31, 2004 $ 521 $ 1 $ 1 $ 860 $ (62,844) $ 1,381 $ (60,080) ========= ======= ======= ======= ========== ============ =========
See notes to unaudited Condensed Consolidated Financial Statements 6 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
SIX MONTHS ENDED DECEMBER 31, 2004 2003 --------- --------- OPERATING ACTIVITIES: Net income (loss) $ (7,712) $ 22,541 Adjustment for discontinued operations -- 172 --------- --------- Income (loss) from continuing operations (7,712) 22,713 Adjustments to reconcile income (loss) from continuing operations to net cash used by operating activities: Depreciation and amortization (includes accelerated depreciation from the Belgium Plant Transactions of $533 for the six months ended December 31, 2004) 7,308 6,544 Deferred income taxes (172) 93 Net gain on extinguishment of debt -- (23,226) Effects of changes in foreign currency (1,174) (1,166) Other 366 589 Changes in operating assets and liabilities: Accounts receivable 1,518 (2,132) Inventories (11,641) (1,499) Prepaid expenses and other current assets 1,456 705 Other assets 316 605 Accounts payable (1,600) (6,749) Accrued expenses and other liabilities (913) 4,516 Accrued costs of non-completed transaction (1,893) -- Accrued costs of the Belgium Plant Transactions 9,003 -- Cash used by discontinued operations -- (1,665) --------- --------- NET CASH USED BY OPERATING ACTIVITIES (5,138) (672) --------- --------- INVESTING ACTIVITIES: Capital expenditures (3,676) (2,280) Proceeds from sale of assets 40 23 Discontinued operations -- 14,397 --------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (3,636) 12,140 --------- --------- FINANCING ACTIVITIES: Net increase in cash overdraft 896 2,204 Net decrease in short-term debt (10,699) (31,453) Proceeds from long-term debt 26,100 107,500 Payments of long-term debt (1,862) (34,020) Payment of Pfizer obligations -- (28,300) Payments relating to the Prince Transactions and transaction costs -- (19,979) Debt refinancing costs (1,550) (11,496) Discontinued operations -- 1,391 --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 12,885 (14,153) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 491 188 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,602 (2,497) CASH AND CASH EQUIVALENTS at beginning of period 5,568 11,179 --------- --------- CASH AND CASH EQUIVALENTS at end of period $ 10,170 $ 8,682 ========= =========
See notes to unaudited Condensed Consolidated Financial Statements 7 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 1. GENERAL PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: In the opinion of Phibro Animal Health Corporation (the "Company" or "PAHC"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly its financial position as of December 31, 2004 and its results of operations and cash flows for the three months and six months ended December 31, 2004 and 2003. The condensed consolidated balance sheet as of June 30, 2004 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Additionally it should be noted the accompanying condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting standards appropriate for interim financial statements. While the Company believes the disclosures presented are adequate to make the information contained herein not misleading, these financial statements should be read in conjunction with the Company's audited consolidated financial statements as found in the Company's annual report filed on Form 10-K for the year ended June 30, 2004. The Company's Mineral Resource Technologies, Inc. ("MRT") and La Cornubia S.A. (France) ("La Cornubia") businesses have been classified as discontinued operations as discussed in these notes to condensed consolidated financial statements. The Company's condensed consolidated financial statements have been reclassified to report separately the financial position, operating results and cash flows of the discontinued operations. These footnotes present information only for continuing operations, unless otherwise noted. The results of operations for all interim periods presented may not be indicative of results for the full year. NEW ACCOUNTING PRONOUNCEMENTS: The Company will adopt the following new accounting pronouncements during 2005: Statement of Financial Accounting Standards No. 151, "Inventory Costs, an amendment to Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated "...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges....". SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal". In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 30, 2005 and the provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement. Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after December 2004. The provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement. 8 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) Statement of Financial Accounting Standards No. 123, "Share-Based Payment (revised 2004)" ("SFAS No. 123"). This Statement is a revision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" and supercedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS No. 123 as originally issued, and it does not address the accounting for employee share ownership plans. This Statement applies to all awards granted after the effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. SFAS No. 123, as revised, is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently assessing the impact of this statement. 2. RISKS, UNCERTAINTIES, AND LIQUIDITY The Company's ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company expects adequate liquidity throughout 2005, with periods of reduced availability around the dates of the semi-annual interest payments due June 1 and December 1 related to its Senior Secured Notes and Senior Subordinated Notes. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that likely would be available. There can be no assurance the Company will be successful in any of the above-noted actions. The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain of the Company's products are subject to extensive regulation by numerous government authorities in the United States and other countries. The Company has significant assets located outside of the United States, and a significant portion of the Company's sales and earnings are attributable to operations conducted abroad. The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company. The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. 9 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 3. REFINANCING ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES: On December 21, 2004, the Company completed a private placement pursuant to which the Company and Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of the Company (the "Dutch Issuer" and together with the Company, the "Issuers") issued and sold 22,491 additional units consisting of $18,207 13% Senior Secured Notes due 2007 of the Company (the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 of the Dutch Issuer (the "Dutch Notes" and together with the U.S. Notes, the "Additional Notes"), from which they received gross proceeds of $23,391. The proceeds were used to refinance indebtedness outstanding under the Company's domestic senior credit facility. The Company incurred financing costs of $2,275 in connection with the issuance of the Additional Notes. The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the "Indenture") under which the Issuers previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes. On January 14, 2005, the Company and its domestic subsidiaries filed a registration statement with the Securities and Exchange Commission (the "SEC") on Form S-4 with respect to an exchange offer for all its senior secured notes, comprised of 105,000 units sold on October 21, 2003 and 22,491 additional units sold on December 21, 2004. On February 4, 2005, such registration statement was declared effective. AMENDMENT TO THE DOMESTIC SENIOR CREDIT FACILITY: On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, the Company amended its domestic senior credit facility to: (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26,800 for purposes of calculating a certain financial covenant; (ii) amend the Indenture reserve definition to include scheduled payments of interest due on the Additional Notes; (iii) amend the maximum aggregate amount of borrowing available under the working capital facility to permit a temporary increase to $22,500 and for its reduction to $17,500 on such borrowings being refinanced by the proceeds of the Additional Notes; (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to Philipp Brothers Brasil Holdings Ltda, ("PAH Brazil") or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the sale of the Belgium Plant and related transactions. 10 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 4. BELGIUM PLANT TRANSACTIONS On December 16, 2004, Phibro Animal Health SA, ("PAH Belgium") entered into an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of PAH Belgium's facilities in Rixensart, Belgium (the "Belgium Plant"). Such sale, when completed (the "Belgium Plant Transactions"), will include the following elements (U.S. dollar amounts at the December 31, 2004 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of PAH Belgium for a purchase price of EUR 6,200 ($8,394), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 700 ($948) for such cleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1,500 ($2,031) within six months from the closing date, EUR 1,500 ($2,031) within eighteen months from the closing date, EUR 1,500 ($2,031) within thirty months from the closing date, and EUR 500 ($677) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 400 ($542)) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 9,100 ($12,320), of which an amount estimated to be approximately EUR 4,600 ($6,227) would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 4,500 ($6,092) would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining any or all equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to PAH Brazil which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur on November 30, 2005, but in no event earlier than July 1, 2005 or later than June 30, 2006. The Dutch Notes and related guarantees are collateralized by a mortgage on the Belgium Plant which will be released in connection with the closing of the sale of the Belgium Plant to GSK. As a result of the above agreement, the Company will depreciate the Belgium plant to its estimated salvage value of EUR 2,470 ($3,344) as of the projected closing date of November 30, 2005. The Company recorded incremental depreciation expense of EUR 394 ($533) in December 2004 and will record an additional EUR 8,662 ($11,727) of incremental depreciation expense ratably through November 2005. The Company recorded severance expense of EUR 6,650 ($9,003) in December 2004 for the estimated minimum severance amounts indicated by law, contract, and/or past practice. The Company estimates it will record additional expense of EUR 2,450 ($3,317) ratably through November 2005 for severance, retention agreements and other costs. The incremental depreciation expense of $533 and severance expense of $9,003 recorded in December 2004 are included in cost of goods sold on the Company's condensed consolidated statements of operations and comprehensive income (loss). The Company has determined that the carrying amount of the Belgium Plant at December 31, 2004 is recoverable based on the estimated future cash flows arising from the use of the assets. In anticipation of transferring production of virginiamycin from the Belgium plant to an alternative production location, the Company has been increasing inventory levels of virginiamycin to ensure adequate supplies during the transfer period. At December 31, 2004 virginiamycin inventories were approximately $40,000 and are expected to continue to increase through November 2005, based on current production rates. 11 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 5. HOLDING COMPANY AND HOLDCO NOTES During January 2005, PAHC Holdings Corporation ("PAHC Holdings") was formed to hold the capital stock of the Company, except for its Series C Preferred Stock. On February 10, 2005, PAHC Holdings issued $29,000 of its 15% Senior Secured Notes due 2010 (the "HoldCo Notes") in a private placement. Interest is payable at the option of PAHC Holdings in cash or pay-in-kind HoldCo Notes. The Company is not obligated for the HoldCo Notes. The Company's ability to make payments to PAHC Holdings is subject to the terms of the Company's Senior Secured Notes, its Senior Subordinated Notes, and its domestic senior credit facility, and to applicable law. The proceeds from the sale of the HoldCo Notes, upon release from escrow, will be used, directly or indirectly, to redeem the Company's Series C Preferred Stock either by PAHC Holdings (i) making a capital contribution to the Company to contemporaneously finance the redemption of the Company's Series C Preferred Stock, or (ii) purchasing a new series of the Company's preferred stock, referred to as Series D Preferred Stock, that may be issued by the Company to finance the redemption of the Company's Series C Preferred Stock. It is contemplated that such redemption will occur on or before February 28, 2005. On March 1, 2005, the applicable percentage for determining the equity value component of the redemption price increases, as currently provided in the Company's certificate of incorporation, from 18% to 22%. If on March 1, 2005, the Company has not redeemed its Series C Preferred Stock from escrow, PAHC Holdings will be required to redeem the HoldCo Notes, primarily with the proceeds of the HoldCo Notes placed in escrow. PAHC Holdings was formed by the holders of all of the Company's capital stock, other than the holders of Series C Preferred Stock. In particular, Jack Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his family exchanged all of their shares of Series A Preferred Stock and Class B Common Stock and Mr. Bendheim exchanged fifty percent (50%) of his shares of Class A Common Stock, for the same number and class of shares of PAHC Holdings, having the same designations, relative rights, privileges and limitations as the Company's shares of such class (except to the extent that PAHC Holdings is a Delaware corporation and the Company is a New York corporation). The HoldCo Notes are to be secured by all of PAHC Holdings' assets (now consisting solely of the Company's capital stock and, until disbursed, the proceeds of the HoldCo Notes in escrow). Currently, such pledge covers all of the Company's Series A Preferred Stock and Class B Common Stock, the Company's non-voting classes of stock. In connection with the release of the proceeds of the HoldCo Notes from escrow and following the redemption of the Company's Series C Preferred Stock, Mr. Bendheim will contribute to PAHC Holdings the balance of the Company's outstanding Class A Common Stock, and all of the Company's outstanding Class A Common Stock, the Company's voting stock, will be pledged as security for the HoldCo Notes. 6. PRINCE TRANSACTIONS Effective December 26, 2003, the Company completed the divestiture of substantially all of the business and assets of Prince Quincy, Inc. (f/k/a The Prince Manufacturing Company ("PMC")), to a company ("Buyer") formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"), and the related reduction of the Company's preferred stock held by the Palladium Investors (collectively, the "Prince Transactions"). The divestiture of PMC has not been reflected as a discontinued operation due to the existence of the Backstop Indemnification Amount and continuing supply and service agreements. On December 29, 2004, the Company and the Buyer reached agreement regarding the post-closing working capital adjustment, which resulted in a final $227 payment to the Company from the Buyer. The Company reassessed the accruals relating to the Prince Transactions and adjusted the accruals accordingly. The adjustments resulted in a net gain of $973 which was recorded as a decrease to accumulated deficit on the Company's condensed consolidated balance sheet as of December 31, 2004. 12 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) PMC is included in the Company's Industrial Chemicals segment. The results of operations of PMC were:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, 2003 DECEMBER 31, 2003 ------------------ ----------------- Net sales $5,435 $11,118 Operating income 1,065 2,278 Depreciation and amortization 244 487
7. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined principally under the first-in, first-out (FIFO) and average methods. Obsolete and unsaleable inventories are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of:
AS OF -------------------------------------- DECEMBER 31, 2004 JUNE 30, 2004 ----------------- ------------- Raw materials $21,349 $16,313 Work-in-process 1,782 1,764 Finished goods 74,473 61,833 ------- ------- Total inventory $97,604 $79,910 ======= =======
8. INTANGIBLES Product intangible cost arising from the acquisition of the medicated feed additive business of Pfizer, Inc. and the acquisition of the rights to sell amprolium was $15,033 and $14,925 at December 31, 2004 and June 30, 2004, respectively, with related accumulated amortization of $3,917 and $3,230 at December 31, 2004 and June 30, 2004, respectively. Amortization expense was $375 and $304 for the three months ended December 31, 2004 and 2003, respectively, and $746 and $608 for the six months ended December 31, 2004 and 2003, respectively. 9. DISCONTINUED OPERATIONS The Company divested MRT and shutdown La Cornubia during fiscal 2004. These businesses have been classified as discontinued operations. Operating results and gain on sale of MRT were:
SIX MONTHS ENDED DECEMBER 31, 2003 ----------------- OPERATING RESULTS: Net sales $ 3,327 Cost of goods sold 3,135 Selling, general and administrative expenses 316 -------- Loss before income taxes (124) Provision for income taxes - -------- Loss from operations $ (124) ======== GAIN ON SALE: Current assets $ (5,813) Property, plant & equipment - net and other assets (10,703) Current liabilities 2,911 Net proceeds of sale 13,836 -------- Gain on sale $ 231 ========
13 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) Operating results of La Cornubia were:
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, 2003 DECEMBER 31, 2003 ------------------ ----------------- OPERATING RESULTS: Net sales $ 3,503 $ 5,723 Cost of goods sold 3,199 5,415 Selling, general and administrative expenses 412 788 Other (income) (193) (243) Interest expense 26 42 ------- ------- Income (loss) before income taxes 59 (279) Provision for income taxes - - Income (loss) from operations ------- ------- $ 59 $ (279) ======= ======= Depreciation and amortization $ 101 $ 201 ======= =======
10. DEBT LOANS PAYABLE TO BANKS At December 31, 2004, loans payable to banks included $297 under the domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted average interest rate at December 31, 2004 was 5.75%. At December 31, 2004, the Company had $17,203 of borrowings available under the working capital facility that is provided under the domestic senior credit facility. As of September 24, 2004, the Company amended its domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27,500 to $32,500; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5,300 for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336; and (v) establish EBITDA covenant levels for the periods after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for item (v). On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, the Company amended its domestic senior credit facility to: (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26,800 for purposes of calculating a certain financial covenant; (ii) amend the Indenture reserve definition to include scheduled payments of interest due on the Additional Notes; (iii) amend the maximum aggregate amount of borrowing available under the working capital facility to permit a temporary increase to $22,500 and for its reduction to $17,500 on such borrowings being refinanced by the proceeds of the Additional Notes; (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to Philipp Brothers Brasil Holdings Ltda, ("PAH Brazil") or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the sale of the Belgium Plant and related transactions. 14 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) As of December 31, 2004, the Company was in compliance with the financial covenants of its domestic senior credit facility. The domestic senior credit facility requires, among other things, the maintenance of certain levels of trailing consolidated and domestic EBITDA (earnings before interest, taxes, depreciation and amortization) calculated on a monthly basis, and an acceleration clause should an event of default (as defined in the agreement) occur. In addition, there are certain restrictions on additional borrowings, additional liens on the Company's assets, guarantees, dividend payments, redemption or purchase of the Company's stock, sale of subsidiaries' stock, disposition of assets, investments, and mergers and acquisitions. The domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the consolidated balance sheet. LONG-TERM DEBT
