UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM
Form 10-K |X| * ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-64641
Phibro Animal Health Corporation (Exact
(Exact name of registrant as specified in its charter) New York 13-1840497 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Parker Plaza, Fort Lee,
New York13-1840497
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
65 Challenger Road, Ridgefield Park, New Jersey 07024 (Address07660
(Address of principal executive offices) (Zip Code)
(201) 944-6020 (Registrant's329-7300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none
None
Securities registered pursuant to Section 12(g) of the Act: none (Title of Class)
None
      Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes |X| *þ          No |_|o
      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     |X|þ
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes | |o          No |X|þ
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o          No þ
      The aggregate market value of the voting stockand non-voting Common Stock held by non-affiliates of the Registrant computed by reference to the price at which such voting stockCommon Stock was last sold was $0 as of June 30, 2004.December 31, 2004 is $0.
      The number of shares outstanding of the Registrant'sRegistrant’s Common Stock as of June 30, 2004:September 23, 2005: 24,488.50
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50 * By virtue of Section 15(d) of the Securities Act of 1934, the Registrant is not required to file this Annual Report pursuant thereto, but has filed all reports as if so required during the preceding 12 months.


PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS Page ----
Page
PART I
Item 1.Business1
Item 2.Properties18
Item 3.Legal Proceedings19
Item 4.Submission of Matters to a Vote of Security Holders20
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21
Item 6.Selected Financial Data21
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations22
Item 7A.Quantitative and Qualitative Disclosures about Market Risk41
Item 8.Financial Statements and Supplementary Data41
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure41
Item 9A.Controls and Procedures41
Item 9B.Other Information41
PART III
Item 10.Directors and Executive Officers of the Registrant42
Item 11.Executive Compensation45
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters49
Item 13.Certain Relationships and Related Transactions49
Item 14.Principal Accounting Fees and Services52
PART IV
Item 15.Exhibits and Financial Statement Schedules53
Index to Consolidated Financial StatementsF-1
Report of Independent Registered Public Accounting FirmF-2
Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2005 and 2004F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2005, 2004 and 2003F-4
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended June 30, 2005, 2004 and 2003F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003F-6
Notes to Consolidated Financial StatementsF-7
Financial Statements of Certain Phibro Animal Health Corporation Affiliates
Report of Independent Registered Public Accounting FirmF-48
Balance Sheets as of June 30, 2005 and 2004F-49
Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2005, 2004 and 2003F-50
Statements of Changes in Stockholders’ Deficit for the years ended June 30, 2005, 2004 and 2003F-51
Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003F-52
Notes to Financial StatementsF-53
SignaturesS-1
EX-21: LIST OF SUBSIDIARIES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-31.3: CERTIFICATION
EX-32: CERTIFICATION


PART I Item 1. Business 1 Item 2. Properties 15 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39 Item 8. Financial Statements and Supplementary Data 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39 Item 9A. Controls and Procedures 39 Item 9B. Other Information 40 PART III Item 10. Directors and Executive Officers of the Registrant 41 Item 11. Executive Compensation 43 Item 12. Security Ownership of Certain Beneficial Owners and Management 47 Item 13. Certain Relationships and Related Transactions 48 Item 14. Principal Accountant Fees and Services 51 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 52 Index to Financial Statements F-1 Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 2004 and 2003 F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2004, 2003 and 2002 F-4 Consolidated Statements of Changes in Stockholders' Deficit for the years ended June 30, 2004, 2003 and 2002 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002 F-6 Notes to Consolidated Financial Statements F-7 Signatures II-1 PART I Item 1. Business
Item 1.Business
General We are
      Phibro Animal Health Corporation (“Company” or “PAHC”) 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 we sell throughout the world predominantly to the poultry, swine and cattle markets. MFAs are used preventively and therapeutically in animal feed to produce healthy livestock. We believe we are the third largest manufacturer and marketer of MFAs in the world, and we believe that certain of our MFA products have leading positions in the marketplace. We are also a specialty chemicals manufacturer and marketer, serving primarily the United States pressure-treated wood and chemical industries. We have several proprietary products, and many of our products provide critical performance attributes to our customers'customers’ products, while representing a relatively small percentage of total end-product cost. We operate in over 1716 countries around the world and sell our animal health and nutrition products and specialty chemicals products into over 40 countries. Approximately 76%77% of our fiscal 20042005 net sales were from our Animal Health and Nutrition business, and approximately 24%23% of our fiscal 20042005 net sales were from our Specialty Chemicals business.
      Our Animal Health and Nutrition segment manufactures and markets more than 500 formulations and concentrations of medicated and nutritional feed additives, including antibiotics, antibacterials, anticoccidials, anthelmintics, trace minerals, vitamins, vitamin premixes and other animal health and nutrition products, to the livestock and pet food industries. Our MFA products are internationally recognized for quality and efficacy in the prevention and treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in swine and acidosis in cattle. We market our Animal Health and Nutrition products under approximately 450 governmental product registrations, approving our MFA products with respect to animal drug safety and effectiveness.
      Our Specialty Chemicals businessGroup (comprised of the Industrial Chemicals and Distribution segments) manufactures and markets a number of specialty chemicals for use in the pressure-treated wood, chemical catalyst, semiconductor, automotive, aerospace and agricultural industries. We anticipate that ourOur proprietary manufacturing process to produce a copper-based solution for one of the leading new products for manufacturing pressure-treated wood will representrepresents our largest growth opportunity in our Specialty Chemicals business.Group. Over 39%52% of our fiscal 20042005 net sales in our Specialty Chemicals businessGroup was derived from copper-based compounds, solutions or mixes.
