10-Q/A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(MARK ONE)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004


o		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 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		13-1840497 (I.R.S. EMPLOYER 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

This amendment to the Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 of Phibro Animal Health Corporation (the “Company”) is being filed to reflect the inclusion of portions of Exhibit 10.33 that had been omitted pursuant to the Company's request for confidential treatment made in connection with the Company's December 31, 2004 Form 10-Q filing.

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

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

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

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)


												ACCUMULATED
	PREFERRED		COMMON									OTHER
	STOCK		STOCK				PAID-IN		ACCUMULATED			COMPREHENSIVE
	SERIES A		CLASS A		CLASS B		CAPITAL		DEFICIT			INCOME (LOSS)			TOTAL
Balance, June 30, 2004	$	521	$	1	$	1	$	860	$	(57,964	)	$	(7,252	)	$	(63,833	)
Dividends on Series C redeemable preferred stock										(668	)					(668	)
Equity value accreted on Series C redeemable preferred stock										(14	)					(14	)
Change in derivative instruments, net of tax													75			75
Foreign currency translation adjustment													3,007			3,007
Net (loss)										(141	)					(141	)

Balance, September 30, 2004	$	521	$	1	$	1	$	860	$	(58,787	)	$	(4,170	)	$	(61,574	)

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

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

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.

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.

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.

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.

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.

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

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).

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	)

NET PERIODIC PENSION COST — DOMESTIC	$	285		$	236		$	571		$	592

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.

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.

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


	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.

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

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	)

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	)

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

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

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

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

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

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

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.

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.

OTHER RISKS AND UNCERTAINTIES

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.

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

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

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
	(THOUSANDS)						(THOUSANDS)
OPERATING INCOME
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.

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.

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

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

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 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.

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

	-		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,


	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
EX-10.33: PURCHASE AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-31.3: CERTIFICATION
EX-32: CERTIFICATION


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.

32		Section 1350 Certifications of Phibro Animal Health Corporation.


	PHIBRO ANIMAL HEALTH CORPORATION.

Date: May 15, 2006		By: /s/ JACK C. BENDHEIM
		JACK C. BENDHEIM
		CHAIRMAN OF THE BOARD

Date: May 15, 2006		By: /s/ GERALD K. CARLSON

		GERALD K. CARLSON
		CHIEF EXECUTIVE OFFICER

Date: May 15, 2006		By: /s/ RICHARD G. JOHNSON

		RICHARD G. JOHNSON
		CHIEF FINANCIAL OFFICER
		(PRINCIPAL FINANCIAL OFFICER AND
		PRINCIPAL ACCOUNTING OFFICER)


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.

32		Section 1350 Certifications of Phibro Animal Health Corporation.