As of ----------------------------------------- December 31, 2004 June 30, 2004 ----------------- ------------- Senior secured notes due December 1, 2007 $127,491 $105,000 Senior subordinated notes due June 1, 2008 48,029 48,029 Foreign bank loans 7,192 6,237 Capitalized lease obligations and other - 103 -------- -------- 182,712 159,369 Less: current maturities $ 4,082 $ 1,351 -------- -------- 178,630 158,018 ======== ========
The Company's foreign subsidiaries have aggregate credit lines of $11,075. At December 31, 2004, the Company had $3,883 of borrowings available under these credit lines. 11. EMPLOYEE BENEFIT PLANS The Company and its domestic subsidiaries maintain noncontributory defined benefit pension plans for all eligible domestic nonunion employees who meet certain requirements of age, length of service and hours worked per year. The Company's Belgium subsidiary maintains a defined contribution and defined benefit plan for eligible employees. Components of net periodic pension expense were:
Three Months Ended Six Months Ended December 31, December 31, DOMESTIC PENSION EXPENSE 2004 2003 2004 2003 ----- ----- ----- ----- Service cost - benefits earned during the year $ 337 $ 321 $ 624 $ 683 Interest cost on benefit obligation 315 226 479 456 Expected return on plan assets (308) (210) (458) (420) Amortization of initial unrecognized net transition (asset) (2) (1) (2) (2) Amortization of prior service costs (55) (41) (72) (82) Amortization of net actuarial loss (gain) (2) 5 - 21 Curtailment Benefit - (64) - (64) ----- ----- ----- ----- $ 285 $ 236 $ 571 $ 592 NET PERIODIC PENSION COST - DOMESTIC ===== ===== ===== =====
15 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, INTERNATIONAL PENSION EXPENSE 2004 2003 2004 2003 ----- ----- ----- ----- Service cost - benefits earned during the year $ 114 $ 117 $ 236 $ 227 Interest cost on benefit obligation 111 94 209 182 Expected return on plan assets (100) (75) (179) (146) Amortization of net actuarial loss (gain) (5) 5 1 11 ----- ----- ----- ----- NET PERIODIC PENSION COST - INTERNATIONAL $ 120 $ 141 $ 267 $ 274 ===== ===== ===== =====
12. CONTINGENCIES LITIGATION: On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and the Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in the United States District Court for the District of New Jersey, alleging that the operations of CP at its Sewaren plant affected adjoining property owned by Chevron and alleging that the Company, as the parent of CP, is also responsible to Chevron. In July 2002, a phased settlement agreement was reached and a Consent Order entered by the Court. That settlement is in the process of being implemented. The Company's and CP's portion of the settlement for past costs and expenses through the entry of the Consent Order was $495 and was included in selling, general and administrative expenses in fiscal 2002 and was paid in fiscal 2003. The Consent Order then provides for a period of due diligence investigation of the property owned by Chevron. The investigation has been conducted and the results are under review. The investigation costs are being split with one other defendant, Vulcan Materials Company. Upon completion of the review of the results of the investigation, a decision will be made whether to opt out of the settlement or proceed. If no party opts out of the settlement, the Company and CP will take title to the adjoining Chevron property, probably through the use of a three-member New Jersey limited liability company. In preparation to move forward, a limited liability company has been formed, with Vulcan Materials Company as the third member. The Company also has commenced negotiations with Chevron regarding its allocation of responsibility and associated costs under the Consent Order. While the costs cannot be estimated with any degree of certainty at this time, the Company believes that insurance recoveries will be available to offset some of those costs. The Company's Phibro-Tech subsidiary was named in 1993 as a potentially responsible party ("PRP") in connection with an action commenced under the Federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") by the United States Environmental Protection Agency ("the EPA"), involving a former third-party fertilizer manufacturing site in Jericho, South Carolina. An agreement has been reached under which such subsidiary agreed to contribute up to $900 of which $635 has been paid as of December 31, 2004. Some recovery from insurance and other sources is expected but has not been recorded. The Company also has accrued its best estimate of any future costs. Phibro-Tech, Inc. has resolved certain alleged technical permit violations with the California Department of Toxic Substances Control ("DTSC") and has reached an agreement to pay $425 over a six year period ending October 2008. The annual payments required under this agreement are not expected to have any material adverse impact on the Company. Phibro-Tech, Inc. and the DTSC are currently negotiating the settlement of certain alleged technical permit violations from 2003. Phibro-Tech, Inc. believes most, if not all, of the alleged violations will be withdrawn. In the event penalties are assessed, they are not expected to exceed $50. In February 2000, the EPA notified numerous parties of potential liability for waste disposal at a licensed Casmalia, California disposal site, including a business, assets of which were originally acquired by a subsidiary in 1984. A settlement has been reached in this matter and the Company has paid $171 in full settlement. 16 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) On or about April 5, 2002, the Company was served, as a potentially responsible party, with an information request from the EPA relating to a third-party superfund site in Rhode Island. The Company has investigated the matter, which relates to events in the 1950's and 1960's, and management does not believe that the Company has any liability in this matter. On or about August 13, 2004 the Company was served with a Request for Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating to possible discharges into Turkey Creek in Sumter, South Carolina. The Company is preparing its response to the Request for Information and believes that, because its Sumter, South Carolina facility is distant from Turkey Creek and does not discharge into Turkey Creek, the likelihood of liability associated with this matter is remote. The Company and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. The Company believes that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on its financial position or results of operations. ENVIRONMENTAL REMEDIATION: The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. Under certain circumstances, the Company or any of its subsidiaries might be required to curtail operations until a particular problem is remedied. Known costs and expenses under environmental laws incidental to ongoing operations are generally included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under environmental laws or to investigate or remediate potential or actual contamination and from time to time the Company establishes reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under environmental laws and the time period during which such costs are likely to be incurred are difficult to predict. The Company's subsidiaries have, from time to time, implemented procedures at their facilities designed to respond to obligations to comply with environmental laws. The Company believes that its operations are currently in material compliance with such environmental laws, although at various sites its subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with their historic operations. The nature of the Company's and its subsidiaries' current and former operations exposes the Company and its subsidiaries to the risk of claims with respect to environmental matters and the Company cannot assure it will not incur material costs and liabilities in connection with such claims. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not have a material adverse effect on the Company's financial position. Based upon information available, the Company estimates the cost of litigation proceedings described above and the cost of further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites to be approximately $2,777, which is included in current and long-term liabilities in the December 31, 2004 condensed consolidated balance sheet (approximately $2,933 at June 30, 2004). 13. GUARANTEES As part of the Prince Transactions (as discussed in these notes to condensed consolidated financial statements), as is normal for such transactions, the Company has agreed to indemnify the Palladium Investors for losses arising out of breach of representations, warranties and covenants. The Company's maximum liability under such indemnification is limited to $15,000. 17 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of the Buyer for less than $21,000, up to a maximum payment by the Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop Indemnification Amount would be payable on the earlier to occur of July 1, 2008 or six months after the redemption date of all of the Company's Senior Secured Notes due 2007 if such a disposition closes prior to such redemption and six months after the closing of any such disposition if the disposition closes after any such redemption. The Company's obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of the Buyer by January 1, 2009. The maximum potential Backstop Indemnification Amount is included in other liabilities on the Company's condensed consolidated balance sheet. The Company established a $1,000 letter of credit escrow for two years to collateralize certain indemnification obligations relating to the Prince Transactions. 14. BUSINESS SEGMENTS The Company's reportable segments are Animal Health and Nutrition, Industrial Chemicals, Distribution and All Other. Reportable segments have been determined primarily on the basis of the nature of products and services and certain similar operating units have been aggregated. The Company's Animal Health and Nutrition segment manufactures and markets more than 500 formulations and concentrations of medicated feed additives and nutritional feed additives including antibiotics, antibacterials, anticoccidials, anthelmintics, trace minerals, vitamins, vitamin premixes and other animal health and nutrition products. The Industrial Chemicals segment manufactures and markets a number of chemicals for use in the pressure-treated wood, chemical catalyst, semiconductor, automotive, and aerospace industries. The Distribution segment markets and distributes a variety of industrial, specialty and fine organic chemicals and intermediates produced primarily by third parties. The All Other segment manufactures and markets a variety of specialty custom chemicals and copper-based fungicides. Intersegment sales and transfers were not significant. The following segment data includes information only for continuing operations.
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE & THREE MONTHS ENDED DECEMBER 31, 2004 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL --------- ---------- ------------ ------- ----------- -------- Net sales $ 70,708 $7,686 $8,104 $ 6,562 $ - $ 93,060 Operating income (loss) (1,520) 655 796 455 (4,276) (3,890) Depreciation and amortization 2,705 413 6 104 725 3,953
The Animal Health and Nutrition segment includes Belgium Plant Transactions costs of $9,003 of severance expense and $533 of depreciation expense.
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE & THREE MONTHS ENDED DECEMBER 31, 2003 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL --------- ---------- ------------ ------ ----------- ------- Net sales $68,687 $11,679 $7,656 $4,518 $ - $92,540 Operating income (loss) 7,655 778 692 657 (4,057) 5,725 Depreciation and amortization 2,059 639 4 98 576 3,376
18
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE & SIX MONTHS ENDED DECEMBER 31, 2004 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL --------- ---------- ------------ ------ ----------- ------- Net sales $136,514 $16,079 $15,765 $ 12,977 $ - $181,335 Operating income/(loss) 6,295 1,428 1,660 1,160 (8,405) 2,138 Depreciation and amortization 4,900 816 8 204 1,380 7,308
The Animal Health and Nutrition segment includes Belgium Plant Transactions costs of $9,003 of severance expense and $533 of depreciation expense.
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE & SIX MONTHS ENDED DECEMBER 31, 2003 NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL --------- ---------- ------------ ------ ----------- ------- Net sales $128,528 $23,661 $15,595 $ 9,706 $ - $177,490 Operating income/(loss) 14,555 1,600 1,533 1,326 (7,914) 11,100 Depreciation and amortization 4,088 1,288 7 213 948 6,544
ANIMAL IDENTIFIABLE ASSETS OF HEALTH & INDUSTRIAL ALL CORPORATE & CONTINUING OPERATIONS NUTRITION CHEMICALS DISTRIBUTION OTHER OTHER TOTAL --------- ---------- ------------ ------ ----------- ------- At December 30, 2004 $209,126 $26,123 $7,775 $5,946 $16,080 $265,050 At June 30, 2004 185,601 26,146 7,715 5,696 16,211 241,369
15. CONSOLIDATING FINANCIAL STATEMENTS The units of Senior Secured Notes due 2007, consisting of US Senior Notes issued by the Company (the "Parent Issuer") and Dutch Senior Notes issued by Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are guaranteed by certain subsidiaries. The Company and its U.S. subsidiaries ("U.S. Guarantor Subsidiaries"), excluding PMC, Prince MFG, LLC and MRT (until divested) (the "Unrestricted Subsidiaries", as defined in the indenture), fully and unconditionally guarantee all of the Senior Secured Notes on a joint and several basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally guarantee the Dutch Senior Notes. The Dutch issuer and the Belgium Guarantor do not guarantee the US Senior Notes. Other foreign subsidiaries ("Non-Guarantor Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S. Guarantor Subsidiaries include all domestic subsidiaries of the Company other than the Unrestricted Subsidiaries and include: CP Chemicals, Inc.; Phibro-Tech, Inc.; Prince Agriproducts, Inc.; Phibrochem, Inc.; Phibro Chemicals, Inc.; Western Magnesium Corp.; Phibro Animal Health Holdings, Inc.; and Phibro Animal Health U.S., Inc. The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and unconditionally guarantee the Senior Subordinated Notes on a joint and several basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not presently guarantee the Senior Subordinated Notes. The U.S. Guarantor Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of the Company including: CP Chemicals, Inc.; Phibro-Tech, Inc.; Prince Agriproducts, Inc.; PMC; Prince MFG, LLC; MRT (until divested); Phibrochem, Inc.; Phibro Chemicals, Inc.; Western Magnesium Corp.; Phibro Animal Health Holdings, Inc.; and Phibro Animal Health U.S., Inc. 19 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) The following consolidating financial data summarizes the assets, liabilities and results of operations and cash flows of the Parent Issuer, Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries are directly or indirectly wholly owned as to voting stock by the Company. Investments in subsidiaries are accounted for by the Parent Issuer using the equity method. Income tax expense (benefit) is allocated among the consolidating entities based upon taxable income (loss) by jurisdiction within each group. The principal consolidation adjustments are to eliminate investments in subsidiaries and intercompany balances and transactions. 20 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
U.S. Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13 $ -- $ 968 $ 2 $ 5,369 $ 3,818 $ -- $ 10,170 Trade receivables 2,821 -- 28,004 -- 2,170 23,880 -- 56,875 Other receivables 693 -- 2,066 -- 766 945 -- 4,470 Inventory 2,867 -- 35,276 -- 34,888 24,573 97,604 Prepaid expenses and other 1,360 -- 64 -- 1,516 3,974 -- 6,914 -------- ---- -------- -------- --------- --------- --------- --------- TOTAL CURRENT ASSETS 7,754 -- 66,378 2 44,709 57,190 -- 176,033 -------- ---- -------- -------- --------- --------- --------- --------- Property, plant & equipment, net 743 -- 13,821 -- 17,743 28,804 -- 61,111 Intangibles -- -- 4,039 -- 1,621 5,456 -- 11,116 Investment in subsidiaries 108,057 -- -- (3,728) -- -- (104,329) -- Intercompany 9,366 -- 68,136 26,903 (5,194) (11,407) (87,804) -- Other assets 15,191 -- 1,142 -- -- 457 -- 16,790 -------- ---- -------- -------- --------- --------- --------- --------- $141,111 $ -- $153,516 $ 23,177 $ 58,879 $ 80,500 $(192,133) $ 265,050 ======== ==== ======== ======== ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Cash overdraft $ -- $ -- $ 1,787 $ -- $ -- $ -- $ -- $ 1,787 Loan payable to banks 297 -- -- -- -- -- -- 297 Current portion of long-term debt -- -- -- -- -- 4,082 -- 4,082 Accounts payable 4,011 -- 28,077 -- 2,561 11,719 -- 46,368 Accrued expenses and other 9,397 -- 9,071 217 21,734 7,390 47,809 -------- ---- -------- -------- --------- --------- --------- --------- TOTAL CURRENT LIABILITIES 13,705 -- 38,935 217 24,295 23,191 -- 100,343 -------- ---- -------- -------- --------- --------- --------- --------- Long-term debt 151,236 -- -- 24,284 -- 3,110 -- 178,630 Intercompany debt -- -- -- 2,411 37,881 47,512 (87,804) -- Other liabilities 13,433 -- 5,522 -- 431 3,954 -- 23,340 -------- ---- -------- -------- --------- --------- --------- --------- TOTAL LIABILITIES 178,374 -- 44,457 26,912 62,607 77,767 (87,804) 302,313 -------- ---- -------- -------- --------- --------- --------- --------- REDEEMABLE SECURITIES: Series C preferred stock 22,817 -- -- -- -- -- -- 22,817 -------- ---- -------- -------- --------- --------- --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Series A preferred stock 521 -- -- -- -- -- -- 521 Common stock 2 -- 33 -- -- -- (33) 2 Paid-in capital 860 -- 108,383 21 52 1,537 (109,993) 860 Retained earnings (accumulated deficit) (62,844) -- 610 (10,906) (10,930) 6,997 14,229 (62,844) Accumulated other comprehensive -- income (loss): Gain on derivative instruments 331 -- 331 -- -- -- (331) 331 Cumulative currency translation adjustment 1,050 -- (298) 7,150 7,150 (5,801) (8,201) 1,050 -------- ---- -------- -------- --------- --------- --------- --------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (60,080) -- 109,059 (3,735) (3,728) 2,733 (104,329) (60,080) -------- ---- -------- -------- --------- --------- --------- --------- $141,111 $ -- $153,516 $ 23,177 $ 58,879 $ 80,500 $(192,133) $ 265,050 ======== ==== ======== ======== ========= ========= ========= =========
21 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- NET SALES $ 6,247 $-- $ 57,791 $ -- $ 2,560 $ 26,462 $ -- $ 93,060 NET SALES - INTERCOMPANY 37 -- 38 -- 4,456 2,342 (6,873) -- COST OF GOODS SOLD (includes Belgium Plant Transactions costs of $9,536) 5,034 -- 43,358 -- 16,085 21,587 (6,873) 79,191 -------- --- -------- -------- -------- -------- -------- -------- GROSS PROFIT 1,250 -- 14,471 -- (9,069) 7,217 -- 13,869 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,315 -- 7,393 -- 813 4,238 -- 17,759 -------- --- -------- -------- -------- -------- -------- -------- OPERATING INCOME (LOSS) (4,065) -- 7,078 -- (9,882) 2,979 -- (3,890) OTHER: Interest expense 4,585 -- 2 649 12 141 -- 5,389 Interest (income) (1) -- (4) -- -- (28) -- (33) Other (income) expense, net 3 -- (146) -- (152) (496) -- (791) Intercompany interest and other (6,407) -- 4,937 (656) 942 1,184 -- -- (Profit) loss relating to subsidiaries 5,122 -- -- 9,071 -- -- (14,193) -- -------- --- -------- -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (7,367) -- 2,289 (9,064) (10,684) 2,178 14,193 (8,455) PROVISION (BENEFIT) FOR INCOME TAXES 204 -- 195 -- (1,613) 330 -- (884) -------- --- -------- -------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (7,571) -- 2,094 (9,064) (9,071) 1,848 14,193 (7,571) DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations -- -- -- -- -- -- -- -- (Loss) from discontinued operations (net of income taxes) -- -- -- -- -- -- -- -- Gain (loss) from disposal of discontinued operations (net of income taxes) -- -- -- -- -- -- -- -- -------- --- -------- -------- -------- -------- -------- -------- NET INCOME (LOSS) $ (7,571) $-- $ 2,094 $ (9,064) $ (9,071) $ 1,848 $ 14,193 $ (7,571) ======== === ======== ======== ======== ======== ======== ========