Strategic Focus
      We have in recent years focused our business on animal health and nutrition products. As a result of the rapid decline of the printed circuit board industry in the United States, we have substantially exited that business, including our etchant recycling operations, and re-directed our productive capacity in niche markets. We have also sold other non-strategic businesses, such as our Agtrol, copper fungicide business and our subsidiaries, Mineral Resource Technologies, Inc. ("MRT"(“MRT”) and, The Prince Manufacturing Company ("PMC"(“PMC”) and Wychem Limited (“Wychem”). In addition, we closed our operations in Odda, Norway ("Odda"(“Odda”) and Bordeaux, France ("(“La Cornubia"Cornubia”). In August 2003,
      On April 29, 2005, the Company completedsold the shares of Wychem, an indirect wholly-owned subsidiary, for cash proceeds of $4.8 million to an investor group that included the former head of the Company’s Specialty Chemicals Group, who retired in August 2004, and the Managing Director of Wychem. The Company owned 75% of Wychem through Koffolk (1949), Ltd. (Israel) and 25% through Ferro Metal and Chemical Corporation Limited (U.K.). The Company recorded a gain on the sale of MRT for net proceeds after transaction costsWychem of approximately $13.8 million. MRT managed and sold coal combustion by-products, including fly ash. Effective$0.5 million in 2005. Wychem was included in the Company’s All Other segment.
Belgium Plant Transactions
      On December 26, 2003,16, 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

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Rixensart, Belgium (the “Belgium Plant”). Such sale, when completed (the “Belgium Plant Transactions”), will include the Company completedfollowing elements (U.S. dollar amounts at the divestitureJune 30, 2005 exchange rate): (i) the transfer of substantially all of the businessland and assetsbuildings and certain equipment of The Prince Manufacturing Company ("PMC")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 ($7.5 million), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a companymaximum of EUR 0.7 million ($0.8 million) for such cleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million ($1.8 million) within six months from the closing date, EUR 1.5 million ($1.8 million) within eighteen months from the closing date, EUR 1.5 million ($1.8 million) within thirty months from the closing date, and EUR 0.5 million ($0.6 million) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 0.4 million ($0.5 million)) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions; 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 later than June 30, 2006.
      The Dutch Notes (as defined below) 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 ($3.0 million) as of the projected closing date of November 30, 2005. The Company recorded incremental depreciation expense of EUR 5.8 million ($7.5 million) during 2005 and will record an additional EUR 3.8 million ($4.6 million) of incremental depreciation expense ratably through November 2005.
      The Company recorded accrued severance expense of EUR 10.2 million ($12.8 million) during 2005, representing the estimated total cost of severance and early-retirement programs for those employees not transferring to GSK. The expense includes $0.9 million for enhanced pension benefits agreed as part of the early-retirement program. The Company estimates $6.5 million will be payable at or around the closing date, and $6.3 million will be payable in subsequent periods.
      The Company also recorded $1.9 million of other transaction-related expense during 2005.
      The incremental depreciation expense of $7.5 million, severance expense of $12.8 million and other transaction-related expense of $1.9 million recorded in 2005 are included in cost of goods sold on the Company’s consolidated statements of operations and comprehensive income (loss).
      The Company expects to record an estimated $6.2 million of additional net expense during fiscal 2006 for employee retention agreements, plant dismantling and decommissioning, plant shutdown and other costs associated with the completion of the sale of the Belgium Plant. The estimated net expense includes an estimated $1.1 million gain from the curtailment of the Belgium pension plan. The Company estimates no material gain or loss during 2006 resulting from the sale of the Belgium Plant.
      The Company has determined that the carrying amount of the Belgium Plant at June 30, 2005 is recoverable based on the estimated future cash flows arising from the use of the assets.
      In anticipation of transferring production of virginiamycin from the Belgium Plant to an alternative production location, the Company has been increasing inventory levels of virginiamycin to ensure adequate supplies during the transfer period. At June 30, 2005 virginiamycin inventories were approximately $38.8 million and are expected to continue to increase through November 2005, based on current production rates.

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      On December 21, 2004, PAHC completed a private placement of $22.5 million of additional senior secured notes to refinance borrowings under PAHC’s domestic senior credit facility incurred to fund alternative virginiamycin production arrangements and the increase of virginiamycin inventory pending supply under such alternative production arrangements.
Holding Company and HoldCo Notes
      During February 2005, PAHC Holdings Corporation (“Holdings”) was formed to hold the capital stock of the Company, except for its Series C Preferred Stock. On February 10, 2005, Holdings issued $29.0 million aggregate principal amount of its 15% Senior Secured Notes due 2010 (the “HoldCo Notes”) in a private placement. Interest is payable at the option of Holdings in cash or pay-in-kind HoldCo Notes in its sole discretion. PAHC is not obligated for the HoldCo Notes. PAHC’s ability to make payments to Holdings is subject to the terms of PAHC’s Senior Secured Notes, its Senior Subordinated Notes, and its domestic senior credit facility, and to applicable law.
      The proceeds from the sale of the HoldCo Notes were used by Holdings to make a capital contribution to PAHC to contemporaneously finance the redemption of PAHC’s Series C Preferred Stock in the amount of $26.4 million on February 28, 2005.
      On May 16, 2005, Holdings completed the exchange of its privately placed HoldCo Notes with new HoldCo Notes that have been registered with the SEC.
      Holdings was formed by the holders of all of PAHC’s capital stock, other than the holders of PAHC’s Series C Preferred Stock. In particular, Jack Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his family exchanged all of their shares of Series A Preferred Stock and Class B Common Stock and Mr. Bendheim exchanged all of his shares of Class A Common Stock, for the same number and class of shares of Holdings, having the same designations, relative rights, privileges and limitations as PAHC’s shares of such class (except to the extent that Holdings is a Delaware corporation and PAHC is a New York corporation). Holdings owns all the outstanding capital stock of all classes of PAHC.
      The HoldCo Notes are collateralized by all of Holdings’ assets (now consisting substantially of all the outstanding capital stock of PAHC). The HoldCo Notes and such security interest are effectively subordinated to all liabilities, including PAHC’s and its subsidiaries’ trade payables, as well as PAHC’s indenture indebtedness.