22 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- NET SALES $ 12,176 $-- $ 114,466 $ -- $ 4,228 $ 50,465 $ -- $ 181,335 NET SALES - INTERCOMPANY 93 -- 131 -- 10,660 3,417 (14,301) -- COST OF GOODS SOLD (includes Belgium Plant Transactions costs of $8,287) 9,654 -- 84,992 -- 20,784 43,715 (14,301) 144,844 --------- --- --------- ------- -------- --------- --------- --------- GROSS PROFIT 2,615 -- 29,605 -- (5,896) 10,167 -- 36,491 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,218 -- 14,349 6 1,366 8,414 -- 34,353 --------- --- --------- ------- -------- --------- --------- --------- OPERATING INCOME (LOSS) (7,603) -- 15,256 (6) (7,262) 1,753 -- 2,138 OTHER: Interest expense 8,937 -- -- 1,299 23 376 -- 10,635 Interest (income) (2) -- (4) -- -- (52) -- (58) Other (income) expense, net 4 -- (374) -- (211) (186) -- (767) Intercompany interest and other (13,934) -- 10,386 (1,316) 1,881 2,983 -- -- (Profit) loss relating to subsidiaries 4,590 -- -- 7,504 -- -- (12,094) -- --------- --- --------- ------- -------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (7,198) -- 5,248 (7,493) (8,955) (1,368) 12,094 (7,672) PROVISION (BENEFIT) FOR INCOME TAXES 514 -- 299 -- (1,451) 678 -- 40 --------- --- --------- ------- -------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS (7,712) -- 4,949 (7,493) (7,504) (2,046) 12,094 (7,712) DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations -- -- -- -- -- -- -- -- (Loss) from discontinued operations (net of income taxes) -- -- -- -- -- -- -- -- Gain (loss) from disposal of discontinued operations (net of income taxes) -- -- -- -- -- -- -- -- --------- --- --------- ------- -------- --------- --------- --------- NET INCOME (LOSS) $ (7,712) $-- $ 4,949 $(7,493) $ (7,504) $ (2,046) $ 12,094 $ (7,712) ========= === ========= ======= ======== ========= ========= =========
23 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- OPERATING ACTIVITIES: Net income (loss) $ (7,712) $ -- $ 4,949 $ (7,493) $ (7,504) $ (2,046) $ 12,094 $ (7,712) Adjustment for discontinued operations -- -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations (7,712) -- 4,949 (7,493) (7,504) (2,046) 12,094 (7,712) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization (includes accelerated depreciation from the Belgium Plant Transactions of $533) 1,380 -- 1,435 -- 2,008 2,485 -- 7,308 Deferred income taxes -- -- -- -- -- (172) -- (172) Effects of changes in foreign currency -- -- (411) -- (211) (552) -- (1,174) Other 286 -- 85 -- -- (5) -- 366 Changes in operating assets and liabilities: -- Accounts receivable (156) -- (857) -- 660 1,871 -- 1,518 Inventory (873) -- 3,580 -- (8,513) (5,835) -- (11,641) Prepaid expenses and other 1,512 -- 233 -- (1,029) 740 -- 1,456 Other assets 255 -- (189) -- -- 250 -- 316 Intercompany 1,276 5 (9,084) 3,193 11,918 4,786 (12,094) -- Accounts payable (1,171) 6 (386) -- 47 (96) -- (1,600) Accrued expenses and other 801 (1) 1,170 1 (965) (1,919) -- (913) Accrued costs of non-completed transaction (1,893) -- -- -- -- -- -- (1,893) Accrued costs of the Belgium Plant Transactions -- -- -- -- 9,003 -- -- 9,003 -------- -------- -------- -------- -------- -------- -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (6,295) 10 525 (4,299) 5,414 (493) -- (5,138) -------- -------- -------- -------- -------- -------- -------- -------- INVESTING ACTIVITIES: Capital expenditures (686) -- (1,184) -- (459) (1,347) -- (3,676) Proceeds from sale of assets -- -- 16 -- -- 24 -- 40 Other investing -- -- -- -- (182) 182 -- -- -------- -------- -------- -------- -------- -------- -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (686) -- (1,168) -- (641) (1,141) -- (3,636) -------- -------- -------- -------- -------- -------- -------- -------- FINANCING ACTIVITIES: Net increase (decrease) in cash overdraft -- (10) 906 -- -- -- -- 896 Net (decrease) in short-term debt (10,699) -- -- -- -- -- -- (10,699) Proceeds from long-term debt 19,107 -- -- 4,284 -- 2,709 -- 26,100 Payments of long-term debt -- -- (103) -- -- (1,759) -- (1,862) Debt refinancing costs (1,550) -- -- -- -- -- -- (1,550) -------- -------- -------- -------- -------- -------- -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 6,858 (10) 803 4,284 -- 950 -- 12,885 -------- -------- -------- -------- -------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- 7 -- 384 100 491 -------- -------- -------- -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (123) -- 167 (15) 5,157 (584) -- 4,602 CASH AND CASH EQUIVALENTS at beginning of period 136 -- 801 17 212 4,402 5,568 -------- -------- -------- -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS at end of period $ 13 $ -- $ 968 $ 2 $ 5,369 $ 3,818 $ -- $ 10,170 ======== ======== ======== ======== ======== ======== ======== ========
24 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 $ -- $ 5,568 Trade receivables 2,670 -- 26,996 -- 2,592 25,400 -- 57,658 Other receivables 317 414 1,195 -- 72 768 -- 2,766 Inventory 1,994 -- 37,890 -- 23,159 16,867 79,910 Prepaid expenses and other 3,195 110 565 -- 1,018 3,800 -- 8,688 --------- ------- -------- ------- ------- -------- --------- -------- TOTAL CURRENT ASSETS 8,312 524 67,447 17 27,053 51,237 -- 154,590 --------- ------- -------- ------- ------- -------- --------- -------- Property, plant & equipment, net 105 -- 13,730 -- 17,321 27,630 -- 58,786 Intangibles -- -- 4,252 -- 1,569 5,874 -- 11,695 Investment in subsidiaries 125,355 -- -- 1,604 -- -- (126,959) -- Intercompany (14,995) 20,995 60,030 20,181 1,630 (12,497) (75,344) -- Other assets 14,506 -- 1,056 -- -- 736 -- 16,298 --------- ------- -------- ------- ------- -------- --------- -------- $ 133,283 $21,519 $146,515 $21,802 $47,573 $ 72,980 $(202,303) $241,369 ========= ======= ======== ======= ======= ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Cash overdraft $ -- $ 10 $ 881 $ -- $ -- $ -- $ -- $ 891 Loan payable to banks 10,996 -- -- -- -- -- -- 10,996 Current portion of long-term debt -- -- 101 -- -- 1,250 -- 1,351 Accounts payable 4,734 9 28,434 -- 2,258 11,537 -- 46,972 Accrued expenses and other 11,857 159 8,306 216 12,022 7,450 40,010 --------- ------- -------- ------- ------- -------- --------- -------- TOTAL CURRENT LIABILITIES 27,587 178 37,722 216 14,280 20,237 -- 100,220 --------- ------- -------- ------- ------- -------- --------- -------- Long-term debt 133,029 -- 2 20,000 -- 4,987 -- 158,018 Intercompany debt -- -- -- -- 30,553 44,791 (75,344) -- Other liabilities 11,822 -- 4,897 -- 1,136 4,431 -- 22,286 --------- ------- -------- ------- ------- -------- --------- -------- TOTAL LIABILITIES 172,438 178 42,621 20,216 45,969 74,446 (75,344) 280,524 --------- ------- -------- ------- ------- -------- --------- -------- REDEEMABLE SECURITIES: Series C preferred stock 24,678 -- -- -- -- -- -- 24,678 --------- ------- -------- ------- ------- -------- --------- -------- STOCKHOLDERS' EQUITY (DEFICIT): Series A preferred stock 521 -- -- -- -- -- -- 521 Common stock 2 1 33 -- -- -- (34) 2 Paid-in capital 860 -- 108,383 21 52 1,537 (109,993) 860 Retained earnings (accumulated deficit) (57,964) 21,340 (4,339) (2,744) (2,757) 8,374 (19,874) (57,964) Accumulated other comprehensive -- income (loss): Gain on derivative instruments 9 -- 9 -- -- -- (9) 9 Cumulative currency translation adjustment (7,261) -- (192) 4,309 4,309 (11,377) 2,951 (7,261) --------- ------- -------- ------- ------- -------- --------- -------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (63,833) 21,341 103,894 1,586 1,604 (1,466) (126,959) (63,833) --------- ------- -------- ------- ------- -------- --------- -------- $ 133,283 $21,519 $146,515 $21,802 $47,573 $ 72,980 $(202,303) $241,369 ========= ======= ======== ======= ======= ======== ========= ========
25 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantors Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- NET SALES $ 5,425 $ 5,435 $54,601 $ -- $ 1,248 $ 25,831 $ -- $ 92,540 NET SALES - INTERCOMPANY 52 1,259 184 -- 3,727 1,405 (6,627) -- COST OF GOODS SOLD 4,311 5,005 41,326 -- 4,774 21,202 (6,627) 69,991 -------- -------- ------- ------- -------- -------- -------- -------- GROSS PROFIT 1,166 1,689 13,459 -- 201 6,034 -- 22,549 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,395 624 6,154 2 561 4,088 16,824 -------- -------- ------- ------- -------- -------- -------- -------- OPERATING INCOME (LOSS) (4,229) 1,065 7,305 (2) (360) 1,946 -- 5,725 OTHER: Interest expense 4,029 7 -- 506 19 (12) 4,549 Interest (income) (3) -- -- -- 30 141 168 Other (income) expense, net 300 -- (34) -- 566 (705) 127 Net (gain) on extinguishment of debt (23,226) -- -- -- -- -- (23,226) Intercompany interest and other (5,753) 810 2,949 (510) 750 1,754 -- (Profit) loss relating to subsidiaries (2,753) -- -- 1,052 -- -- 1,701 -- -------- -------- ------- ------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 23,177 248 4,390 (1,050) (1,725) 768 (1,701) 24,107 PROVISION (BENEFIT) FOR INCOME TAXES 1,950 80 454 -- (673) 1,069 2,880 -------- -------- ------- ------- -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS 21,227 168 3,936 (1,050) (1,052) (301) (1,701) 21,227 DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations 59 -- -- -- -- -- (59) -- Profit from discontinued operations (net of income taxes) -- -- -- -- -- 59 59 Gain from disposal of discontinued operations (net of income taxes) -- -- -- -- -- -- -- -------- -------- ------- ------- -------- -------- -------- -------- NET INCOME (LOSS) $ 21,286 $ 168 $ 3,936 $(1,050) $ (1,052) $ (242) $ (1,760) $ 21,286 ======== ======== ======= ======= ======== ======== ======== ========
26 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantors Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- NET SALES $ 11,122 $ 11,118 $ 102,696 $ -- $ 2,240 $ 50,314 $ -- $ 177,490 NET SALES - INTERCOMPANY 97 2,598 393 -- 12,996 2,175 (18,259) -- COST OF GOODS SOLD 8,819 10,139 77,219 -- 13,971 41,892 (18,259) 133,781 --------- --------- --------- ----- --------- --------- --------- --------- GROSS PROFIT 2,400 3,577 25,870 -- 1,265 10,597 -- 43,709 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,068 1,299 12,375 2 1,084 7,781 32,609 --------- --------- --------- ----- --------- --------- --------- --------- OPERATING INCOME (LOSS) (7,668) 2,278 13,495 (2) 181 2,816 -- 11,100 OTHER: Interest expense 7,741 18 -- 506 19 198 8,482 Interest (income) (3) -- -- -- -- (71) (74) Other (income) expense, net 528 -- (276) -- (412) (298) (458) Net (gain) on extinguishment of debt (23,226) -- -- -- -- -- (23,226) Intercompany interest and other (11,745) 1,892 5,488 (510) 1,446 3,429 -- (Profit) loss relating to subsidiaries (5,627) -- -- 532 -- -- 5,095 -- --------- --------- --------- ----- --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 24,664 368 8,283 (530) (872) (442) (5,095) 26,376 PROVISION (BENEFIT) FOR INCOME TAXES 1,951 96 672 -- (340) 1,284 3,663 --------- --------- --------- ----- --------- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS 22,713 272 7,611 (530) (532) (1,726) (5,095) 22,713 DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations (403) -- -- -- -- -- 403 -- (Loss) from discontinued operations (net of income taxes) -- (124) -- -- -- (279) (403) Gain from disposal of discontinued operations (net of income taxes) 231 -- -- -- -- -- 231 --------- --------- --------- ----- --------- --------- --------- --------- NET INCOME (LOSS) $ 22,541 $ 148 $ 7,611 $(530) $ (532) $ (2,005) $ (4,692) $ 22,541 ========= ========= ========= ===== ========= ========= ========= =========
27 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance ------ ------------ ------------ ------ --------- ------------ ----------- ------- OPERATING ACTIVITIES: Net income (loss) $ 22,541 $ 148 $ 7,611 $ (530) $ (532) $ (2,005) $(4,692) $ 22,541 Adjustment for discontinued operations 172 124 -- -- -- 279 (403) 172 -------- --------- --------- -------- ------- --------- ------- --------- Income (loss) from continuing operations 22,713 272 7,611 (530) (532) (1,726) (5,095) 22,713 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization 948 487 1,248 -- 1,857 2,004 6,544 Deferred income taxes -- -- -- -- -- 93 93 Net gain on extinguishment of debt (23,226) -- -- -- -- -- (23,226) Effects of changes in foreign currency -- -- (198) -- (1,380) 412 (1,166) Other 259 -- 423 -- -- (93) 589 Changes in operating assets and liabilities: Accounts receivable 185 329 (3,590) -- 308 636 (2,132) Inventory (330) (543) 25 -- (2,250) 1,599 (1,499) Prepaid expenses and other 1,340 273 (892) -- 289 (305) 705 Other assets 605 -- (4) -- -- 4 605 Intercompany 2,179 16,879 (13,879) (19,955) 9,912 (231) 5,095 -- Accounts payable (2,414) (337) 366 -- (2,647) (1,717) (6,749) Accrued expenses and other 2,076 (128) 5,515 506 3,647 (7,100) 4,516 Cash provided (used) by discontinued operations 231 (652) -- -- -- (1,244) (1,665) -------- --------- --------- -------- ------- --------- ------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 4,566 16,580 (3,375) (19,979) 9,204 (7,668) -- (672) -------- --------- --------- -------- ------- --------- ------- --------- INVESTING ACTIVITIES: Capital expenditures -- (62) (648) -- (659) (911) (2,280) Proceeds from sale of assets -- -- -- -- -- 23 23 Discontinued operations 13,849 -- -- -- -- 548 14,397 -------- --------- --------- -------- ------- --------- ------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,849 (62) (648) -- (659) (340) -- 12,140 -------- --------- --------- -------- ------- --------- ------- --------- FINANCING ACTIVITIES: Net increase (decrease) in cash overdraft (350) (286) 2,849 -- -- (9) 2,204 Net increase (decrease) in short-term debt (32,194) -- -- -- -- 741 (31,453) Proceeds from long-term debt 85,000 -- -- 20,000 -- 2,500 107,500 Payments of long-term debt (32,679) (13) (867) -- -- (461) (34,020) Payment of Pfizer obligations (20,075) -- -- -- (8,225) -- (28,300) Payments relating to the Prince Transactions and transaction costs (3,667) (16,312) -- -- -- -- (19,979) Debt refinancing costs (11,496) -- -- -- -- -- (11,496) Discontinued operations -- -- -- -- -- 1,391 1,391 -------- --------- --------- -------- ------- --------- ------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (15,461) (16,611) 1,982 20,000 (8,225) 4,162 -- (14,153) -------- --------- --------- -------- ------- --------- ------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- -- -- 42 146 188 -------- --------- --------- -------- ------- --------- ------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,954 (93) (2,041) 21 362 (3,700) -- (2,497) CASH AND CASH EQUIVALENTS at beginning of period 43 119 2,167 -- 185 8,665 11,179 -------- --------- --------- -------- ------- --------- ------- --------- CASH AND CASH EQUIVALENTS at end of period $ 2,997 $ 26 $ 126 $ 21 $ 547 $ 4,965 $ -- $ 8,682 ======== ========= ========= ======== ======= ========= ======= =========
28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with the condensed consolidated financial statements and related notes contained in this Report. The Company's MRT and LaCornubia businesses have been classified as discontinued operations. This discussion presents information only for continuing operations, unless otherwise indicated. The Company presents its annual consolidated financial statements on the basis of its fiscal year ending June 30. GENERAL The Company is a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives (MFAs) and nutritional feed additives (NFAs), which are sold throughout the world predominantly to the poultry, swine and cattle markets. MFAs are used preventatively and therapeutically in animal feed to produce healthy livestock. The Company believes it is the third largest manufacturer and marketer of MFAs in the world, and that certain of its MFA products have leading positions in the marketplace. The Company is also a specialty chemicals manufacturer and marketer, serving primarily the United States pressure-treated wood and chemical industries. The Company has several proprietary products, and many of the Company's products provide critical performance attributes to customers' products, while representing a relatively small percentage of total end-product cost. On December 16, 2004, Phibro Animal Health SA ("PAH Belgium") entered into an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of PAH Belgium's facilities in Rixensart, Belgium (the "Belgium Plant"). Such sale, when completed, (the "Belgium Plant Transactions") will include the following elements (U.S. dollar amounts as of December 31, 2004 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of PAH Belgium, for a purchase price of EUR 6.2 million ($8.4 million), payable at closing; (ii) the transfer to GSK of a majority of the employees of PAH Belgium and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 0.7 million ($0.9 million) for such clean-up costs; (iv) in recognition of the benefits to the Company from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million ($2.0 million) within six months from the closing date, EUR 1.5 million ($2.0 million) within eighteen months from the closing date, EUR 1.5 million ($2.0 million) within thirty months from the closing date, and EUR 0.5 million ($0.7 million) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 0.4 million ($0.5 million)) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 9.1 million ($12.3 million), of which an amount estimated to be approximately EUR 4.6 million ($6.2 million) would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 4.5 million ($6.1 million) would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining certain equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to Philipp Brothers Brasil Holdings Ltda. ("PAH Brazil") which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur on November 30, 2005, but in no event earlier than July 1, 2005 or later than June 30, 2006. The Dutch Notes and related guarantees are collateralized by a mortgage on the Belgium Plant which will be released in connection with the closing of the sale of the Belgium Plant to GSK. As a result of the above agreement, the Company will depreciate the Belgium plant to its estimated salvage value of EUR 2.5 million ($3.3 million) as of the projected closing date of November 30, 2005. The Company recorded incremental depreciation expense of EUR 0.4 million ($0.5 million) in December 2004 and will record an additional EUR 8.7 million ($11.7 million) of incremental depreciation expense ratably through November 2005. The Company recorded severance expense of EUR 6.7 million ($9.0 million) in December 2004 for the estimated 29 minimum severance amounts indicated by law, contract, and/or past practice. The Company estimates it will record additional expense of EUR 2.4 million ($3.2 million) ratably through November 2005 for severance, retention agreements and other costs. The incremental depreciation expense of $0.5 million and severance expense of $9.0 million recorded in December 2004 are included in cost of goods sold on the Company's condensed consolidated statements of operations and comprehensive income (loss). The Company has determined that the carrying amount of the Belgium Plant at December 31, 2004 is recoverable based on the estimated future cash flows arising from the use of the assets. In anticipation of transferring production of virginiamycin from the Belgium Plant to an alternative production location, the Company has been increasing inventory levels of virginiamycin to ensure adequate supplies during the transfer period. At December 31, 2004 virginiamycin inventories were approximately $40.0 million and are expected to continue to increase through November 2005, based on current production rates. On December 21, 2004, the Company completed a private placement pursuant to which the Company and Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of the Company (the "Dutch Issuer" and together with the Company, the "Issuers") issued and sold 22,491 additional units consisting of $18.2 million 13% Senior Secured Notes due 2007 of the Company (the "U.S. Notes") and $4.3 million 13% Senior Secured Notes due 2007 of the Dutch Issuer (the "Dutch Notes" and together with the U.S. Notes, the "Additional Notes"), from which they received gross proceeds of $23.4 million. The proceeds were used to refinance indebtedness outstanding under the Company's domestic senior credit facility. The Company incurred financing costs of $2.3 million in connection with the issuance of the Additional Notes. The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the "Indenture") under which the Issuers previously issued 105,000 units consisting of $85.0 million aggregate principal amount of U.S. Notes and $20.0 million aggregate principal amount of Dutch Notes. On January 14, 2005, the Company and its domestic subsidiaries filed a registration statement with the Securities and Exchange Commission (the "SEC") on Form S-4 with respect to an exchange offer for all its Senior Secured Notes, comprised of 105,000 units sold on October 21, 2003 and 22,491 additional units sold on December 21, 2004. On February 4, 2005, such registration statement was declared effective. On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, the Company amended its domestic senior credit facility to: (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26.8 million for purposes of calculating a certain financial covenant; (ii) amend the Indenture reserve definition to include scheduled payments of interest due on the Additional Notes; (iii) amend the maximum aggregate amount of borrowing available under the working capital facility to permit a temporary increase to $22.5 million and for its reduction to $17.5 million on such borrowings being refinanced by the proceeds of the Additional Notes; (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to PAH Brazil or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the sale of the Belgium Plant and related transactions. During January 2005, PAHC Holdings Corporation ("PAHC Holdings") was formed to hold the capital stock of the Company, except for its Series C Preferred Stock. On February 10, 2005, PAHC Holdings issued $29.0 million of its 15% Senior Secured Notes due 2010 (the "HoldCo Notes") in a private placement. Interest is payable at the option of PAHC Holdings in cash or pay-in-kind HoldCo Notes. The Company is not obligated for the HoldCo Notes. The Company's ability to make payments to PAHC Holdings is subject to the terms of the Company's Senior Secured Notes, its Senior Subordinated Notes, and its domestic senior credit facility, and to applicable law. The proceeds from the sale of the HoldCo Notes, upon release from escrow, will be used, directly or indirectly, to redeem the Company's Series C Preferred Stock either by PAHC Holdings (i) making a capital contribution to the Company to contemporaneously finance the redemption of the Company's Series C Preferred Stock, or (ii) purchasing a new series of the Company's preferred stock, referred to as Series D Preferred Stock, that may be issued by the Company to finance the redemption of the Company's Series C Preferred Stock. It is contemplated 30 that such redemption will occur on or before February 28, 2005. On March 1, 2005, the applicable percentage for determining the equity value component of the redemption price increases, as currently provided in the Company's certificate of incorporation, from 18% to 22%. If on March 1, 2005, the Company has not redeemed its Series C Preferred Stock from escrow, PAHC Holdings will be required to redeem the HoldCo Notes, primarily with the proceeds of the HoldCo Notes placed in escrow. PAHC Holdings was formed by the holders of all of the Company's capital stock, other than the holders of Series C Preferred Stock. In particular, Jack Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his family exchanged all of their shares of Series A Preferred Stock and Class B Common Stock and Mr. Bendheim exchanged fifty percent (50%) of his shares of Class A Common Stock, for the same number and class of shares of PAHC Holdings, having the same designations, relative rights, privileges and limitations as the Company's shares of such class (except to the extent that PAHC Holdings is a Delaware corporation and the Company is a New York corporation). The HoldCo Notes are to be secured by all of PAHC Holdings' assets (now consisting solely of the Company's capital stock and, until disbursed, the proceeds of the HoldCo Notes in escrow). Currently, such pledge covers all of the Company's Series A Preferred Stock and Class B Common Stock, the Company's non-voting classes of stock. In connection with the release of the proceeds of the HoldCo Notes from escrow and following the redemption of the Company's Series C Preferred Stock, Mr. Bendheim will contribute to PAHC Holdings the balance of the Company's outstanding Class A Common Stock, and all of the Company's outstanding Class A Common Stock, the Company's voting stock, will be pledged as security for the HoldCo Notes. OTHER RISKS AND UNCERTAINTIES The Company's ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company expects adequate liquidity throughout 2005, with periods of reduced availability around the dates of the semi-annual interest payments due June 1 and December 1 related to its Senior Secured Notes and Senior Subordinated Notes. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that likely would be available. There can be no assurance the Company will be successful in any of the above-noted actions. The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain of the Company's products are subject to extensive regulation by numerous government authorities in the United States and other countries. The Company has significant assets located outside of the United States, and a significant portion of the Company's sales and earnings are attributable to operations conducted abroad. The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company. 31 The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. SUMMARY CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------ ---------------------------- 2004 2003 2004 2003 -------- -------- --------- --------- (THOUSANDS) (THOUSANDS) Net sales $ 93,060 $ 92,540 $ 181,335 $ 177,490 Gross profit 13,869 22,549 36,491 43,709 Selling, general and administrative 17,759 16,824 34,353 32,609 Operating income (3,890) 5,725 2,138 11,100 Interest expense, net 5,356 4,717 10,577 8,408 Other expense (income), net (791) 127 (767) (458) Net (gain) on extinguishment of debt - (23,226) - (23,226) Provision (benefit) for income taxes (884) 2,880 40 3,663 Income from continuing operations $ (7,571) $ 21,227 $ (7,712) $ 22,713
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003 Net Sales of $93.1 million increased $0.5 million, or 1%. Animal Health and Nutrition sales of $70.7 million grew $2.0 million, or 3%, due to volume increases offset in part by lower average selling prices. Specialty Chemical Group (comprised of the Industrial Chemicals, Distribution and All Other segments) sales of $22.4 million decreased $1.5 million. Excluding The Prince Manufacturing Company ("PMC"), which was divested effective December 26, 2003, Specialty Chemical Group sales increased by $3.9 million due to volume increases in Industrial Chemicals and All Other segments. The Specialty Chemical Group included PMC sales of $5.4 million for the 2003 quarter. Gross Profit of $13.9 million decreased $8.7 million to 14.9% of net sales. The Belgium Plant Transactions increased costs by $9.5 million for the current quarter. Excluding this charge, Animal Health and Nutrition gross profit increased due to higher unit volumes and lower unit costs offset in part by lower average selling prices. The Specialty Chemical Group also contributed to the improvement due to expanded sales of the Company's new copper-based wood treatment product. The Specialty Chemical Group included PMC gross profit of $1.7 million for the 2003 quarter. Selling, General and Administrative Expenses of $17.8 million increased $0.9 million. Expenses in the operating segments, excluding PMC, increased over the prior year due to higher research and development costs associated with registration trials, unfavorable foreign exchange rates, costs associated with the relocation of the Company's corporate office, higher depreciation and amortization charges and severance costs. Corporate expenses decreased due to the elimination of the Palladium management fee of $0.6 million in 2003 and income of $0.3 million from the PMC advisory fee. In addition, the Company recognized additional gains of $0.4 million from the previous sale of its etchant business. PMC expenses were $0.6 million for the 2003 quarter. Operating Income (Loss) of ($3.9) million decreased $9.6 million from the 2003 quarter. Operating income, excluding the Belgium Plant Transactions and PMC, improved in both the Animal Health and Nutrition and Specialty Chemical Group with increased gross profit offset in part by higher selling, general and administrative 32 expenses. PMC contributed $1.1 million for the 2003 quarter offset in part by the elimination of the $0.6 million Palladium management fee. Interest Expense, Net of $5.4 million increased $0.6 million from the 2003 quarter, primarily due to higher average interest rates and also higher borrowing levels associated with the issuance of the Company's Senior Secured Notes. Other (Income) Expense, Net principally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. Income Tax (Benefit) of ($0.9) million were recorded on a consolidated pre-tax loss of $7.6 million. The tax rate reflects income tax provisions in profitable foreign jurisdictions and for state income taxes. A provision for U.S. federal income taxes has not been recorded due to the utilization of net operating loss carryforwards. The Company has recorded valuation allowances related to substantially all deferred tax assets. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003 Net Sales of $181.3 million increased $3.8 million, or 2%. Animal Health and Nutrition sales of $136.5 million grew $8.0 million, or 6%, due to volume increases offset in part by lower average selling prices. Specialty Chemical Group (comprised of the Industrial Chemicals, Distribution and All Other segments) sales of $44.8 million decreased $4.2 million. Excluding PMC, Specialty Chemical group sales increased by $7.0 million due to volume increases in Industrial Chemicals and All Other segments. The Specialty Chemical Group included PMC sales of $11.1 million for the 2003 period. Gross Profit of $36.5 million decreased $7.2 million to 20.1% of net sales. The Belgium Plant Transactions increased costs by $9.5 million for the current period. Excluding this charge, Animal Health and Nutrition gross profit increased due to higher unit volumes and lower unit costs offset in part by lower average selling prices. The Specialty Chemical Group also contributed to the improvement due to expanded sales of the Company's new copper-based wood treatment product and higher unit volumes in its Distribution and All Other businesses. The Specialty Chemical Group included PMC gross profit of $3.6 million for the 2003 period. Selling, General and Administrative Expenses of $34.4 million increased $1.7 million. Expenses in the operating segments, excluding PMC, increased over the prior year due to higher research and development costs associated with registration trials, unfavorable foreign exchange rates, costs associated with the relocation of the Company's corporate office, higher depreciation and amortization charges and severance costs. Corporate expenses decreased due to the elimination of the Palladium management fee of $1.1 million in 2003 and income of $0.5 million from the PMC advisory fee. In addition, the Company recognized additional gains of $0.7 million from the previous sale of its etchant business. PMC expenses were $1.3 million for the 2003 period. Operating Income of $2.1 million decreased $9.0 million. Operating income, excluding the Belgium Plant Transactions and PMC, improved in both the Animal Health and Nutrition and Specialty Chemical Group with increased gross profit offset in part by higher selling, general and administrative expenses. PMC contributed $2.3 million for the 2003 period offset in part by the elimination of the $1.1 million Palladium management fee. Interest Expense, Net of $10.6 million increased $2.2 million from the 2003 period, primarily due to higher average interest rates and also higher borrowing levels associated with the issuance of the Company's senior secured notes. Other (Income) Expense, Net principally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. Income Taxes of $0.0 million were recorded on consolidated pre-tax loss of $7.7 million. The tax rate reflects income tax provisions in profitable foreign jurisdictions and for state income taxes. A provision for U.S. federal 33 income taxes has not been recorded due to the utilization of net operating loss carryforwards. The Company has recorded valuation allowances related to substantially all deferred tax assets. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. OPERATING SEGMENTS The Animal Health and Nutrition segment manufactures and markets MFAs and NFAs to the poultry, swine and cattle markets, and includes the operations of the Phibro Animal Health business unit, Prince AgriProducts, Koffolk (1949) Ltd. and Planalquimica. The Industrial Chemicals segment manufacturers and markets specialty chemicals for use in the pressure treated wood and chemical industries, and includes Phibro-Tech and, until its divestiture, PMC. The Distribution segment markets a variety of specialty chemicals, and includes PhibroChem and Ferro operations. The All Other segment includes contract manufacturing of crop protection chemicals, Wychem and all other operations. Due to the divestiture of PMC in December 2003, PMC's results are shown separately for comparability.
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------- ----------------------------- 2004 2003 2004 2003 -------- ------------ -------- --------- (THOUSANDS) (THOUSANDS) NET SALES Animal Health & Nutrition $70,708 $ 68,687 $136,514 $128,528 Industrial Chemicals - ex PMC 7,686 6,244 16,079 12,543 Industrial Chemicals - PMC - 5,435 - 11,118 Distribution 8,104 7,656 15,765 15,595 All other 6,562 4,518 12,977 9,706 ------- -------- -------- --------- 93,060 92,540 $181,335 $177,490 ======= ======== ======== =========
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------ ----------------------------- 2004 2003 2004 2003 --------- ----------- -------- ------------- OPERATING INCOME (THOUSANDS) (THOUSANDS) Animal Health & Nutrition $(1,520) $ 7,655 $ 6,295 $ 14,555 Industrial Chemicals - ex PMC 655 (287) 1,428 (678) Industrial Chemicals - PMC - 1,065 - 2,278 Distribution 796 692 1,660 1,533 All other 455 657 1,160 1,326 Corporate expenses and adjustments (4,276) (4,057) (8,405) (7,914) ------- ------- -------- -------- $(3,890) $ 5,725 $ 2,138 $ 11,100 ======= ======= ======== ========
OPERATING SEGMENTS COMPARISON OF THREE MONTHS ENDED DECEMBER 2004 AND 2003 ANIMAL HEALTH AND NUTRITION NET SALES of $70.7 million increased $2.0 million, or 3%. MFA net sales decreased by $0.8 million. Revenues were lower primarily for antibacterials and anticoccidials but were offset in part by higher sales of antibiotics. The decrease in MFA revenues was due to lower average selling prices offset in part by higher unit volumes and favorable currency effect on international sales. NFA net sales increased by $2.8 million principally due to volume increases in trace mineral premixes and other feed ingredients. 34 OPERATING INCOME (LOSS) of ($1.5) million decreased $9.2 million from the 2003 period. Operating income, excluding costs relating to the Belgium Transactions of $9.5 million, improved due to higher unit volumes and lower unit costs offset in part by lower average selling prices and increased selling, general and administrative expenses. SPECIALTY CHEMICALS INDUSTRIAL CHEMICALS net sales of $7.7 million, excluding PMC, increased $1.4 million, or 23%. Sales of copper- related products to the wood treatment markets increased due to the introduction of new copper based wood treatment products. PMC, divested in December 2003, generated revenues of $5.4 million for the 2003 quarter. Operating income, excluding PMC, of $0.7 million improved by $0.9 million from the 2003 quarter. This improvement was due to new product introductions and savings from previously implemented headcount reductions and facility restructurings in Phibro-Tech operations. PMC provided operating income of $1.1 million for the 2003 quarter. DISTRIBUTION net sales of $8.1 million increased $0.4 million, or 6%. Higher domestic unit volumes and slightly higher average selling prices were offset in part by lower sales volumes in Europe. Distribution operating income of $0.8 million improved by $0.1 million from the 2003 quarter. As a percentage of sales, operating income was 10% and 9% in 2004 and 2003, respectively. ALL OTHER net sales of $6.6 million increased $2.0 million, or 45%. Revenues for contract manufacturing increased $2.0 million due to increased volumes. Revenues from specialized lab projects and formulations approximated the prior period. Operating income of $0.5 million decreased by $0.2 million from the prior period due to higher manufacturing costs. OPERATING SEGMENTS COMPARISON OF SIX MONTHS ENDED DECEMBER 2004 AND 2003 ANIMAL HEALTH AND NUTRITION NET SALES of $136.5 million increased $8.0 million, or 6%. MFA net sales increased by $1.6 million. Revenues were higher primarily for antibacterials and antibiotics but were offset in part by lower sales of anticoccidials. The increase in MFA revenues was due to higher unit volumes and favorable currency effect on international sales offset in part by lower average selling prices. NFA net sales increased by $6.4 million principally due to volume increases in trace mineral premixes and other feed ingredients. OPERATING INCOME of $6.3 million decreased $8.3 million from the 2003 period. Operating income, excluding costs relating to the Belgium Transactions of $9.5 million, improved due to higher sales unit volumes and lower unit costs offset in part by lower average selling prices and increased selling, general and administrative expenses. SPECIALTY CHEMICALS INDUSTRIAL CHEMICALS net sales of $16.1 million, excluding PMC, increased $3.5 million, or 28%. Sales of copper-related products to the wood treatment markets increased due to the introduction of new copper based wood treatment products. PMC, divested in December 2003, generated revenues of $11.1 million for the 2003 period. Operating income, excluding PMC, of $1.4 million improved by $2.1 million from the 2003 period. This improvement was due to new product introductions and savings from previously implemented headcount reductions and facility restructurings in Phibro-Tech operations. PMC provided operating income of $2.3 million for the 2003 period. DISTRIBUTION net sales of $15.8 million increased $0.2 million, or 1%. Higher domestic unit volumes and slightly higher average selling prices were offset in part by lower sales volumes in Europe. Distribution operating income of $1.7 million improved by $0.1 million from the 2003 period. As a percentage of sales, operating income was 11% and 10% in 2004 and 2003, respectively. 35 ALL OTHER net sales of $13.0 million increased $3.3 million, or 34%. Revenues for contract manufacturing increased $2.8 million due to increased volumes and average selling prices. Revenues from specialized lab projects and formulations increased $0.5 million over the prior period. Operating income of $1.2 million decreased from the prior period due to higher manufacturing costs. DISCONTINUED OPERATIONS In August 2003, the Company divested Mineral Resource Technologies, Inc and shutdown its operations at La Cornubia. These businesses have been classified as discontinued operations. The Company's consolidated financial statements have been reclassified to report separately the operating results and cash flows of the discontinued operations.