Redemption of Series C Preferred Stock
      On February 28, 2005, PAHC, Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"(“Palladium”), Holdings and the related reductionprincipal stockholders of Holdings entered into an agreement to redeem PAHC’s Series C Preferred Stock with respect to (i) the redemption price of $26.4 million (consisting of $19.6 million of liquidation preference and $6.8 million of equity value), (ii) amending the terms of the Company's preferredpost-redemption redemption price adjustment set forth in the certificate of incorporation of PAHC (a) from an amount payable upon occurrence of certain capital stock heldtransactions determined with respect to the value of the Company upon the occurrence of such capital stock transaction, to a liquidated amount of $4.0 million, payable only after the occurrence of certain capital stock transactions and the receipt by the current stockholders of PAHC, on a cumulative basis, of an aggregate of $24.0 million of dividends and distributions in respect of such capital stock transactions, and (b) to remove the one year time period for such adjustment of the redemption price, and (iii) eliminating the backstop indemnification obligation of up to $4.0 million of PAHC to Palladium Investors. PMC manufactured and marketed various mineral oxides, including iron compounds and manganese compounds (see Item 7 "Prince Transactions"incurred in connection with the sale by PAHC to Palladium in December 2003 of The Prince Manufacturing Company (“PMC”). Unless otherwise indicated,The excess of the information in this Item 1 does not include PMC. Onredemption price over the carrying value of the Series C Preferred Stock and the elimination of the backstop indemnification obligation have been reflected as adjustments to stockholder’s deficit on the consolidated balance sheet at June 30, 2004, one2005. The redemption agreement also eliminated PAHC’s agreement to pay $0.1 million per year to Palladium for certain treasury services. The Company has determined the fair value of the Company's French subsidiaries, La Cornubia SA ("La Cornubia"), filedliability for bankruptcy under the insolvency laws of France. The Company believes that as a resultpost-redemption redemption price adjustment to be insignificant to the consolidated financial statements, due to the uncertainty 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 exceptultimate

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timing of such payment, if any. Future changes in the fair value of the liability for its investmentthe post-redemption redemption price adjustment will be recorded through earnings in La Cornubia, may also file for bankruptcythe period in France. 1 Our which such change occurs.
Animal Health and Nutrition Business -- Medicated Feed Additives We manufacture
      The Company manufactures and market a broad range of medicated feed additive products to the global livestock industry, either directly to large integrated producers or through a network of independent distributors. Feed additives provide both therapeutic benefits and increased conversion efficiency -- key drivers of profitability for livestock producers.
      Our MFA products can be grouped into five principal categories:include antibiotics, antibacterials, anticoccidials, anthelmintics and other medicated feed additives. In fiscal 2004, antibiotics and antibacterials generated sales for us of approximately $79 million, anticoccidials generated sales for us of approximately $44 million, and anthelmintics and other medicated feed additives generated sales for us of approximately $9 million.
      Our core MFA products are listed in the table below:
Market
BrandActive/Antigen Market EntryComment - ----------------------------- -------------- ------------ ------- Terramycin(R)
Terramycin®/Neo-
Terramycin®/Neo- TM®
oxytetracycline, neomycin/OTC1951 Antibiotic with multiple Terramycin(R)/Neo-TM(R) neomycin applications for a wide number of species CLTC(R) chlortetracycline 1954 Antibiotic with multiple applications for a wide number of species Nicarb(R)
CLTC®chlortetracycline1954Antibiotic with multiple applications for a wide number of species
Nicarb®nicarbazin1955Anticoccidial for poultry Amprol(R)
Amprol®amprolium1960Anticoccidial for poultry and cattle Bloatguard(R)
Bloatguard®poloxalene1966Anti-bloat treatment for cattle Banminth(R)
Banminth®pyrantel tartrate1969Anthelmintic for livestock Mecadox(R)
Mecadox®carbadox1971Antibacterial used in swine feeds to control salmonellosis and dysentery Stafac(R)
Stafac®/Eskalin(R)Eskalin®/V-Max(R) V-Max®virginiamycin1972Antibiotic with multiple applications for a wide number of species Coxistac(R)used to prevent and control diseases in poultry, swine and cattle
Coxistac®/Posistac(R) Posistac®salinomycin1979Anticoccidial for poultry; disease preventative in swine Rumatel(R)
Rumatel®morantel tartrate1981Anthelmintic for livestock Oxibendazole(R)
Cerditac®/Cerdimix®oxibendazole1982Anthelmintic for livestock Aviax(R)
Aviax®semduramicin1995Anticoccidial for poultry
Antibiotics
      Antibiotics are natural products produced by fermentation and are used to treat or to prevent diseases, thereby promoting more efficient growth. Several factors contribute to limit the efficiency, the weight gain and feed conversions of livestock production, including poor nutrition, environmental and management problems, heat stress and subclinical disease.
Virginiamycin. Virginiamycin is an antibiotic marketed under ourthe brand names Stafac(R)Stafac® for treating swine, cows,cattle, broilers and turkeys, Eskalin(R)Eskalin® for dairy cows and V-Max(R)V-Max® for feed lot cattle. We formulate virginiamycin to improve health in poultry, swine and cattle and prevent necrotic enteritis in poultry, dysentery in swine and liver abscesses in cattle. The product is sold to large poultry and swine producers and feed companies in North America, Latin America and Asia.Asia and to cattle producers in markets where registrations are in place.
      First discovered in Belgium in 1954, virginiamycin is an antimicrobialantibiotic produced from thestreptomyces virginiaefungus. Virginiamycin has been successful due to a number of strong product features. For example, no withdrawal period is required since it is virtually unabsorbed from the digestive tract. It is excreted in very low concentrations and rapidly degraded. It alleviates some of the production limiting effects of certain diseases of livestock and poultry. To date, no generic competition has been introduced due to our proprietary virginiamycin manufacturing technology.

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Terramycin and Neo-Terramycin. Terramycin(R) Terramycin® and Neo-Terramycin(R)Neo-Terramycin®, which are derived from the active ingredient oxytetracycline, are effective against a range of diseases including: o fowl cholera in chickens, o airsacculitis in turkeys, o
• fowl cholera in chickens,
• airsacculitis in turkeys,
• pneumonia and enteritis in swine, and
• pneumonia, enteritis and liver abscesses in cattle.
      The Company sells Terramycin® and enteritis in swine, and o pneumonia, enteritis and liver abscesses in cattle. 2 We sell Terramycin(R) and Neo-Terramycin(R)Neo-Terramycin® feed additive products in various concentrations. Terramycin(R)Terramycin® is approved for use for poultry, swine, cattle and sheep. Neo-Terramycin(R)Neo-Terramycin® combines the active ingredients oxytetracycline and neomycin to prevent and treat a wide range of diseases caused by gram positiveGram-positive and gram negativeGram-negative organisms, including bacterial enteritis in chickens and turkeys, baby pig diarrhea in swine and calf diarrhea. These Terramycinterramycin products are sold mostly in the United States to livestock producers, feed companies and distributors. Limited quantities are sold in selected countries in Latin America and Asia.