THREE MONTHS ENDED DECEMBER 31, 2003 ------------------------------------ MRT LACORNUBIA TOTAL ---- ---------- ------- Net Sales $ - $3,503 $3,503 ==== ====== ======= Operating Loss $ - $ (108) $ (108) Interest Expense, net - 26 26 Other Expense (Income), net - (193) (193) Provision (benefit) for income tax - - - ---- ------ ------- Net Income (loss) from discontinued operations $ - $59 $ 59 ==== ====== ======= Depreciation and Amortization $ - $101 $ 101 ==== ====== =======
SIX MONTHS ENDED DECEMBER 31, 2003 ----------------------------------------- MRT LACORNUBIA TOTAL ------- ---------- ------- Net Sales $ 3,327 $ 5,723 $ 9,050 ======= ======= ======= Operating Loss $ (124) $ (480) $ (604) Interest Expense, net - 42 42 Other Expense (Income), net - (243) (243) Provision (benefit) for income tax - - - ------- ------- ------- Net Income (loss) from discontinued operations $ (124) $ (279) $ (403) ======= ======= ======= Depreciation and Amortization $ - $ 201 $ 201 ======= ======= =======
Mineral Resource Technologies, Inc. ("MRT"). In August 2003, the Company divested MRT for net proceeds, after transaction costs, of approximately $13.8 million. MRT was included in the Company's All Other segment. La Cornubia. On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA ("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The Company believes that, as a result of the bankruptcy filing by La Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding company with no assets except for its investment in La Cornubia, may also file for bankruptcy in France. The Company does 36 not believe that La Cornubia's bankruptcy filing, nor the possible bankruptcy filing by LC Holding, will have a material adverse effect on its financial condition or results of operations. LIQUIDITY AND CAPITAL RESOURCES Net Cash (Used) by Operating Activities. Cash (used) by operations for the six months ended December 31, 2004 and 2003 was ($5.1) million and ($0.7) million, respectively. Cash used was due to higher working capital requirements offset in part by income from continuing operations. The Company is currently increasing inventory levels of virginiamycin to enhance future supply flexibility and reduce cost as part of the planned exit of the Belgium Plant. Net Cash Provided (Used) by Investing Activities. Net cash provided (used) by investing activities for the six months ended December 31, 2004 and 2003 was ($3.6) million and $12.1 million, respectively. Capital expenditures of $3.7 million and $2.3 million for 2004 and 2003, respectively, were for new product capacity, for maintaining the Company's existing asset base and for environmental, health and safety projects. Discontinued operations, primarily from the sale of MRT, provided funds of $14.4 million in 2003. Net Cash Provided (Used) by Financing Activities. Net cash provided (used) by financing activities for the six months ended December 31, 2004 and 2003 was $12.9 million and ($14.2) million, respectively. Proceeds from long-term debt reflect the issuance of additional 13% Senior Secured Notes and borrowings of Koffolk Israel. The decrease in short-term debt is due to the reduction of the senior credit facility. Payments of long-term debt reflect the repayments of Koffolk Israel borrowings. Working Capital and Capital Expenditures. Working capital as of December 31, 2004 was $75.7 million compared to $54.4 million at June 30, 2004, an increase of $21.3 million. The fiscal 2005 increase in working capital primarily was due to higher inventory levels and higher cash balances related to the issuance of new long-term debt. The Company anticipates spending approximately $8.0 million for capital expenditures in fiscal 2005, primarily to cover the Company's asset replacement needs, to improve processes, and for environmental and regulatory compliance, subject to the availability of funds. Liquidity. At December 31, 2004 the amount of credit extended under the Company's domestic senior credit facility totaled $0.3 million under the working capital facility and $9.8 million under the letter of credit facility, and the Company had $17.2 million available under the working capital facility. In addition, certain of the Company's foreign subsidiaries also had availability totaling $3.9 million under their respective loan agreements. As of September 24, 2004, the Company amended its domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities to $32.5 million; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17.5 million; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5.3 million for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish covenant EBITDA levels for the periods ending after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for item (v). On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, the Company amended the domestic senior credit facility to: (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26.8 million for purposes of calculating a certain financial covenant; (ii) amend the Indenture reserve definition to include scheduled payments of interest due on the Additional Notes; (iii) amend the maximum aggregate amount of borrowing available under the working capital facility to permit a temporary increase to $22.5 million and for its reduction to $17.5 million on such 37 borrowings being refinanced by the proceeds of the Additional Notes; (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to PAH Brazil or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the sale of the Belgium Plant and related transactions. The domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the condensed consolidated balance sheet. The Company's ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company expects adequate liquidity throughout 2005, with periods of reduced availability around the dates of the semi-annual interest payments due June 1 and December 1 related to its Senior Secured Notes and Senior Subordinated Notes. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that likely would be available. There can be no assurance the Company will be successful in any of the above-noted actions. The Company's contractual obligations (in millions) at December 31, 2004 mature as follows:
YEARS ------------------------------------------------- WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL -------- ----------- ----------- ------ --------- Loans payable to banks $ 0.3 $ - $ - $ - $ 0.3 Long-term debt (including current portion) 4.1 129.8 48.8 - 182.7 Interest payments 22.3 44.9 2.4 - 69.6 Lease commitments 1.4 2.7 2.0 2.0 8.1 Acquisition of rights 0.5 0.7 0.2 - 1.4 ------- -------- ------- ------ --------- Total contractual obligations $ 28.6 $ 178.1 $ 53.4 $ 2.0 $ 262.1 ======= ======== ======= ====== =========
CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates. The accounting policies and related risk described in our Annual Report on Form 10-K for the year ended June 30, 2004 are those that depend most heavily on these judgments and estimates. As of December 31, 2004 there have been no material changes to any of the critical accounting policies contained therein. 38 NEW ACCOUNTING PRONOUNCEMENTS During the quarter, the Financial Accounting Standards Board released three new standards. These standards will be adopted by the Company during fiscal 2005 and are discussed in the notes to condensed consolidated financial statements included in this report. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In the normal course of operations, the Company is exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates, and commodity prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. The Company uses, from time to time, foreign currency forward contracts as a means of hedging exposure to foreign currency risks. The Company also utilizes, on a limited basis, certain commodity derivatives, primarily on copper used in its manufacturing processes, to hedge the cost of its anticipated purchase requirements. The Company does not utilize derivative instruments for trading purposes. The Company does not hedge its exposure to market risks in a manner that completely eliminates the effects of changing market conditions on earnings, cash flows and fair values. The Company monitors the financial stability and credit standing of its major counterparties. For financial market risks related to changes in interest rates, foreign currency exchange rates and commodity prices, reference is made to Part II, Item 7, Quantitative and Qualitative Disclosure about Market Risk, in our annual report on Form 10-K for the fiscal year ended June 30, 2004 and to Notes 2 and 17 to our Consolidated Financial Statements included therein. CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS FORWARD-LOOKING STATEMENTS This Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words "may," "could," "would," "should," "believe," "expect," "anticipate," "plan," "estimate," "target," "project," "intend," or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management's beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following: - our substantial leverage and potential inability to service our debt - our dependence on distributions from our subsidiaries - risks associated with our international operations and significant foreign assets - our dependence on our Israeli operations 39 - competition in each of our markets - potential environmental liability - potential legislation affecting the use of medicated feed additives - extensive regulation by numerous government authorities in the United States and other countries - our reliance on the continued operation and sufficiency of our manufacturing facilities - our reliance upon unpatented trade secrets - the risks of legal proceedings and general litigation expenses - potential operating hazards and uninsured risks - the risk of work stoppages - our dependence on key personnel See also the discussion under "Risks, Uncertainties and Liquidity" in Note 2 of our Condensed Consolidated Financial Statements included in this Report. In addition, the issue of the potential for increased bacterial resistance to certain antibiotics used in certain food producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in these food producing animals. The sale of feed additives containing antibiotics is a material portion of our business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on our financial position, results of operations and cash flows. We believe the forward-looking statements in this Report are reasonable; however, no undue reliance should be placed on any forward-looking statements, as they are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk is set forth in Item 2 of this Form 10-Q. ITEM 4. CONTROLS AND PROCEDURES (a) Based upon an evaluation, under the supervision and with the participation of our Principal Executive Officers and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, they have concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures, as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, are effective for gathering, analyzing and disclosing information we are required to disclose in periodic reports that we furnish to the Securities and Exchange Commission. (b) During the quarter ended September 30, 2004, the Company remediated the material weakness in internal control (which was comprised of a combination of significant deficiencies) discussed in our Annual Report on Form 10K for the year ended June 30, 2004. The Company completed a review of significant balance sheet accounts related to September 30, 2004 balances and implemented enhanced supervisory reviews of these accounts. Additionally, the Company is implementing improvements in processes and procedures related to the review, substantiation and evaluation of general ledger account balances. As of the end of the period covered by this report, 40 other than noted above, there have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote. 41 PART II -- OTHER INFORMATION ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS (a) Exhibits Exhibit No. Description 10.33 Purchase Agreement by and between Phibro Animal Health SA and GlaxoSmithKline Biologicals SA, dated December 16, 2004. * 31.1 Certification of Gerald K. Carlson, Chief Executive Officer required by Rule 15d-14(a) of the Act. 31.2 Certification of Jack C. Bendheim, Chairman of the Board required by Rule 15d-14(a) of the Act. 31.3 Certification of Richard G. Johnson, Chief Financial Officer required by Rule 15d-14(a) of the Act. * A request for confidential treatment has been submitted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 24b-2 of the Securities Exchange Act. Since the Company does not have securities registered under Section 12 of the Securities Exchange Act of 1934 and is not required to file periodic reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and therefore the Company is not filing the written certification statement pursuant to Section 906 of such Act. The Company submits periodic reports with the Securities and Exchange Commission because it is required to do so by the terms of the indentures governing its 13% Senior Secured Notes due 2007 and its 9 7/8% Senior Subordinated Notes due 2008. 42 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PHIBRO ANIMAL HEALTH CORPORATION. Date: February 18, 2005 By: /s/ JACK C. BENDHEIM ------------------------------------ JACK C. BENDHEIM CHAIRMAN OF THE BOARD Date: February 18, 2005 By: /S/ GERALD K. CARLSON ------------------------------------ GERALD K. CARLSON CHIEF EXECUTIVE OFFICER Date: February 18, 2005 By: /s/ RICHARD G. JOHNSON ------------------------------------ RICHARD G. JOHNSON CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER) 43 EX-10.33 2 y05801exv10w33.txt PURCHASE AGREEMENT Exhibit 10.33 Portions of this Agreement have been omitted pursuant to a request for Confidential Treatment. ================================================================================ BUSINESS PURCHASE AGREEMENT BY AND BETWEEN PHIBRO ANIMAL HEALTH SA AS THE SELLER, AND GLAXOSMITHKLINE BIOLOGICALS SA AS THE PURCHASER DATED AND ENTERED INTO ON THIS THE 16 DAY OF DECEMBER, 2004 ================================================================================ 1 SIGNATURE VERSION BUSINESS PURCHASE AGREEMENT THIS BUSINESS PURCHASE AGREEMENT (this "Agreement") is dated and entered into as of this sixteenth day of December 2004 (the "Effective Date"), by and between PHIBRO ANIMAL HEALTH SA, a societe anonyme organized under the laws of Belgium with its principal offices at 87a rue de l'Institut, B-1330 Rixensart, Belgium ("Seller"), and GLAXOSMITHKLINE BIOLOGICALS S.A., a corporation organized under the laws of Belgium having a place of business at 89, rue de L'Institut, 1330 Rixensart, Belgium (the "Purchaser") (the Seller and the Purchaser, collectively, the "Parties", and each individually, a "Party"). PRELIMINARY STATEMENTS The Seller and the Purchaser entered into a Process Development Agreement on August 19th, 2004 under which the Seller is acting as a subcontractor of the Purchaser to perform pilot scale development of MPL in its facilities located in Rixensart; and The Seller and the Purchaser have also expressed their potential interest in the acquisition by the Purchaser of the Seller's facilities in Rixensart; and The Seller desires to sell, and the Purchaser desires to purchase, subject to the terms and conditions set forth herein, the Seller's Activities, Site and the Acquired Assets performed and/or located in Rixensart (as hereinafter defined), pursuant to the transactions, documents and deliveries contemplated by this Agreement; and On 17 November 2004, Seller has announced to its Work Council that Seller intends to proceed with the collective dismissal for technical and economical reasons of 52 of its employees. NOW, THEREFORE, in consideration of the foregoing preliminary statement and the mutual agreements and covenants set forth herein, the Parties hereby agree as follows: SECTION 1 DEFINITIONS AND REFERENCES 1.1. DEFINED TERMS. As used in this Agreement, the following defined terms shall have the meanings specified below: "Acquired Assets" shall mean all assets physically on the Site as of the Effective Date other than the Excluded Assets. An indicative list of the Acquired Assets, which is not a detailed list but a simplified list, is set forth on Exhibit A. "Activities" shall mean Seller's industrial activities relating to its manufacturing capacity and know-how in respect of Seller's expertise in solvents technology. "Affiliates" shall mean, with respect to any Person, any Persons directly or indirectly controlling, controlled by, or under common control with, such Person. For purposes hereof, the 2 CONFIDENTIAL 16-12-2004 term "controlled" (including the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the direct or indirect ability or power to direct or cause the direction of management policies of such Person or otherwise direct the affairs of such Person, whether through ownership of voting securities or otherwise. "Agreement" shall have the meaning in the introductory paragraph of this Agreement. "Assumed Liabilities" shall have the meaning set forth in Section 2.2(a). "Claim Notification" shall have the meaning set forth in Section 6.2.1. "Closing" shall have the meaning set forth in Section 2.5(a). "Closing Date" shall have the meaning set forth in Section 2.5(a). "Company Guarantee" shall have the meaning set forth in Section 6.3. "Decommissioning" shall mean decommissioning carried out in compliance with the document entitled "TP05 Facilities Decommissioning Process GMS Technical Processes" attached hereto as Exhibit F, an outline of which is also included in same Exhibit F. "Dispute" shall have the meaning set forth in Section 12.12. "Due Indemnity" shall have the meaning set forth in Section 6.2.5. "Effective Date" shall have the meaning in the introductory paragraph of this Agreement. "Employees" shall mean the persons listed in Exhibit G and in Exhibit H who are employed in the Activities being transferred to the Purchaser. "Encumbrance" means any claim, condition, lien, option, mortgage, pledge, security interest, limitation, charge or encumbrance of any kind, restriction or exercise of any right attributing ownership or other right whatsoever whether in favour of third parties or held by third parties. "Excluded Assets" shall mean the assets set forth in Exhibit B hereto. "Excluded Liabilities" shall have the meaning set forth in Section 2.2(b). "Finishing Activities" shall mean all granulation and other reasonable and necessary ancillary finishing activities for intermediate Virginiamycin products to be carried out in Building 3 (granulation) and/or requiring QC in Building 1, QA in Building 1, maintenance in Building 11, warehousing in Pavillon 5, utilities in Building 6 and supervisor offices in Pavillon 11. 3 CONFIDENTIAL 16-12-2004 "Governmental Authority" shall mean any court of competent jurisdiction, governmental agency, board or commission or other governmental authority or other instrumentality of Belgium. "Industrial Activities" means all Seller's activities, process, equipment used in the manufacturing of Virginiamycin and Semduramicin, including but not limited to all necessary services supports including QC, QA, maintenance, warehousing, supervision and management. "Intellectual Property" means the software licences and service agreements necessary to utilise the Acquired Assets, as listed in Exhibit J hereto. "Liabilities" shall mean, as to any Person, all debts, adverse claims, liabilities and obligations, direct, indirect, absolute or contingent of such Person, whether accrued, vested or otherwise, whether known or unknown, whether in contract, tort, strict liability or otherwise and whether or not actually reflected, or required by generally accepted accounting principles to be reflected, in such Person's balance sheets or other financial books and records. "Loss" shall have the meaning set forth in Section 6.1.5 (a). "Mortgage" shall mean the mortgage dated 14 April 2004 granted by Seller to HSBC Bank USA for an amount of USD 15 million in principal. "MPL" shall have the meaning set forth in Section 4.8 (f) (ii). "Party" or "Parties" shall have the meaning in the introductory paragraph of this Agreement. "Permitted Liens" shall mean (i) mechanics', carriers', workmen's, repairmen's or other like Encumbrances arising or incurred in the ordinary course of business, (ii) Encumbrances for industrial taxes excluding VAT and registration duties that are not due and payable and (iii) such other Encumbrances as would not be reasonably likely to be material to the Acquired Assets. Bank Encumbrances and any other financial Encumbrances will in no circumstances be considered as Permitted Liens. "Person" shall mean a natural person, a corporation, a partnership, a trust, a joint venture, a limited liability company, any governmental authority or any other entity or organization. "Phibro Animal Health Corporation" shall mean a New York Corporation which is the ultimate parent company of Seller with offices at 65 Challenger Road, 3rd Floor, Ridgefield Park, NJ 07660, USA. "Previous Liabilities" shall have the meaning set forth in Section 2.2(c). "Prior Rights" shall have the meaning set forth in Section 11.2(b). "Proceeding" shall mean all claims, litigation, proceedings, investigations, actions, suits, or orders at law or in equity. 4 CONFIDENTIAL 16-12-2004 "Purchaser" shall have the meaning in the introductory paragraph of this Agreement. "Purchase Price" shall have the meaning set forth in Section 2.1(a). "Seller" shall have the meaning in the introductory paragraph of this Agreement. "Seller Position Notification" shall have the meaning set forth in Section 6.2.1. "Site" shall mean the site of the Seller located at 87a rue de l'Institut, 1330 Rixensart (Belgium). A plan of the Site is attached hereto as Exhibit C. "Transfer Tax" shall have the meaning set forth in Section 8.1. "Transition Period" shall have the meaning set forth in Section 2.4 (c). "Warranties" means the representations and warranties set forth in Sections 4, 5 and 6 of this Agreement. 1.2. INTERPRETATION 1.2.1 Defined terms include the plural as well as the singular and the use of any gender shall be deemed to include the other gender; 1.2.2 References to clauses and Sections are to clauses of and the Sections to this Agreement, references to paragraphs are, unless otherwise stated, references to the Sections referred to in said paragraphs, and references to this Agreement include the Sections; 1.2.3 References to Persons include those Person's successors and other beneficiaries; 1.2.4 Clause and Section headings are included for the convenience of the Parties only and shall not be used for the interpretation thereof; 1.2.5 References to all or any part of any statute or statutory instrument include any statutory amendment, modification or re-enactment in force from time to time and references to any statute include any statutory instrument or regulations made under it. 1.2.6 The use of terms including means "including but not limited to"; 1.2.7 The words "herein", "hereof", "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision. 5 CONFIDENTIAL 16-12-2004 SECTION 2 SALE AND PURCHASE OF ASSETS 2.1. PURCHASE AND SALE OF ASSETS; SIGNING PAYMENT. (a) On the terms and subject to the conditions of this Agreement, at the Closing the Seller shall sell, assign, transfer, convey and deliver to the Purchaser, and the Purchaser shall purchase, acquire and accept from the Seller, the Activities and all of the Acquired Assets, free and clear of all Encumbrances, other than Permitted Liens, and in consideration for the Purchaser's acquisition of the Activities and all of the Acquired Assets, the Purchaser shall assume the Assumed Liabilities and pay Seller, on the Closing Date, free and clear of and without reduction for any value-added or withholding tax, an amount equal to Six Million Two Hundred Thousand Euro (EUR 6,200,000) (the "Purchase Price") broken down as follows: (i) One Million Three Hundred Thousand Euro (EUR 1,300,000) for the land (incl. Equipment like roads, car parks,...) plus (ii) Four Million Nine Hundred Thousand Euro (EUR 4,900,000) for the buildings and equipment. (b) In consideration of the advantages for Seller resulting from the transaction contemplated hereby Seller agrees to make the following payments to Purchaser: (i) within six (6) months from the Closing Date: One Million Five Hundred Thousand Euro (1,500,000 EUR) (ii) within eighteen (18) months from the Closing Date: One Million Five Hundred Thousand Euro (1,500,000 EUR) (iii) within thirty (30) months from the Closing Date: One Million Five Hundred Thousand Euro (1,500,000 EUR) (iv) within forty-two (42) months from the Closing Date: Five Hundred Thousand Euro (500,000 EUR). (c) The payments pursuant to Section 2.1(a) shall be made by wire transfer of immediately available funds to a bank account of the Seller in Belgium as specified by the Seller before the Closing Date. (d) The payments pursuant to Section 2.1(b) shall be made by wire transfer of immediately available funds to a bank account of the Purchaser in Belgium as specified by the Purchaser before the Closing Date. 6 CONFIDENTIAL 16-12-2004 2.2. ASSUMED LIABILITIES. (a) At and by virtue of the Closing Purchaser shall assume and thereafter will pay, discharge, perform or otherwise satisfy when due all Liabilities (other than Excluded Liabilities) according to their respective terms arising out of the use, ownership and/or operation of the Acquired Assets on or after the Closing Date subject to the appropriate representations and warranties of the Seller pursuant to Sections 4 and 6 below. The foregoing Liabilities being assumed by Purchaser are referred to hereinafter collectively as the "Assumed Liabilities." (b) Notwithstanding any other provision of this Agreement to the contrary, but subject to Section 2.2.(c) below and to the terms of the Letter Agreement dated September 28, 2000 between Pfizer Inc., Pfizer Animal Heath S.A, Philipp Brothers Chemicals, Inc. SmithKline Beecham plc and SmithKline Beecham Biologicals S.A., a copy of which is attached hereto as Exhibit D, other than the Assumed Liabilities, the Purchaser shall not assume or be deemed to have assumed any Liability or obligation of the Seller whatsoever pursuant to this Agreement, including any Liabilities arising out of the use, ownership and/or operation of the Acquired Assets prior to the Closing Date (the "Excluded Liabilities"). (c) All Site Liabilities in connection with events or activities conducted by Purchaser on the Site before January 19th, 1995 will remain Purchaser's responsibility according to the terms of the Sale Agreement between SmithKline Beecham Biologicals SA and Pfizer SA dated January 19th, 1995 (hereafter "Previous Liabilities"). 2.3. MAINTENANCE OF ACQUIRED ASSETS AND CLEAN-UP ACTIVITIES (a) The Seller undertakes to keep all Acquired Assets and related utilities, including without limitation the pilot unit referred to in Section 2.4 (b) (iv) below, fully operational until the Closing Date subject to normal business considerations. The Seller also undertakes to keep all Acquired Assets on the Site between the Effective Date and the Closing Date. Purchaser shall be permitted to control that all Acquired Assets physically remain on the Site after the Effective Date, including without limitation the analytical equipment listed in Exhibit A, and Seller shall cooperate with Purchaser to set up and effect such control. (b) The indicative list of buildings and equipment Purchaser intends to clean-up is attached hereto as Exhibit E. The clean-up activities either through destruction or otherwise shall be the responsibility of Purchaser. The Seller shall reimburse to Purchaser clean-up costs according to demolition costs up to a maximum amount of Seven Hundred Thousand Euro (EUR 700,000). Such reimbursement shall be made by Seller to a bank account designated by Purchaser, based on documented expenses submitted by Purchaser when the cost of clean-up activities reach Seven Hundred Thousand Euro (EUR 700,000) or, if such cost is lower than Seven Hundred Thousand Euro (EUR 700,000), when the clean-up activities will be completed by Purchaser, such payment to be made no later than on the first anniversary of the Closing Date. Purchaser shall be authorised to start clean-up activities on the Site before the Closing Date, provided such clean-up activities do not affect the on-going manufacturing and granulation activities as well as the stockpiling or residual activities of Seller on the Site. For the avoidance 7 CONFIDENTIAL 16-12-2004 of doubt, the demolition costs to be reimbursed by Seller hereunder shall not be diminished by the value of equipment dismantled or recovered by Purchaser. For the avoidance of doubt, the buildings and equipment referred to in this Section 2.3 are all part of the Acquired Assets. 2.4. JOINT ACTION; CO-OPERATION (a) General. (i) Subject to the terms and conditions of this Agreement, each of the Parties shall use its respective best efforts, and shall co-operate with the other Party, to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable, including furnishing any necessary information or copies of documentation, or obtaining any consents, approvals, permits, authorisations or waivers, to cause the transaction contemplated by this Agreement to be consummated, as expeditiously as reasonably practicable in accordance with the provisions of this Agreement. In the event that any action, suit, proceeding or investigation relating to this Agreement or the transaction contemplated hereby is commenced at any time, each of the Parties shall co-operate and use its best efforts to defend against the same. (ii) In particular, but without being considered as an exhaustive list, the Seller and Purchaser shall jointly proceed with any official notifications or other formalities as may be required by environmental or planning regulations, and Seller and Purchaser shall cooperate to obtain such official environmental or planning authorisations as may be required by such environmental or planning regulations. (iii) Parties agree that all costs and expenses, including taxes, related to the Activities, Site and Acquired Assets, and in particular, but without this being an exhaustive list, all costs and expenses, including taxes, related to the gas and electricity supply, shall be apportioned such that these costs and expenses, including taxes, accrued during or referable to periods prior to Closing Date, shall be borne by the Seller and thereafter by the Purchaser. In the event Seller has prepaid during the period prior to the Closing Date such costs and expenses which only accrued or are referable to periods after the Closing Date, Purchaser shall reimburse such costs and expenses to Seller. In the event Purchaser has paid during the period after the Closing Date such costs and expenses which accrued or are referable to periods prior to the Closing Date, Seller shall reimburse such costs and expenses to Purchaser. Seller and Purchaser shall use all reasonable efforts to draw up and agree a provisional statement of the apportionment, and the balance owing by or between Seller and Purchaser, thirty (30) calendar days after the Closing which statement shall be reviewed and finalized twelve (12) months after Closing. Seller shall pay to Purchaser, and Purchaser shall pay 8 CONFIDENTIAL 16-12-2004 to the Seller, as applicable, the balance agreed within ten (10) calendar days after (i) agreeing on the provisional statement of the apportionment, and (ii) agreeing on the final statement of apportionment. (b) Pre-Closing. (i) Seller shall arrange for the closure (fill in) of the water well number 3 located on the Site in a professional manner before the Closing Date and shall bore in a professional manner a new water well delivering water the quantity and quality in accordance with the Seller's current permit. Both operations, closure and boring, will be duly documented and such documentation shall be provided by Seller to Purchaser as available but in any event before the Closing Date. In exchange for the closure of water well number 3, Purchaser shall provide to Seller and Seller shall be entitled to receive from Purchaser the water supply Seller requires to operate and conduct its business till the Closing Date as its is currently conducted. (ii) Upon reasonable notice by Purchaser, Seller shall provide Purchaser with all necessary and reasonable access to and use, including occupation by Purchaser, of those facilities of the Site as Purchaser may require for purposes of its MPL activities before the Closing Date provided such access and use, including occupation by Purchaser, do not effect the on-going activities of the Seller on the Site. From July 1, 2005 or an earlier date as may be agreed upon between the Parties Purchaser may start modifications to Buildings 1 and 1A as per the drawings attached hereto as schedule 2.4 (b) (ii), except to the QC part of those buildings, in order to set up Purchaser's projects and activities related to MPL. In particular Seller agrees that Purchaser may install a GMP pilot unit or units for MPL in Building 1A if it does not interfere with the Industrial Activities. In case Purchaser decides to implement such GMP pilot unit before the Closing Date, Seller shall carry out the necessary works to isolate the areas dedicated to Virginiamycin and MPL activities in Buildings 1, 1A and 3 pursuant to Purchaser's instructions. All costs relating to modifications to Buildings 1 or 1A and 3 necessary to isolate the areas dedicated to Virginiamycin and MPL activities made in accordance with such instructions will be borne by Purchaser, including : - modification of people access and material access, - fluids and energy separated pipes - isolation works. (iii) The Parties agree that during the period prior to and until Closing, Seller shall place at the disposal of Purchaser such Employees as Purchaser may request for its activities during the period prior to Closing, based on the availability of such Employees. Purchaser shall reimburse Seller for the services of such Employees and at a rate per Employee as specified in Schedule 2.4. 9 CONFIDENTIAL 16-12-2004 (iv) Seller shall maintain the pilot unit used by Seller to perform the activities described in the Work Plan under the Process Development Agreement of August 19, 2004 between the Parties and continue operations of said pilot unit during the period prior to and until Closing. In particular, but without limitation, Seller agrees to maintain fully operational the analytical equipment necessary for the MPL activities listed on Exhibit A attached hereto. (v) The Seller shall use its best efforts, with the collaboration from Purchaser, to obtain regular town planning permits for the following buildings : P11 and H31. (c) Post-Closing. Seller shall have until December 31st, 2006 to complete the Finishing Activities for intermediate Virginiamycin products ("Transition Period"). During such Transition Period, Purchaser shall (i) place at the disposal of the Seller such employees as Seller may request for such Finishing Activities including, but not limited to, production employees and laboratory personnel, and (ii) provide Seller with all necessary and reasonable access to those areas of the Site as Seller may require for purposes of the Finishing Activities. Seller shall reimburse Purchaser for such employees placed at the disposal of Seller at a rate per such employee and for other costs as specified in Schedule 2.4. Seller agrees that it will indemnify and hold harmless Purchaser for any damages or claims incurred by Purchaser as a result of the Finishing Activities conducted by Seller. This obligation of indemnification shall not be subject to any other limitation set forth in this Agreement. (d) Process Development Agreement. Seller shall continue to perform its obligations under the Process Development Agreement entered into with Purchaser on 19 August 2004 and allocate its resources to achieve the objectives, in particulars the milestones, set out in the Process Development Agreement. (e) Seller shall be responsible for termination of all contracts relating to the Excluded Assets and, as may be directed by Purchaser, Seller shall either continue maintenance agreements listed in Schedule 2.4 (e) and other relevant agreements related to the Acquired Assets in the name of Purchaser or terminate said agreements. Seller and Purchaser shall jointly notify utilities suppliers and other relevant contractors of change of name of contracting party. 2.5. CLOSING. (a) Closing. The consummation of the transactions contemplated by this Agreement (the "Closing") shall take place on November 30, 2005 or at another date mutually agreed between the Parties provided such other date is not earlier than July 1st, 2005 and not later than June 30th, 2006. The date on which the Closing occurs is referred to in this Agreement as the "Closing Date". 10 CONFIDENTIAL 16-12-2004 (b) Seller's Obligations at the Closing. At the Closing the Seller shall undertake, cause to be undertaken, deliver to the Purchaser and/or cause to be delivered to the Purchaser, as applicable, the following: (i) those Acquired Assets which are capable of physical delivery and which are cleaned, emptied of any raw materials unless otherwise indicated by Purchaser and of which Decommissioning has been completed; (ii) a receipt for the Purchase Price. (c) Purchaser's Obligations at the Closing. At the Closing the Purchaser shall pay to the Seller the Purchase Price. (d) Both Parties' Obligations at the Closing. At the Closing the Purchaser and the Seller shall: (i) execute the notarial deed of transfer of the buildings and fixtures set forth on Exhibit A. The notarial deed shall either contain the representations and warranties from the Seller in Sections 4 and 6 hereof or refer to Sections 4 and 6 hereof; (ii) jointly notify the competent environmental authorities and any other competent authority of the change of operator pursuant to the notification letter to be drafted by Seller who will modify this letter following the reasonable comments of Purchaser and a form of which is attached hereto as Exhibit I. 2.6. RISK OF LOSS. Until the Closing, any loss of or damage to the Acquired Assets from fire, casualty or any other occurrence shall be the sole responsibility of the Seller (except for loss or damage caused by the Purchaser's activities on the Site, including MPL activities performed by Purchaser as set out in Section 2.4. (b) (ii) and/or clean-up performed by Purchaser, as set out in Section 2.3(b)). Upon the Closing, risk of loss to the Acquired Assets shall be transferred to the Purchaser except that Seller shall remain solely responsible for any loss or damage to the Acquired Assets from fire, casualty or any other occurrence related to Seller's Finishing Activities post Closing. The Parties acknowledge that if any Acquired Assets are lost or damaged by fire, casualty or any other occurrence the Purchase Price shall be appropriately adjusted, but the Closing shall nonetheless proceed. 2.7. SCOPE OF THE PARTIES' RIGHTS. 11 CONFIDENTIAL 16-12-2004 The Purchaser hereby acknowledges and agrees that it will acquire no right, title, or interest whatsoever in any property or assets of the Seller except as explicitly set forth in this Agreement. SECTION 3 WORKFORCE 3.1. TRANSFER OF EMPLOYEES (a) Parties acknowledge that the rights and obligations of Seller with respect to the Employees referred to in Exhibit G and Exhibit H will at Closing transfer with the Activities to the Purchaser pursuant to the Belgian Collective Bargaining Agreement nr. 32bis on the safeguarding of employees' rights in event of transfers of undertakings, businesses or parts of businesses ("CBA nr. 32bis"). (b) Seller shall be responsible for all costs, expenses and other liabilities arising from or relating to any claims or demands made by Employees, and all liabilities for employee benefits received, earned, accrued or enjoyed, in relation to any period up to and including the Closing Date and shall accordingly indemnify and hold the Purchaser harmless. (c) Purchaser shall be responsible for all costs, expenses and other liabilities arising from or relating to any claims or demands made by Employees, and all liabilities for employee benefits received, earned, accrued or enjoyed, in relation to any period following the Closing Date and shall accordingly indemnify and hold the Seller harmless in respect thereto. (d) Parties agree that costs in relation to Employees borne by the Seller shall be apportioned such that these costs in relation to Employees accrued, or referable to periods, prior to the Closing Date shall be borne by the Seller and thereafter by the Purchaser. Such costs in relation to Employees shall include, but not be limited to: salaries, wages, expenses, commission, bonuses, overtime pay, 13th month, sick pay, accrued holiday pay entitlement, full financing of applicable benefit schemes, and other emoluments including taxes, social security contributions or other amounts required to be withheld there from or paid in relation to any of the foregoing. Seller and Purchaser shall use all reasonable efforts to draw up and agree a statement of the apportionment, and the balance owing by or between Seller and Purchaser, as soon as practicable and at the latest thirty (30) calendar days after the Closing. Seller shall pay to Purchaser or Purchaser shall pay to Seller, as the case may be, the balance agreed within ten (10) calendar days after agreeing on the statement of the apportionment. (e) If for any reason, any Employee listed on Exhibit G or Exhibit H leaves the Seller before the Closing, Seller shall be entitled to fill temporarily the open position(s) until the Closing Date with replacement employees as necessary for its own activities. However, on or after the Closing Date, Purchaser shall have no obligation whatsoever to take over or employ any other person, including any such replacement employees, than the persons listed in Exhibit G and Exhibit H, pursuant to the transaction set out in this Agreement. 12 CONFIDENTIAL 16-12-2004 3.2. REDUNDANCIES Seller shall be responsible and shall bear the entire expense for all redundancies, dismissals or lay-off of Seller's employees who are not listed in Exhibit G or Exhibit H attached hereto. 3.3. NON-HIRING Purchaser agrees not to recruit any employee of Seller to start employment at Purchaser before the Closing Date, except as otherwise expressly agreed in writing between Parties. It is recognized and agreed that Purchaser cannot prevent Seller's employees to actively solicit or apply for positions open at Purchaser. Hiring by Purchaser of any such Seller's employee who has solicited or applied for a job at Purchaser shall be permitted and shall not constitute a breach of this Agreement SECTION 4 REPRESENTATIONS AND WARRANTIES OF SELLER The Seller hereby represents and warrants to the Purchaser on the Effective Date that: 4.1. ORGANIZATION. The Seller is a corporation duly organized, validly existing and in good standing under the laws of Belgium. The Seller has all requisite power and authority to own, use and operate all of the Acquired Assets, and to conduct its Activities as currently being conducted. 4.2. AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY. The Seller has the requisite power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder. The execution and delivery of this Agreement and the performance by the Seller of its obligations hereunder have been authorized by all requisite action on the part of the Seller. This Agreement has been validly executed and delivered by the Seller and constitutes a legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or similar laws affecting creditors' rights generally and to general equitable principles. 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS. (a) Neither the execution and delivery of this Agreement by the Seller, nor the performance by the Seller of its obligations hereunder will: (i) violate the organizational documents of the Seller; (ii) conflict with or result in a violation or breach of, or constitute a default under, any contract, agreement or instrument to which the Seller is a party or by which 13 CONFIDENTIAL 16-12-2004 the Acquired Assets are bound, or result in the creation or imposition of any Encumbrance upon any of the Acquired Assets (in particular the Asset Purchase Agreement dated 28 September 2000 between Pfizer, Inc. and Philipp Brothers Chemicals, Inc. (predecessor of Phibro Animal Health Corporation) does not contain any obligation that would affect the Acquired Assets); or (iii) violate or conflict with any law, rule, regulation, judgement, order or decree of any court, other than, in the case of clauses (ii) and (iii) above, such as would not, individually or in the aggregate, have a material adverse effect on the Acquired Assets. (b) No filing with, and no permit, authorization, consent or approval of, any Governmental Authority or any other Person is necessary for the consummation by the Seller of the transactions contemplated by this Agreement. 4.4. TITLE TO ASSETS. Subject to Section 6.1.7, on the Closing Date Seller shall hold good and marketable title to the Acquired Assets, free and clear of any Encumbrance, except for Permitted Liens. Upon delivery of the Acquired Assets to Purchaser on the Closing Date, Seller shall convey to Purchaser good and marketable title to the Acquired Assets, free and clear of any Encumbrance, except for Permitted Liens. 4.5. AS IS; WHERE IS. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE ACQUIRED ASSETS CONVEYED TO PURCHASER HEREUNDER BY SELLER ARE PROVIDED "AS IS" AND "WHERE IS" AND SELLER MAKES NO OTHER REPRESENTATIONS OR WARRANTIES WITH RESPECT THERETO. 4.6. BROKERS OR FINDERS. The Seller has had no dealings, negotiations or communications, whether in writing or otherwise, with any broker(s), other intermediaries or other person acting pursuant to the Seller's authority who will be entitled to make any claim against the Purchaser for any commission, finder's fee or other fee may, in any circumstance or event, be payable in connection with the transactions contemplated by this Agreement. 4.7. MATERIAL ASSETS RELATED TO ACQUIRED ASSETS. To the knowledge of the executive officers of Seller, all material assets which are reasonably related to the Acquired Assets are listed in Exhibit A. 4.8. SPECIFIC WARRANTIES. (a) Acquired Assets. To the best of Seller's knowledge, Seller has operated the Acquired Assets and Activities in all material respects, on the Site in compliance with all applicable laws and regulations and requirements, and under all legally required authorisations and/or permits. 