Antibacterials
      Antibacterials are produced through chemistry and are used to treat and prevent diseases.
Carbadox. We market carbadox under the brand name Mecadox(R)Mecadox®. Carbadox is an antibacterial compound recommended for use in swine feeds to promote and to control swine salmonellosis and swine dysentry.dysentery. In swine production, the primary objective of producers is the rapid and efficient development of swine at minimal cost. Since 1970, Mecadox(R)Mecadox® has been a leader in reducing livestock production costs through meaningful performance enhancement. Mecadox(R)Mecadox® is a leading product for starter/grower swine in the United States. In addition to its antimicrobial properties, it also improves nitrogen retention and increases the efficiency of amino acid metabolism, two critical factors in the development of young swine. Mecadox(R)Mecadox® is chemically unrelated to any other antibacterial that is used in animals or humans. Mecadox(R)Mecadox® is sold primarily in North America to feed companies and large integrated swine producers.
Anticoccidials
      Anticoccidials are produced through fermentation and chemistry, and are primarily used to prevent and control the disease coccidiosis in poultry and in cattle. Coccidiosis is a disease of the digestive tract that is of great concern to animal producers. Caused by the protozoan parasites such as parasiteEimeria spp., coccidiosis is one of the most destructive diseases facing the world'sworld’s poultry producers. Common effects of this disease (such as weight loss, wet droppings, poor feed utilization and higher mortality rates) rapidly affect an entire flock of poultry, resulting in annual losses of hundreds of millions of dollars for the poultry industry.
      Modern, large scale poultry production is based on intensive animal management practices. This type of animal production requires routine preventive medications in order to prevent health problems. Coccidiosis is one of the critical disease challenges which poultry producers face globally. We sell our anticoccidials globally, primarily to integrated poultry producers and feed companies in North America, the Middle East, Latin America and Asia, and to international animal health companies.
NicarbazinandAmprolium. We produce nicarbazin and amprolium for distribution to the world-wide poultry industry through major multinational life science and veterinary companies. Nicarbazin is a broad-spectrum anticoccidial which works by interfering with mitochondrial metabolism. It is classified as an oxidative phosphorylation uncoupler and is used for coccidiosis prevention in broiler chickens.
      We believe that we are the largest volume world-wide producer of amprolium, and the largest volume world-wide producer of nicarbazin. We are also the sole Latin American producer of nicarbazin. Nicarbazin and amprolium, along with salinomycin and semduramicin, are among the most effective medications for the prevention of coccidiosis in chickens when used in rotation with other anticoccidials. In the United States, we market nicarbazin under the trademark Nicarb(R)Nicarb®. Other Anticoccidials.

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Semduramicin and Salinomycin. From a class of compounds known as ionophores, we developed Aviax(R)Aviax® and Coxistac(R)Coxistac® to combat coccidiosis. These two products have demonstrated increased feed efficiency and the ability to suppress coccidial lesions, and provide reliable reserve potency with minimal side-effects. Through a third product, Posistac(R)Posistac®, we have extended the application of the active ingredient in Coxistac(R)Coxistac® to swine. Aviax(R)
      Aviax® contains the ionophore semduramicin which provides protection for poultry against all major coccidial parasites. The product can be incorporated into virtually any type of feed, and provided to broilers of any production stage. We have received regulatory approval to sell Aviax(R)Aviax® in the EU and have applied in the United States for the sale of Aviax(R)Aviax® in mycelial dosage form. This dosage form is significantly more cost-effective and may improve profitability significantly. Coxistac(R)profitability.
      Coxistac® contains the ionophore salinomycin. The product acts early in the coccidial life cycle by killing sporozoites, trophozoites and early developing schizonts before poultry can be severely damaged. Coxistac(R)Coxistac® has proven to be effective and safe with minimal resistance development evident in commercial studies. The recommended dosage provides a high level of protection against coccidiosis even through temporary periods of low feed intake caused by disease or adverse climatic conditions. No withdrawal period is required for poultry before slaughter. Coxistac(R)Coxistac® is a leading anticoccidial in Asia, Latin America, the Middle East and Canada. 3 Posistac(R)The Company anticipates it will receive regulatory approval within the next twenty four months for sales in the United States.
      Posistac® contains salinomycin which acts as a productivity enhancer for grower/finisher swine. The compound increases the utilization and digestion of feed ingredients by mature swine thereby allowing swine to reach market weight earlier and at less cost than swine fed conventional feed additives. Posistac(R)Posistac® can be used up to the slaughter phase without the need for withdrawal. Anthelmintics
Anthelmintics
Anthelmintics protect against internal parasites. Our anthelmintic products are marketed under the Rumatel(R)Rumatel® and Banminth(R)Banminth® brand names. Rumatel(R)
Rumatel®. Rumatel(R)Rumatel® is a potent broad-spectrum anthelmintic that effectively eliminates the major internal nematode parasites in cattle. Unlike other single-dose dewormers, Rumatel(R)Rumatel® may be administered to lactating dairy cattle with no milk withdrawal. Dairy cattle may be treated with Rumatel(R)Rumatel® at any time during their production cycle, whether dry, pregnant or lactating. Banminth(R)
Banminth®. Banminth(R)Banminth® is an anthelmintic compound, a member of the class of synthetic compounds called tetra-hydropyrimidines. Banminth(R)Banminth® has a mode of action that works effectively in protecting swine against the two major internal parasites, large roundworms (Ascaris suum) and nodular worms (Oesophagostomum spp.). Banminth(R)Banminth® kills adult parasites and prevents roundworm larval migration, preventing damage to the liver and lungs of swine. When used continuously in feeds, Banminth(R)Banminth® prevents re-infection of swine raised on dirt.
Other Medicated Feed Additives
      Other Medicated Feed Additives Our other medicated feed additives include a range of products sold under the Bloat Guard(R)Guard® brand name. Bloat Guard(R)Guard® controls legume or wheat pasture bloat in cattle. The products control bloat for at least 12 hours after a single dose with no adverse effect on reproduction, rumen function or milk production.
Manufacturing, Sales and Regulatory
      We manufacture bulk active ingredients for our MFA products primarily in four modern facilities located in: o Guarulhos, Brazil (salinomycin and semduramicin), o Rixensart, Belgium (virginiamycin and semduramicin), o Ramat Hovav, Israel (nicarbazin and amprolium), and o
• Guarulhos, Brazil (salinomycin and semduramicin),
• Rixensart, Belgium (virginiamycin and semduramicin), which facility is to be sold and production transferred to Guarulhos, Brazil,

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• Ramat Hovav, Israel (nicarbazin and amprolium), and
• Braganca Paulista, Brazil (nicarbazin).
      Active ingredients are further processed in our facilities and in contract premix facilities located in each major region of the world. We have
      The Company has established sales and technical offices for our MFA products in 14 countries including: the United States, Canada, Mexico, Venezuela, Brazil, Argentina, Chile,Costa Rica, Australia, China, Thailand, Malaysia, South Africa, Belgium and Israel. The business is not dependent on any one customer.
      The use of MFAs is controlled by regulatory authorities that are specific to each country (e.g., the Food and Drug Administration ("FDA"(“FDA”) in the United States, Health Canada in Canada, EFSA/EMEA authorities in Europe, etc.), responsible for the safety and wholesomeness of the human food supply, including feed additives for animals from which human foods are derived. Each product is registered separately in each country where it is sold. The appropriate registration files pertaining to such regulations and approvals are continuously monitored, maintained and updated by us. In certain countries where we are working with a third party distributor, local regulatory requirements may require registration in the name of such distributor.
Animal Health and Nutrition -- Nutritional Feed Additives We manufacture
      The Company manufactures and marketmarkets trace minerals, trace mineral premixes, vitamins and other nutritional ingredients to the livestock feed and pet food industries, predominantly in the United States and Israel. These products generally fortify, enhance or make more nutritious or palatable the livestock feeds and pet foods with which they are mixed. The majority of the other ingredients that we sell are nutrients that are used as supplements for animal feed. We serve customers in major feed segments, including swine, dairy, poultry and beef. We customize trace mineral premixes at our blending facilities in Marion, Iowa, Bremen, Indiana and Petach Tikva, Israel, and market a diverse line of other trace minerals and macro-minerals. Our major customers for these products are medium-to-large feed companies, co-ops, blenders, integrated poultry operations and pet food companies. We sell other ingredients, such as buffers, yeast, palatants, vitamin K and amino acids, including lysine, tryptophan and threonine. We also market copper sulfate as an animal feed supplement. 4 Our
Specialty Chemicals Business We manufactureGroup
      The Company manufactures and marketmarkets a number of specialty chemicals for use in the wood treatment, chemical catalyst, semiconductor, automotive, aerospace and agricultural industries. Our manufacturing customers incorporate our specialty chemicals products into their finished products in various industrial markets. We seek to take advantage of opportunistic niche markets where we believe that our expertise and capabilities can be leveraged.
Copper Wood Treatment Products
      For many years, we werethe Company was a major supplier of an important ingredient (copper oxide) used in the manufacture of CCA (chromated-copper-arsenic)(chromated-copper-arsenate) wood treating solutions for the pressure-treated wood industry. Pursuant to a United States Environmental Protection Agency ("EPA"(“EPA”) ruling, since December 31, 2003, all pressure-treated wood for the residential and recreational markets can no longer be treated using the standard chromated-copper-arsenicchromated-copper-arsenate (CCA) solution. A leading replacement solution for CCA pressure-treated wood is a copper carbonate compound. We currently estimate that the total potential size of this copper solution to the pressure-treated wood market is approximately $120 million annually. We have already signed a multi-year, take-or-pay contract with a major chemicals supplier to the pressure-treated wood industry to provide it with this new product, which we estimate will increase our sales by approximately $30 million over the life of the contract, based on existing forecasts. A patent with respect to the manufacturing process of our solution, and the claims in our patent application was granted and issued on November 11, 2003. We believe that our manufacturing process allows us to operate in this market with a lower cost of capital and higher factory through-put than our competition. To take advantage of this potential new market, we have constructed and are operating commercial production facilities in Sumter, South Carolina and in Joliet, Illinois. In addition, we havethe Company has filed a provisional patent for a new, large molecule pressure-treated woodnano size copper compound product. We believefor wood treatment. The Company believes that this new product may be the next generation in copper-based wood treatment products, with the potential to substantially increase the duration of protection for treated wood. Other Copper Products We manufacture

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Other Copper Products
      The Company manufactures on a contract basis copper compounds for use primarily in agricultural fungicides from our Sumter, South Carolina facility. This contract was part of the sale by us of our Agtrol business to Nufarm, Inc. in the fourth quarter of fiscal 2001. Utilizing our over fifty-year history in producing copper chemicals, we supply various metal-based chemicals to the catalyst, electronics, semiconductor and electronicsrelated industries. We also manufacture copper compounds for a broad variety of industrial customers. Other Specialty Chemicals Products We market
Other Specialty Chemicals Products
      The Company markets and distributedistributes fine and specialty chemicals to manufacturers of ethanol, health and personal care products and chemical coating products to customers in the automotive, metal finishing and chemical intermediate markets. Among our products for suchhealth and personal care applications are sodium fluoride and stannous fluoride, DL Panthenol and selenium disulfide. Sodium fluoride is the active anti-cavity ingredient in fluoride toothpaste, powders and mouthwashes. Selenium disulfide is used as a dandricide in shampoo and hair care preparations.
Sales, Marketing and Distribution We have
      The Company has approximately 2,8002,500 customers. Sales to our top ten customers represented approximately 22%27% of our fiscal 20042005 net sales and no single customer represented more than 5%7% of our fiscal 20042005 net sales.
      Our world-wide sales and marketing network consists of approximately 118114 employees, 511 independent agents and 125132 distributors who specialize in particular markets.
      Our products are often critical to the performance of our customers'customers’ products, while representing a relatively small percentage of the total end-product cost. We believe the three key factors to marketing our products successfully are high quality products, a highly trained and technical sales force, and customer service.