14 CONFIDENTIAL 16-12-2004 (b) Legal action. There is no legal action ongoing or pending or, to the best of Seller's knowledge, threatened against the Seller related to the Acquired Assets. To the best of Seller's knowledge, there is no circumstance susceptible of giving rise to a claim for damages or other legal action relating to or involving the Acquired Assets. To the best of Seller's knowledge, Seller's activities on the Site or Seller's operation of the Site are not subject to any investigation from a Governmental Authority and the Seller has received no notification that a similar investigation will be conducted on the Site. (c) Employees (i) Employees: the only persons assigned to the Activities on the Closing Date are the persons listed in Exhibit G and Exhibit H, save for changes in personnel to which the Purchaser has consented by prior written agreement between the Effective Date and the Closing. On or after the Closing Date, Purchaser shall have no obligation to employ any other person, including the replacement employees referred to in Section 3.1(e), than the persons listed in Exhibits G and H pursuant to the transaction set out in this Agreement. (ii) Representative Bodies: the Seller has complied with all applicable regulations in respect of representative bodies, in particular with regard to the establishment of Works Councils, or Health and Safety Committees. Neither the Seller nor Seller's officers have been investigated or prosecuted for a "delit d'entrave" (impeding the course of the law) or any charge subsequent to a refusal or delay in instituting Works Councils, or Health and Safety Committees. No Works Council representative has been appointed to Seller's board of directors. (iii) Collective Bargaining Agreements - Employment contracts: the Seller has respected the terms of all applicable collective bargaining agreements and other agreements and the legal and contractual terms of all its employment contracts. The Seller has complied with all applicable national, sectoral and companies' Collective Labour Agreement provisions as well as with all applicable fiscal and social security laws, regulations and administrative circulars. It has complied with all legal and statutory requirements of pension schemes and group insurance policies, in particular the group insurance policy concerning health, incapacity and/or death before retirement age. Seller represents and warrants that on the Closing Date, it will have complied will all legal and statutory requirements as to financing of its respective benefit schemes as listed in Schedule 4.8. (c) (iv) hereof, it being in particular understood that : (x) the minimum financing requirements of the old age pension built up by Belgian legislation will have been respected, and 15 CONFIDENTIAL 16-12-2004 (y) the pension fund assets that will be transferred from Seller to Purchaser on the Closing Date will not be less than the minimum financing requirements. Any and all of the then existing surplus above the minimum financing requirements will be transferred to Purchaser. The correct amounts under this clause will be determined and the necessary adjustments will be made, within ninety (90) days after the Closing Date. (iv) Employee Benefits: Except as listed in Schedule 4.8.(c)(iv) , there are no extra-legal pension plans, statutory or voluntary profit sharing schemes retirement bonus plans, life or health insurance or other employee benefit schemes of whatever nature in existence or proposed or due to take effect after the Closing Date nor any contractual or moral obligation to create or provide the same. has a right to make a claim for employee benefit arising from past or existing statutory or voluntary profit sharing scheme. Seller represents and warrants that any and all benefit schemes applicable comply with any and all applicable rules and legislation on complementary pension schemes (old age, death, disability and medical coverage). (v) Indemnities: at the date hereof, the Seller does not owe any amounts to or for the benefit of any person in respect of past service or the termination of the employment contract. (vi) Remuneration: Schedule 4.8.(c)(vi) truly and accurately lists the date of birth, date of commencement of continuous employment and protection against dismissal of each Employee and the full remuneration and benefit package to which each Employee is entitled. Except as listed in Schedule 4.8.(c)(vi), there are no agreements or outstanding commitments (other than provided by law, collective labour agreements and/or individual employment contracts) to increase the remuneration of any Employee in the future. Furthermore there have been and there will be no negotiations that are due to take place for any increase in the remuneration or benefits of any of the Employees within a period of twenty-four (24) months after the Closing. (vii) Absence: Except as described in Exhibits G and H, as of the Effective Date, no Employee is on secondment, absent on grounds of disability or other long-term leave of absence or in receipt of any benefit pursuant to any permanent health insurance or similar arrangement, on maternity leave or on parental leave. (viii) Disputes: None of the Employees has any existing dispute, claim or cause of action against the Seller or will have any dispute, claim or cause of action against Purchaser whose triggering event originates in the employment relationship between these Employees and the Seller prior to the Closing Date nor is bringing or, to the best of Seller's knowledge, threatening to bring or will bring any proceedings before a court or otherwise, nor are 16 CONFIDENTIAL 16-12-2004 there, so far as the Seller is aware, any circumstances in existence likely to give rise to any such dispute, claim or cause of action. (ix) Change of control: No Employee will be entitled by reason of this transaction contemplated by this Agreement to any one-off payment, bonus or to terminate his/her employment. (x) Terms of employment: No proposal, assurance or commitment has been communicated to any Employee regarding any change to his terms of employment or working conditions. (xii) No special advantages: None of the Employees listed in Exhibits G or H benefits from provisions in the event of dismissal or removal from office which would oblige the Seller to pay amounts (i) exceeding those amounts provided pursuant to law and applicable collective agreements or (ii) due pursuant to a "Golden Parachute" clause. None of the Employees has the right to a pension or other advantage at the time of retirement which exceeds that which is provided under law, applicable collective agreements, and company pension plans. (xiii) The Seller has not, in the past twelve months, given to or received from any Employee notice of termination of employment. (d) Insurance The Seller is up to date with respect to the payment of the premiums due for insurance policies related to the Acquired Assets which are in full force and effect, and has infringed no provision of said policies which could prejudice any claim. There are no outstanding claims made by the Seller under any of the insurance policies related to the Acquired Assets. (e) Health, Safety, Environment and Planning (i) General representations and warranties. The Purchaser acknowledges that, prior to the date of signature hereof, both itself and its advisers have had access to certain health, safety, planning and environmental information related to the Seller, the Activities and the Acquired Assets in the context of the due diligence performed in respect of documentation and information made available by the Seller to the Purchaser, as well as through various discussions with the Seller's main executives, the Seller's statutory auditors and visits to the Seller's Site, without having conducted an audit on Site. The Purchaser considers that such information, if fairly disclosed by Seller, is satisfactory to take its decision to purchase the Activities and all of the Acquired Assets. The Seller hereby declares that at the Effective Date and until the Closing Date: 17 CONFIDENTIAL 16-12-2004 (1) to the best of Seller's knowledge, for both the Activities and Acquired Assets, the Seller respects and materially complies with all health, safety, planning and environmental protection and regulations and standards applicable at the Closing Date, and has all necessary material permits and authorisations and has completed all formalities as required with regards to all health, safety, planning and environmental protection and regulations and standards applicable at the date of the transfer. (2) the environmental audits that have been conducted from 1992 till 2001 do not reveal any significant detrimental findings in respect to the Site, Activities or Acquired Assets; the Seller has carried out no environmental audit of its facilities and its site since 2001 (other than cross-site audits with Purchaser). (3) for both the Activities and the Acquired Assets, the Seller has all necessary permits and authorisations related to town planning (urbanisme) except for (i) the buildings P4, P5 and H5 which Purchaser intends to demolish (ii) building H29 which Purchaser intends to move and (iii) buildings P11 and H31 for which the Seller shall use its best efforts, with the collaboration from Purchaser, to obtain permits before the Closing pursuant to Section 2.4. (b)(v), and has completed all formalities as required with regard to such authorisations and permits. Said authorisations and permits have been lawfully issued and are valid. (4) the Seller has received no notification from Governmental Authorities concerning any infringement of applicable environmental protection regulations and standards or involving its liability with regard to any environmental pollution or damage. (5) the Seller declares that the legal inspections made in respect of health, safety, environmental and planning matters relating to the Site, Activities and Acquired Assets do not reveal any significant detrimental findings in respect to the Site, Activities or Acquired Assets. (6) the Seller is concerned by no legal action or decision concerning health, safety, environmental and planning matters which has an adverse effect on permits and authorisations for the Activities and Acquired Assets (i) Special representations and warranties - Incidents (1) The Seller declares that to his knowledge there have been no operating incidents or other major events concerning the facilities mentioned above. (2) The Seller declares that to his knowledge there has been no pollution or risk of pollution of the soil or sub-soil or the water table, except for two (2) accidental discharges of MIBK that have occurred in April 1999 and April 2004 and the soil pollution well known to the Purchaser which is currently under remediation by the Purchaser. (f) Equipment/Installations 18 CONFIDENTIAL 16-12-2004 The Seller declares that all inspections in respect of equipment and installations, included in the Acquired Assets, which are subject to acceptance by official bodies, have been carried out in compliance with legal requirements and that there is no report of non-conformity which would prevent Purchaser from using Seller's equipment and installations. (g) PCB/PCT The Seller declares that all PCB/PCT have been professionally eliminated from the facilities of the Seller in accordance with the Decree of the Walloon government of 25 March 1999 on the elimination of PCB/PCT. (h) Use and future extensions of Site/Acquired Assets/Activities The Seller declares that it has not made any arrangements or has entered into any agreements with any third parties or Governmental Authorities at federal, regional and/or local levels, which limit the use of the Site and the Acquired Assets and the conduct of the Activities. In particular, the Seller declares that it is not aware of, and has not agreed with any third parties or Governmental Authorities whether federal, regional or local, to any limitation to possible future extensions of the Site, Acquired Assets and Activities. (i) Intellectual Property rights The Seller declares that it does not control any intellectual property rights which are relevant to the operations and activities, including the Activities, which Purchaser will carry out with the Acquired Assets. SECTION 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER The Purchaser hereby represents and warrants to the Seller that on the Effective Date: 5.1. ORGANIZATION. The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Belgium. The Purchaser has all requisite power and authority to own, lease and operate its properties and to conduct its business as now being conducted. 5.2. AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY. The Purchaser has the requisite power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder. The execution and delivery of this Agreement and the performance by the Purchaser of its obligations hereunder have been authorized by all requisite action on the part of the Purchaser. This Agreement has been validly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, fraudulent transfer, moratorium, 19 CONFIDENTIAL 16-12-2004 reorganization or similar laws affecting creditors' rights generally and to general equitable principles. 5.3. CONSENTS AND APPROVALS; NO VIOLATIONS. (a) Neither the execution and delivery of this Agreement by the Purchaser nor the performance by the Purchaser of its obligations hereunder will: (i) violate the certificate of formation, operating agreement or other organizational document of the Purchaser; (ii) conflict with or result in a violation or breach of, or constitute a default under, any contract, agreement or instrument to which the Purchaser or any of its Affiliates is a party or by which any of its or their properties or assets are bound; or (iii) violate or conflict with any law, rule, regulation, judgement, order or decree. (b) No filing with, and no permit, authorization, consent or approval of, any Governmental Authority is necessary for the consummation by the Purchaser of the transactions contemplated by this Agreement. SECTION 6 WARRANTIES - INDEMNIFICATION 6.1. WARRANTIES The Seller hereby represents and warrants that all the Warranties given by it in this Agreement are true, complete and accurate as of the date hereof, subject only to the disclosure exceptions expressly mentioned in this Agreement and its Sections and Exhibits. It is expressly agreed between Parties that information disclosed in the context of the due diligence shall be considered as appropriate disclosure for the purposes of releasing Seller's liability pursuant to the representations and warranties given by the Seller in Section 4 of this Agreement, only if such information is fairly disclosed. It is expressly agreed between Parties that the Seller may not be released from any liability under the representations and warranties of Section 4 of this Agreement by the oral information disclosed to Purchaser and/or its counsels prior to the Closing Date (including the oral information collected during the due diligence mentioned in the above paragraph). 6.1.1 The Purchaser acknowledges that, prior to the Effective Date, both itself and its advisers have had access to certain technical, financial, legal, tax, commercial and accounting information related to the Seller, as well as through various discussions with the Seller's main executives, the statutory auditors and visits to the Site. The Purchaser considers that such information is satisfactory to take its decision to purchase the Acquired Assets. 6.1.2 The Seller shall be liable to the Purchaser in accordance with the terms of the Warranties set forth in Section 4 and this Section 6. The Purchaser shall be entitled to notify a 20 CONFIDENTIAL 16-12-2004 claim to, and to actively enforce such claim against, the Seller for any misrepresentation and/or material breach of the Warranties as set forth in Section 4 or Section 6 by Seller and for the entire amount of such claim, subject to Section 6 and the limitations set forth in Section 7. 6.1.3. Each Warranty is given independently from and shall not be limited by reference to any of the other Warranties; one and the same prejudice shall however only be indemnified once under the terms hereof. 6.1.4. The Seller shall as soon as possible and, in any event, within (15) days from the occurrence of such event, disclose to the Purchaser in writing any matter which becomes known to the Seller after the execution hereof which is or could reasonably be expected to constitute a breach of the Warranties or affect the accuracy thereof. 6.1.5 Subject to the limitations set out in Section 7 of this Agreement, the Seller undertakes to indemnify the Purchaser for any costs, expenses, damages, claims or losses (including increase of liabilities or decrease of value of assets) incurred by the Purchaser which directly results from: (a) a misrepresentation and/or material breach of any of the Warranties as set forth in Section 4 or this Section 6 (a "Loss"). (b) the fact that Seller has not obtained the consent from its bondholders and banks and/or has not obtained the lifting of the mortgage on the Acquired Assets as referred to in Section 4.3. and Section 4.4. above; or 6.1.6. * Omitted pursuant to our request for confidential treatment. 6.1.7. If at Closing the Mortgage is not lifted the Seller undertakes to indemnify and keep indemnified Purchaser. 6.2. NOTIFICATION OF CLAIMS, PAYMENT OF CLAIMS AND WARRANTIES 21 CONFIDENTIAL 16-12-2004 6.2.1 Upon the Purchaser becoming aware of any Loss which may give right to a claim, the Purchaser shall, within a maximum period of sixty (60) days notify the Seller in writing (as indicated in Section 12.1 of this Agreement) of the details of the claim, including the Purchaser's best estimate of the amount of the claim, as well as any documents justifying Purchaser's claim ("Claim Notification"). Within thirty (30) days of receipt of a Claim Notification, the Seller shall notify the Purchaser of its acceptance or rejection of the claim or make an offer to settle ("Seller Position Notification"). In the event that, within such thirty (30) day period from the date of the Claim Notification the Seller should fail to notify its position to the Purchaser, or should notify its acceptance of the claim, or should the Purchaser accept the proposed settlement, the claim shall be payable in accordance with Section 6.2.2 of this Agreement. Should the Seller notify the Purchaser within such thirty (30) day period from the date of the Claim Notification that it rejects the claim or should the Purchaser reject the proposed settlement, the claim shall be (i) dealt with under the expert procedure set forth in article 6.4 if the Purchaser and the Seller agree that the dispute concerns the valuation either of the prejudice or of the indemnity, or (ii) in all other cases, referred to the Commercial Court of Nivelles. 6.2.2. In the absence of any dispute in respect of a claim, the payment of any amounts owed by the Seller to the Purchaser under any such claim shall be made within fifteen (15) days from receipt of the Seller Position Notification to the Purchaser and within thirty (30) days of the date of the Claim Notification if the Seller fails to serve a Seller Position Notification in accordance with Article 6.1.1 of this Agreement; such payment shall be made in accordance with Section 6.2.4 hereafter. 6.2.3. In the event of a dispute between the Seller and the Purchaser in respect of any claim, the payment of any amounts owed by the Seller to the Purchaser under any such claim shall be made within fifteen (15) days from the notification by the Purchaser of any of the following events, and in accordance with the provisions of: - a full and final out of court settlement with respect to the claims ; - a final and unappealable court order ; - an expert decision, binding the Seller and the Purchaser, in accordance with the provisions of Section 6.4 herein. Such payment shall be made in accordance with Section 6.2.4. hereafter. 6.2.4. In the event of any amounts become due by the Seller to the Purchaser pursuant to this Section (the "Due Indemnity"), the following payment rules shall apply within the limitation period mentioned in Section 7.4 hereafter: 22 CONFIDENTIAL 16-12-2004 (i) firstly, the Purchaser shall set-off the Due Indemnity (but only to the extent that it relates to amounts due under Section 6.1.6) against the Purchase Price if not yet paid (or part of the Purchase Price) but only in respect of two million six hundred thousand Euro (EUR 2,6 million), then (ii) secondly, the Purchaser shall be entitled to draw the remaining amount due by the Seller of the Due Indemnity from the Company Guarantee under the terms of the attached Company Guarantee in Schedule 6.3, then (iii) thirdly, the Seller shall be bound to pay the difference, if any, between the portion of the Due Indemnity and the amounts charged against the previous part incumbent upon him pursuant to the paragraphs (i) and (ii) above. 6.3. GUARANTEE OF PAYMENTS UNDER THE WARRANTIES To secure the performance of obligations made by the Seller to the Purchaser, Phibro Animal Health Corporation, a New York corporation which is the ultimate parent company of Seller, has issued in favour of the Purchaser a first demand Company Guarantee attached hereto as Schedule 6.3. This Company Guarantee is not a substitution for all other rights or actions available to the Purchaser arising under this Agreement, this Company Guarantee being an integral part thereof. The Seller's obligations under this Agreement shall survive expiry of the above mentioned Company Guarantee and shall subsist until expiry of the deadlines set forth in this Agreement. 6.4. DISPUTES CONCERNING THE AMOUNT OF THE CLAIM In the event of any disagreement concerning the valuation of the Seller's liability for a claim, or the amount of the indemnity to be paid to the Purchaser, and if the Purchaser and the Seller agree that the dispute concerns solely such valuation of liability or amount of indemnity, the Parties agree to submit the matter to a third party expert appointed by mutual agreement and, in case of disagreement, appointed by the President of the Institute of Certified Accountants (Institut des Reviseurs d'Entreprise) at the request of the most diligent party. The Party initiating the action shall refer the matter and the expert shall furnish its opinion within sixty (60) days of referral in a written report sent by registered letter with acknowledgement of receipt to the Purchaser and the Seller. Fees charged by the expert shall be shared equally between the Seller and the Purchaser. 23 CONFIDENTIAL 16-12-2004 SECTION 7 LIMITATIONS TO WARRANTIES Any liability of the Seller for any claims for Losses, and any obligation of the Seller to indemnify the Purchaser pursuant to Section 6 shall be subject to the limitations of this Section 7: 7.1. DURATION OF THE WARRANTIES The Seller shall not be liable in respect of any claims for Losses for which a Claim Notification is notified by the Purchaser: (a) after 3 (three) years from the Closing Date; or (b) if the claim relates to tax or social matters after three (3) years from the Closing Date or after the end of a period of thirty (30) days following expiry of the relevant statute of limitations applicable to the claim, whichever is later. 