      Most of our plants have chemists and technicians on staff involved in product development, quality assurance, quality control and also providing technical services to customers. Technical assurance is an important aspect of our overall sales effort. We field Animal Health and Nutrition technical service people throughout the world, with capabilities to interface with all key customers on a marketing, sales training and technical (product) basis, and who work directly with commercial feed manufacturers and integrated 5 poultry, swine and cattle producers to promote animal health. Our MFA and NFA field personnel are skilled in the area of product differentiation and have extensive application knowledge so as to work closely with customers in determining optimum benefits from product usage. As agricultural food production will continue to intensify and will adopt evolving technologies, our MFA and NFA personnel are constantly working with customers to better understand their needs in order to best utilize the products existing within our portfolio. This commercial knowledge also plays a pivotal role within the research and development function to ensure that research results are applicable to customer needs and concerns.
Product Registrations, Patents and Trademarks We own
      The Company owns certain product registrations, patents, tradenames and trademarks, and use know-how, trade secrets, formulae and manufacturing techniques which assist in maintaining the competitive positions of certain of our products. Product registrations are required to manufacture and sell medicated feed additives. Formulae and know-how are of particular importance in the manufacture of a number of the products sold in our specialty chemicals business. We believe that no single patent or trademark is of material importance to our business and, accordingly, that the expiration or termination thereof would not materially affect our business. See "Government“Government Regulation." The following trademarks and service marks used throughout this Report belong to, are licensed to, or are otherwise used by us in our medicated feed additives business: Stafac(R); Eskalin(R); V-Max(R); Terramycin(R); Neo-Terramycin(R); CLTC(R); Mecadox(R); Nicarb(R); Amprol(R); Bloatguard(R); Aviax(R); Coxistac(R); Posistac(R); Banminth(R); Oxibendazole(R); Rumatel(R).

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Raw Materials
      The raw materials used in our business include certain active drug ingredients, a wide variety of chemicals, mineral ores and copper metal that are purchased from manufacturers and suppliers in the United States, Europe and Asia. In fiscal 2004,2005, no single raw material accounted for more than 5% of our cost of goods sold. Total raw materials cost was approximately $133$158 million or 38%43% of net sales in fiscal 2004.2005. We believe that for most of our raw materials, alternate sources of supply are available to us at competitive prices.
Research and Development
      Research, development and technical service efforts are conducted at our various facilities. We operate research and development facilities in Rixensart, Belgium (which are to be transferred to Guarulhos, Brazil), Sumter, South Carolina and Ramat Hovav, Israel and Stradishall, England.Israel. These facilities provide research and development services relating to fermentation development in the areas of micro-biological strain improvement as well as: process scale-up; wood treatment products; and organic chemical intermediates.
      Technology is an important component of our competitive position, providing us unique and low cost positions enabling us to produce high quality products. Patents protect some of our technology, but a great deal of our competitive advantage revolves around know-how built up over many years of commercial operation.
Customers
      We do not consider our business to be dependent on a single customer or a few customers, and the loss of any of our customers would not have a material adverse effect on our results. No single customer accounted for more than 5%7% of our fiscal 20042005 net sales. We typically do not enter into long-term contracts with our customers.
Competition We are
      The Company is engaged in highly competitive industries and, with respect to all of our major products, we face competition from a substantial number of global and regional competitors. Some of our competitors have greater financial, research and development, production and other resources than we do. Our competitive position is based principally on customer service and support, product quality, manufacturing technology, facility location and price. We have competitors in every market in which we participate. Many of our products face competition from products that may be used as an alternative or substitute.
Employees
      As of June 30, 2004, we2005, the Company had 1,051992 employees worldwide. Of these, 210192 employees were in management and administration, 118114 were in sales and marketing, 132128 were chemists, technicians or quality control personnel, and 591558 were in production. Certain 6 employees are covered by individual employment agreements. Our Israeli operations continue to operate under the terms of Israel'sIsrael’s national collective bargaining agreement, portions of which expired in 1994. We consider our relations with both our union and non-union employees to be good.
Environmental Matters We
      The Company and ourits 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 manufacture, sale and use of pesticides and the health and safety of employees. Pursuant to environmental laws, our subsidiaries are required to obtain and retain numerous governmental permits and approvals to conduct various aspects of their operations, any of which may be subject to revocation, modification or denial under certain circumstances. Under certain circumstances, we or any of our subsidiaries might be required to curtail operations until a particular problem is remedied. Known costs and expenses under environmental laws

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incidental to ongoing operations are generally included within operating budgets. 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 we establish 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. Our
      The Company’s subsidiaries have, from time to time, implemented procedures at their facilities designed to respond to obligations to comply with environmental laws. We believe that our operations are currently in material compliance with such environmental laws, although at various sites our subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with their historic operations. As many environmental laws impose a strict liability standard, however, we can provide no assurance that future environmental liability will not arise.
      Israel’s Ministry of the Environment has imposed revised business license terms on Koffolk’s Ramat Hovav manufacturing facilities. The Company has taken steps to contest the revised terms and can not currently estimate the costs or the timing of the final resolution of the issue.
      In addition, wethe Company cannot predict the extent to which any future environmental laws may affect any market for our products or services or our costs of doing business. Alternatively, changes in environmental laws might increase the cost of our products and services by imposing additional requirements on us. States that have received authorization to administer their own hazardous waste management programs may also amend their applicable statutes or regulations, and may impose requirements which are stricter than those imposed by the EPA. We can provide no assurance that such changes will not adversely affect our ability to provide products and services at competitive prices and thereby reduce the market for our products and services.
      The nature of ourthe Company and our subsidiaries'its subsidiaries’ current and former operations exposes us and our subsidiaries to the risk of claims with respect to environmental matters and we can provide no assurance that we will not incur material costs and liabilities in connection with such claims. Based upon our experience to date, we believe 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 us. Based upon information available, we estimate the cost of further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, (including the litigation referred to under "-- Legal Proceedings"“Legal Proceedings”) to be approximately $2.9$2.7 million, which is included in current and long-term liabilities in our June 30, 20042005 consolidated balance sheet. However, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption, under Item 3, Legal Proceedings“Legal Proceedings” and elsewhere in this Report, it should be noted that we take and have taken the position that neither Phibro Animal Health Corporation, nor any of our subsidiaries is liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible.
Federal Regulation
      The following summarizes the principal federal environmental laws affecting our business: Resource Conservation and Recovery Act of 1976, as amended ("RCRA"). Congress enacted RCRA to regulate, among other things, the generation, transportation, treatment, storage and disposal of solid and hazardous wastes. RCRA required the EPA to promulgate regulations governing the management of hazardous wastes, and to allow individual states to administer and enforce their own hazardous waste management programs as long as such programs were equivalent to and no less stringent than the federal program. Such facilities are also subject to closure and post-closure requirements. The EPA's regulations, and most state regulations in authorized states, establish categories of regulated entities and set standards and procedures those entities must follow in their handling of hazardous wastes. The three general categories of waste handlers governed by the regulations are hazardous waste generators, hazardous waste transporters, and owners and operators of hazardous waste treatment, storage and/or disposal facilities. Generators are required, among other things, to obtain identification numbers and to 7 arrange for the proper treatment and/or disposal of their wastes by licensed or permitted operators and all three categories of waste handlers are required to utilize a document tracking system to maintain records of their activities. Transporters must obtain permits, transport hazardous waste only to properly permitted treatment, storage or disposal facilities, and maintain required records of their activities. Treatment, storage and disposal facilities are subject to extensive regulations concerning their location, design and construction, as well as the operating methods, techniques and practices they may use. Such facilities are also required to demonstrate their financial responsibility with respect to compliance with RCRA, including closure and post-closure requirements. The Federal Water Pollution Control Act, as amended (the "Clean Water Act"). The Clean Water Act prohibits the discharge of pollutants to the waters of the United States without governmental authorization. Like RCRA, the Clean Water Act provides that states with programs approved by the EPA may administer and enforce their own water pollution control programs. Pursuant to the mandate of the Clean Water Act, the EPA has promulgated "pre-treatment" regulations, which establish standards and limitations for the introduction of pollutants into publicly-owned treatment works. Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws, we and our subsidiaries may have strict and, under certain circumstances, joint and several liability for the investigation and remediation of environmental pollution and natural resource damages associated with real property currently and formerly-owned or operated by us or a subsidiary and at third-party sites at which our subsidiaries disposed of or treated, or arranged for the disposal of or treatment of, hazardous substances. Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA"). FIFRA governs the manufacture, sale and use of pesticides, including the copper-based fungicides sold by us. FIFRA requires such products and the facilities at which they are formulated to be registered with the EPA before they may be sold. If the product in question is generic in nature (i.e., chemically identical or substantially similar to a previously registered product), the new applicant for registration is entitled to cite and rely on the test data supporting the original registrant's product in lieu of submitting data of its own. Should the generic applicant choose this citation option, it must offer monetary compensation to the original registrant and must agree to binding arbitration if the parties are unable to agree on the terms and amount of compensation. We have elected this citation option in the past and may use the citation option in the future should we conclude it is, in some instances, economically desirable to do so. While there are cost savings associated with the opportunity to avoid one's own testing and demonstration to the EPA of test data, there is, in each instance, a risk that the level of compensation ultimately required to be paid to the original registrant will be substantial. Under FIFRA, the EPA also has the right to "call in" additional data from existing registrants of a pesticide, should the EPA determine, for example, that the data already in the file need to be updated or that a specific issue or concern needs to be addressed. The existing registrants have the option of submitting data separately or by joint agreement. Alternatively, if one registrant agrees to generate and submit the data, the other(s) may meet their obligations under the statute by making a statutory offer to jointly develop or share in the costs of developing the data. In that event, the offering party must, again, agree to binding arbitration to resolve any dispute as to the terms of the data development arrangement. The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and amendments to the Clean Air Act, and corresponding state laws regulate the emissions of materials into the air. Such laws affect the coal industry both directly and indirectly and, therefore, the operations of MRT, which was divested in August 2003. Phibro-Tech is also impacted by the Clean Air Act and has various air quality permits, including a Title V operating air permit at its Sumter, South Carolina facility.
Resource Conservation and Recovery Act of 1976, as amended (“RCRA”). Congress enacted RCRA to regulate, among other things, the generation, transportation, treatment, storage and disposal of solid and hazardous wastes. RCRA required the EPA to promulgate regulations governing the management of hazardous wastes, and to allow individual states to administer and enforce their own hazardous waste management programs as long as such programs were equivalent to and no less stringent than the federal program. Such facilities are also subject to closure and post-closure requirements.
      The EPA’s regulations, and most state regulations in authorized states, establish categories of regulated entities and set standards and procedures those entities must follow in their handling of

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hazardous wastes. The three general categories of waste handlers governed by the regulations are hazardous waste generators, hazardous waste transporters, and owners and operators of hazardous waste treatment, storage and/or disposal facilities. Generators are required, among other things, to obtain identification numbers and to arrange for the proper treatment and/or disposal of their wastes by licensed or permitted operators and all three categories of waste handlers are required to utilize a document tracking system to maintain records of their activities. Transporters must obtain permits, transport hazardous waste only to properly permitted treatment, storage or disposal facilities, and maintain required records of their activities. Treatment, storage and disposal facilities are subject to extensive regulations concerning their location, design and construction, as well as the operating methods, techniques and practices they may use. Such facilities are also required to demonstrate their financial responsibility with respect to compliance with RCRA, including closure and post-closure requirements.
The Federal Water Pollution Control Act, as amended (the “Clean Water Act”). The Clean Water Act prohibits the discharge of pollutants to the waters of the United States without governmental authorization. Like RCRA, the Clean Water Act provides that states with programs approved by the EPA may administer and enforce their own water pollution control programs. Pursuant to the mandate of the Clean Water Act, the EPA has promulgated “pre-treatment” regulations, which establish standards and limitations for the introduction of pollutants into publicly-owned treatment works.
Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA” or “Superfund”). Under CERCLA and similar state laws, we and our subsidiaries may have strict and, under certain circumstances, joint and several liability for the investigation and remediation of environmental pollution and natural resource damages associated with real property currently and formerly-owned or operated by us or a subsidiary and at third-party sites at which our subsidiaries disposed of or treated, or arranged for the disposal of or treatment of, hazardous substances.