7.2. EXCESS It is agreed that the Seller shall not be liable for any claims for Losses unless: (a) The amount of each individual claim (which expression shall be deemed to include any series of claims arising out of the same event or circumstance) exceeds Thirty Five Thousand Euros (E 35,000); and, (b) The aggregate amount of all individual claims in excess of this amount of Thirty Five Thousand Euros (E 35,000) (which expression shall be deemed to include any series of claims arising out of the same event or circumstance) exceeds Hundred Twenty Five Thousand Euros (E 125,000), it being stipulated that if such aggregate amount is above this threshold, the Seller shall indemnify the Purchaser for the entire amount of the claim or claims as from the first Euro. 7.3. LIMITATION The amounts payable by Seller for claims for Losses shall be limited to an aggregate amount of 6,200,000 EUR which aggregate amount shall automatically reduce and decline by the amount of any payment made to Purchaser in respect of obligations of Seller under this Agreement, it being understood, however, that such aggregate amount shall not reduce and decline by the amount of the clean-up and demolition costs payable by Seller to Purchaser pursuant to Section 2.3.(b) of this Agreement. For the avoidance of doubt, the indemnity provided for in Section 6.1.6 if Purchaser is taking over more than eighty-eight (88) employees is not subject to the limitation of this Section 7.3. 24 CONFIDENTIAL 16-12-2004 7.4. THIRD PARTY CLAIMS In the event that a third party should, after the Closing, assert a claim or threaten to assert a claim against the Purchaser which is likely to give rise to a claim by the Purchaser against the Seller for Losses: (a) The Purchaser shall notify such Third Party Claim to the Seller as soon as practicable and at the latest within sixty (60) days from the date of receipt of the Third Party Claim or the threat of Third Party Claim by the Purchaser, giving details of the claim and Purchaser's best estimate of the amount of the Loss, which estimate is not binding upon the Purchaser. (b) The Purchaser shall consult with the Seller as to the handling of any Third Party Claim. Notwithstanding Section 7.4.(a) above, in the event that the Seller and the Purchaser do not agree on whether a given Third Party Claim should be settled or defended, the ultimate decision shall rest with the Purchaser notwithstanding any claim for Losses which the Purchaser could make in that respect against the Seller; In this event, Purchaser may continue any proceedings at its own cost, in which case any indemnity due by the Seller for Losses shall be limited to the lower of the two following amounts: (i) the amount of the prejudice calculated as if the Third Party Claim had been settled through an agreement offered and/or accepted by the Third Party. (ii) the amount of the prejudice actually suffered by Purchaser, as shown through a final judgement concerning the Third Party Claim. (c) Should the Seller decide to join in the defense of a Third Party Claim, the Purchaser shall ensure that the Seller has full access to the information and documents required or desirable to understand the claims made against the Purchaser and shall consult with the Seller and take into account the Seller's reasonable views before making any decision in respect of the defense or settlement of the Third Party Claim; (d) The Seller, inasmuch as it shall have control of any evidence or information material to the defense against the Third Party Claim, shall fully disclose and deliver to the Purchaser any such evidence or information. 7.5. SET-OFF - PREJUDICE NOT GIVING ENTITLEMENT TO INDEMNIFICATION (a) If the Seller indemnifies the Purchaser under a claim for Losses and if the Purchaser later receives from a third party any amount in relation to such claim, the Purchaser shall reimburse within fifteen (15) days to the Seller the amount received (principal, interest and other) from such third party to the extent of the amount paid by the Seller to the Purchaser, after deduction of costs made by the Purchaser in order to collect this amount, it being understood that 25 CONFIDENTIAL 16-12-2004 the costs which can be deducted by the Purchaser are limited to five percent (5%) of the amount paid by the Seller to the Purchaser. (b) The following shall not be treated as a prejudice giving rise to a claim for Losses: deficiency notices issued by the tax, social or customs authorities which concern a simple timing difference for the payment of mandatory contributions, for example readjustments concerning depreciation or provisions or concerning tax provisions for deferred taxation, excluding any connected penalties, surcharges and late payment interest. 7.6. EXCLUSION OF LIMITATIONS No limitations on the Seller's liability contained in this Agreement shall apply to: (a) any claim for breach of Warranty or for breach of any other provision of this Agreement which (or the delay on discovery of which) is the result of deliberate misstatement or fraud of the Seller; or (b) any claim for breach of Warranty or for breach of any other provision of this Agreement relating to Employees, or the indemnifications payable by Seller as referred to in Section 6.1.6. Subject to the foregoing, for the avoidance of doubt, any claims for Losses relating to a Third Party Claim shall be subject to the limitations of Sections 7.1 through 7.3. SECTION 8 COVENANTS 8.1. TRANSFER TAXES. The Purchaser shall pay any stamp, documentary, registration transfer or similar tax (a "Transfer Tax") imposed under applicable law in connection with the transactions described in Section 2 hereof. The Purchaser shall also pay all legal costs and notary fees (other than Seller's legal costs) in connection with such transactions. The Seller and the Purchaser shall cooperate to prepare and timely file any tax returns required to be filed in connection with Transfer Taxes described in the preceding sentence. 8.2. FURTHER ASSURANCES. Each Party shall from time to time after the Closing take such other action and, without consideration, execute and deliver such further instruments as may be reasonably requested by the other Party to make effective the transactions contemplated by this Agreement. Each Party shall use all commercially reasonable efforts to consummate the transactions contemplated hereby as promptly as practicable. 26 CONFIDENTIAL 16-12-2004 8.3. NON-COMPETITION. (a) For a period of ten (10) years from the Closing Date, the Purchaser or its subsidiaries or affiliates shall not manufacture or market, directly or indirectly, anywhere in the world any products which compete with Viginiamycin or with any other products manufactured on the Site. (b) For a period of ten (10) years from the date of the signature hereof, the Seller or its subsidiaries or affiliates will not carry out any activities or assume any responsibilities with respect to the production of MPL, and shall not develop, conduct, or form any business concerned with the process development or manufacturing of MPL or other adjuvants in competition with the Purchaser's activities unless agreed to by Purchaser. 8.4 LICENSING OF THE INTELLECTUAL PROPERTY; CONFIDENTIALITY The Parties agree that it is the intent of the Agreement to exclude all Intellectual Property relating to Virginiamycin and other products manufactured at the site by Seller which are Excluded Assets. However, to the extent that any Intellectual Property related to Virginiamycin or other products manufactured at the site by Seller is transferred to the Purchaser as part of the Acquired Assets, the Purchaser hereby licenses such Intellectual Property to the Seller on an exclusive, even as to the Purchaser, world-wide, royalty-free and perpetual basis. In addition, the Purchaser will, and will cause its subsidiaries and affiliates to, keep all information related to both the excluded Intellectual Property and any Intellectual Property licensed pursuant to this Section, confidential. 8.5. REMOVAL OF ASSETS Subject to Section 8.9, the Parties agree that the Seller will have up to and including six (6) months after Closing (i) to move all of the Excluded Assets listed in Exhibit B, off the Site, and (ii) to terminate all maintenance contracts related to the Excluded Assets and/or the Acquired Assets (if applicable) pursuant to Section 2.4 (e). The Seller shall ensure that the removal of the Excluded Assets of the Site after Closing will not affect the on-going activities of the Purchaser on the Site 8.6. INFORMATION - REPORTS Seller will inform and keep Purchaser informed in reasonable detail until the Closing Date of all actions undertaken by and against Seller in respect of its rights and obligations under this Agreement, and in particular, but not limited to, (i) the preparations in respect of the transfer of the Site, Activities and Acquired Assets to Purchaser on Closing Date and (ii) the status of completion and execution of the collective dismissal of Seller's employees as announced to Seller's work's council on 17 November 2004, and the Seller shall in this respect provide to Purchaser such information as Purchaser may reasonably request from time to time. 27 CONFIDENTIAL 16-12-2004 8.7. PRESS RELEASES Any press release or public announcement regarding the transaction contemplated herein shall be subject to the prior written consent of both Parties, and, unless otherwise specified by the Purchaser, shall be made jointly by the Parties. 8.8. MATERNITY LEAVE/PARENTAL LEAVE Seller undertakes not to grant up and until the Closing Date additional extra-legal benefits in respect of maternity leave or parental leave to Employees as a result of which the costs related to such maternity leave/parental leave granted to Employees would be increased after the Effective Date. 8.9. BUILDING 3 (GRANULATION PROCESS) The Seller undertakes to clean, empty of all raw materials and have the Decommissioning of Building 3 completed by no later than December 31st, 2006. SECTION 9 CONDITIONS 9.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each Party to effect the Closing shall be subject to the satisfaction or waiver at or prior to the Closing of the following condition: There shall not be in effect any statute, regulation, order, decree or judgment of any Governmental Authority which makes illegal or enjoins or prevents the consummation of the transactions contemplated by this Agreement. 9.2. CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligation of the Purchaser to effect the Closing shall be further subject to the satisfaction or waiver by the Purchaser at or prior to the Closing of the following conditions: (a) Representations and Warranties. The representations and warranties of the Seller made in this Agreement, except for the representation and warranty made by Seller in Section 4.8.(c)(vii)(Absence) in respect of maternity leave which shall only be made by Seller on the Effective date, shall be repeated by Seller on the Closing Date and shall be materially true and correct as of the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct on and as of such earlier date), except where the failure to be so true and correct would not have a material adverse effect on the transactions contemplated hereby. 28 CONFIDENTIAL 16-12-2004 (b) Obligations and Covenants. The Seller shall have performed in all material respects all obligations and covenants required to be performed or complied with by the Seller under this Agreement by the time of the Closing. (c) Seller shall have fully executed and completed the collective dismissal for technical and economical reasons of 52 of its employees as announced to Seller's work's council on 17 November 2004 as a result of which the only persons assigned to the Activities on the Closing Date are the * Omitted pursuant to our request for confidential treatment Employees referred to in Exhibit G and Exhibit H. (d) The Seller shall have delivered to Purchaser a declaration from the Social Secretariat that there are no outstanding amounts due by the Seller in respect of the Employees. (e) The Seller shall have cleaned and emptied the Acquired Assets of all raw materials, and completed the Decommissioning thereof, unless otherwise indicated by Purchaser, according to criteria set and other conditions to be agreed upfront between the Parties, with the exception of Building 3 which building the Seller shall have decommissioned, cleaned, and emptied of all raw materials by no later than December 31st, 2006. (f) Seller shall have obtained all consents from bondholders and banks and shall have lifted the Mortgage subject to Article 6.1.7. 9.3. CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligation of the Seller to effect the Closing shall be further subject to the satisfaction or waiver by the Seller at or prior to the Closing of the following conditions: (a) Representations and Warranties. The representations and warranties of the Purchaser made in this Agreement shall be materially true and correct as of the Closing Date as though made on the Closing Date, except to the extent such representations and warranties expressly related to an earlier date (in which case such representations and warranties shall be true and correct on and as of such earlier date) except where the failure to be so true and correct would not have a material adverse effect on the transactions contemplated hereby. (b) Obligations and Covenants. The Purchaser shall have performed in all material respects all obligations and covenants required to be performed or complied with by the Purchaser under this Agreement by the time of the Closing. 29 CONFIDENTIAL 16-12-2004 SECTION 10 AMENDMENTS 10.1. AMENDMENTS, ETC. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties hereto. No delay or failure on the part of any Party hereto in exercising any right, power or privilege under this Agreement shall impair any such right, power or privilege or be construed as a waiver of any default or any acquiescence therein. No single or partial exercise of any such right, power or privilege shall preclude the further exercise of such right, power or privilege, or the exercise of any other right, power or privilege. SECTION 11 TERMINATION 11.1. TERMINATION PRIOR TO THE CLOSING. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written consent of the Parties; (b) by either Party notifying the other Party if a Governmental Authority shall have issued an injunction, order, decree or ruling or taken any other action that permanently restrains, enjoins, or otherwise prohibits the transactions contemplated by this Agreement and such injunction, order, decree, ruling or other actions shall have become final and non-appealable; provided that the Party seeking to terminate this Agreement pursuant to this Section 11.1(b) shall not have taken any action, or failed to take any action, that would cause it to be in breach of any of its agreements, representations, warranties or covenants set forth in this Agreement; 11.2. EFFECTIVENESS AND EFFECTS OF TERMINATION. The termination of this Agreement in accordance with Section 11.1(a) or (b) shall be effective upon notice of such termination being given by the terminating Party to the other Party. Following such termination of this Agreement: (a) The Parties shall have no further liability hereunder except that each Party shall remain liable to the other for any material breach by it of this Agreement; (b) All contracts, rights, licenses, obligations, agreements, understandings and letters of intent to which the Parties were a party at any time prior to the Effective Date ("Prior Rights") shall remain in whatever force and effect such contracts, agreements, understandings 30 CONFIDENTIAL 16-12-2004 and letters of intent were prior to the Effective Date, without giving effect to the execution and subsequent termination of this Agreement, or the negotiations and course of conduct of the Parties in connection therewith. Furthermore, neither Party shall be prejudiced, nor any Prior Rights such Persons may have be diminished, altered or terminated, in any way by the execution and subsequent termination of this Agreement and the negotiations and course of conduct of the Parties and their Affiliates in connection therewith; (c) Sections 12.5, 12.7 and 12.12 shall survive any such termination; and (d) Termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights, claims or amounts owed that shall have accrued to the benefit of either Party prior to such termination, relinquishment or expiration. Such termination, relinquishment or expiration shall not relieve either Party from obligations that are expressly indicated to survive termination or expiration of this Agreement. SECTION 12 MISCELLANEOUS 12.1. NOTICES. Any notice required or permitted under this Agreement shall be sent by certified mail, return receipt requested, postage pre-paid, or by facsimile with answer back to the following addresses of the Parties: If to Seller: Phibro Animal Health U.S., Inc., 65 Challenger Road 3rd Floor Ridgefield Park NJ 07660 UNITED STATES OF AMERICA Attention: President and copy to: Phibro Animal Health Corporation 65 Challenger Road 3rd Floor Ridgefield Park NJ 07660 UNITED STATES OF AMERICA Attention: General Counsel 31 CONFIDENTIAL 16-12-2004 If to Purchaser: GlaxoSmithKline Biologicals S.A. rue de L'Institut 89 1330 Rixensart BELGIUM Attention: Jean Stephenne, President, General Manager Any notice required or permitted to be given concerning this Agreement shall be effective upon receipt by the Party to whom it is addressed. 12.2. DESCRIPTIVE HEADINGS. The descriptive headings in this Agreement are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 12.3. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the Parties and delivered to the other Party. 12.4. ENTIRE AGREEMENT. This Agreement, entered into as of the date first written above, including the Exhibits and Schedules (which are incorporated in this Agreement by this reference and are made part hereof), constitutes the entire agreement between the Parties relating to the subject matter hereof and supersedes all previous writings and understandings relating to the subject matter hereof, including the Letter of Intent signed on 19 August 2004 by the Purchaser. No terms or provisions of this Agreement shall be varied or modified by any prior or subsequent statement, conduct or act of either of the Parties, except that the Parties may amend this Agreement pursuant to the terms of Section 10.1. 12.5. FEES AND EXPENSES. Subject to Section 8.1, regardless of whether or not the transactions contemplated by this Agreement are consummated, except as otherwise provided herein each Party shall bear its own fees and expenses incurred in connection with the transactions contemplated by this Agreement. 12.6. INDEPENDENT CONTRACTORS. Nothing contained in this Agreement shall be deemed to constitute a partnership or joint venture between the Seller and the Purchaser, or to constitute one as the agent of the other. The Seller and the Purchaser shall act solely as independent contractors, and nothing in this Agreement shall be construed to give either Party the power or authority, express or implied, to act for, bind, or commit the other Party. 32 CONFIDENTIAL 16-12-2004 12.7. GOVERNING LAW. This Agreement shall be deemed to have been made in Belgium and its form, execution, validity, construction and effect shall be determined in accordance with the laws of Belgium without regard to its conflict of laws principles. 12.8. SPECIFIC PERFORMANCE. The Parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the Parties shall be entitled to specific performance of the terms of this Agreement, in addition to any other remedy at law or equity. 12.9. ASSIGNMENT. This Agreement may not be assigned by any Party hereto without the prior written consent of the other Party, provided, however, that the Purchaser may assign its rights under this Agreement to any Affiliate without the consent of the Seller; provided, that such assignment shall not be deemed to release the Purchaser from its obligations hereunder. Any attempted assignment in violation of this Section 12.9 shall be void. 12.10. SUCCESSORS AND ASSIGNS. This Agreement, including all obligations hereunder, shall be binding upon and inure to the benefit of the Parties hereto and their respective permitted successors and assigns pursuant to this Agreement. 12.11. SEVERABILITY In the event any portion of this Agreement shall be held illegal, void or ineffective, the remaining portions hereof shall remain in full force and effect. If any of the terms or provisions of this Agreement are in conflict with any applicable statute or rule of law, then such terms or provisions shall be deemed inoperative to the extent that they may conflict therewith and shall be deemed to be modified to conform with such statute or rule of law. In the event that the terms and conditions of this Agreement are materially altered as a result of this Section 12.11, the Parties will renegotiate the terms and conditions of this Agreement to resolve any inequities. 12.12. COMPETENT COURTS Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination, invalidity, or existence thereof (a "Dispute"), shall be referred to the Belgian Courts (Commercial Court of Nivelles). 33 CONFIDENTIAL 16-12-2004 [THE NEXT PAGE IS THE SIGNATURE PAGE.] 34 CONFIDENTIAL 16-12-2004 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first written above in two original copies. PHIBRO ANIMAL HEALTH SA. By: /s/ Jack C. Bendheim ------------------------------------ Name: Jack C. Bendheim Title: President GLAXOSMITHKLINE BIOLOGICALS S.A. By: /s/ Jean Stephenne ------------------------------------ Name: Jean Stephenne Title: President, General Manager By: /s/ Jean-Pierre Suin ------------------------------------ Name: Jean-Pierre Suin Title: Vice President Finance & Management Services 35 EX-31.1 3 y05801exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATIONS I, Gerald K. Carlson, Chief Executive Officer of Phibro Animal Health Corporation, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Phibro Animal Health Corporation; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2005 /s/ Gerald K. Carlson - ----------------------------- Gerald K. Carlson, Chief Executive Officer (Principal Executive Officer) EX-31.2 4 y05801exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATIONS I, Jack C. Bendheim, Chairman of the Board of Phibro Animal Health Corporation, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Phibro Animal Health Corporation; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2005 /s/ Jack C. Bendheim - ----------------------------- Jack C. Bendheim, Chairman of the Board (Principal Executive Officer) EX-31.3 5 y05801exv31w3.txt CERTIFICATION Exhibit 31.3 CERTIFICATIONS I, Richard G. Johnson, Chief Financial Officer of Phibro Animal Health Corporation, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Phibro Animal Health Corporation; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2005 /s/ Richard G. Johnson - ----------------------------- Richard G. Johnson, Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----