Federal Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”). FIFRA governs the manufacture, sale and use of pesticides, including the copper-based fungicides sold by us. FIFRA requires such products and the facilities at which they are formulated to be registered with the EPA before they may be sold. If the product in question is generic in nature (i.e., chemically identical or substantially similar to a previously registered product), the new applicant for registration is entitled to cite and rely on the test data supporting the original registrant’s product in lieu of submitting data of its own. Should the generic applicant choose this citation option, it must offer monetary compensation to the original registrant and must agree to binding arbitration if the parties are unable to agree on the terms and amount of compensation. We have elected this citation option in the past and may use the citation option in the future should we conclude it is, in some instances, economically desirable to do so. While there are cost savings associated with the opportunity to avoid one’s own testing and demonstration to the EPA of test data, there is, in each instance, a risk that the level of compensation ultimately required to be paid to the original registrant will be substantial.
      Under FIFRA, the EPA also has the right to “call in” additional data from existing registrants of a pesticide, should the EPA determine, for example, that the data already in the file need to be updated or that a specific issue or concern needs to be addressed. The existing registrants have the option of submitting data separately or by joint agreement. Alternatively, if one registrant agrees to generate and submit the data, the other(s) may meet their obligations under the statute by making a statutory offer to jointly develop or share in the costs of developing the data. In that event, the offering party must, again, agree to binding arbitration to resolve any dispute as to the terms of the data development arrangement.
The Clean Air Act. The Federal Clean Air Act of 1970 (“Clean Air Act”) and amendments to the Clean Air Act, and corresponding state laws regulate the emissions of materials into the air.. Phibro-Tech is impacted by the Clean Air Act and has various air quality permits, including a Title V operating air permit at its Sumter, South Carolina facility.

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State and Local Regulation
      In addition to those federal programs described above, a number of states and some local governments have also enacted laws and regulations similar to the federal laws described above governing hazardous waste generation, handling and disposal, emissions to the water and air and the design, operation and maintenance of recycling facilities.
Foreign Regulation
      Our foreign subsidiaries are subject to a variety of foreign environmental laws relating to pollution and protection of the environment, including the generation, handling, storage, management, transportation, treatment and disposal of solid and hazardous materials and wastes, the manufacture and processing of pesticides and animal feed additives, emissions to the air, discharges to land, surface water and subsurface water, human exposure to hazardous and toxic materials and the remediation of environmental pollution relating to their past and present properties and operations. Regulation of Recycling Activities We have
Regulation of Recycling Activities
      The Company has substantially reduced our recycling activities at our Joliet, Illinois; Garland, Texas; Sumter, South Carolina; and Sewaren, New Jersey sites. Our recycling activities may be broken down into the following segments for purposes of regulation under RCRA or 8 equivalent state programs: (i) transport of wastes to our facilities; (ii) storage of wastes prior to processing; (iii) treatment and/or recycling of wastes; (iv) corrective action at our RCRA facilities; and (v) management of wastes and residues from the recycling process. Although all aspects of the treatment and recycling of waste at our recycling facilities are not currently the subject of federal RCRA regulation, our subsidiaries decided to permit our recycling facilities as RCRA regulated facilities. Final RCRA "Part B"“Part B” permits to operate as hazardous waste treatment and storage facilities have been issued at our facilities in Santa Fe Springs, California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina; and Sewaren, New Jersey (expired August 2003, see "Particular“Particular Facilities - Sewaren, NJ"NJ” below). Part B renewal applications have been submitted for the Santa Fe Springs Garland and Joliet sites. The applications are being reviewed.
      In connection with RCRA Part B permits for the waste storage and treatment units of various facilities, ourthe Company’s subsidiaries have been required to perform extensive site investigations at such facilities to identify possible contamination and to provide regulatory authorities with plans and schedules for remediation. Soil and groundwater contamination has been identified at several plant sites and has required and will continue to require corrective action and monitoring over future years. In order to maintain compliance with RCRA Part B permits, which are subject to suspension, revocation, modification or denial under certain circumstances, we have been, and in the future may be, required to undertake additional capital improvements or corrective action. Our
      The Company’s subsidiaries involved in recycling activities are required by the RCRA and their Part B permits to develop and incorporate in their Part B permits estimates of the cost of closure and post-closure monitoring for their operating facilities. In general, in order to close a facility which has been the subject of a RCRA Part B permit, a RCRA Part B closure permit is required which approves the investigation, remediation and monitoring closure plan, and requires post-closure monitoring and maintenance for up to 30 years. Accordingly, we incur additional costs in connection with any such closure. These cost estimates are updated annually for inflation, developments in available technology and corrective actions already undertaken. We have in most instances, chosen to provide the required regulatory guarantees requiredfinancial assurance in connection with these matters by means of our coverage under an environmental impairment liability insurance policy. We can provide no assurance that such policy will continue to be available in the future at economically acceptable rates, in which event other methodsletters of financial assurance will be necessary.credit.
      In addition to certain operating facilities, wethe Company or our subsidiaries have been and will be required to investigate and remediate certain environmental contamination at shutdown plant sites. We or our subsidiaries are also required to monitor such sites and continue to develop controls to manage these sites within the requirements of RCRA corrective action programs.

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Waste Byproducts
      In connection with our subsidiaries'the Company’s subsidiaries’ production of finished chemical products, limited quantities of waste by-products are generated. Depending on the composition of the by-product, our subsidiaries either sell it, send it to smelters for metal recovery or send it for treatment or disposal to regulated facilities.
Particular Facilities
      The following is a description of certain environmental matters relating to certain facilities of certain of our subsidiaries. References to "we"“we” or "us"“us” throughout this section is intended to refer only to the applicable subsidiary unless the context otherwise requires. These matters should be read in conjunction with the description of Legal Proceedings in Item 3 below, certain of which involve such facilities, and Note 1517 to our Consolidated Financial Statements.
      In 1984, Congress enacted certain amendments to RCRA under which facilities with RCRA permits were required to have RCRA facility assessments ("RFA"(“RFA”) by the EPA or the authorized state agency. Following an RFA, a RCRA facility investigation, a corrective measures study, and corrective measure implementation must, if warranted, be developed and implemented. As indicated below, certain of our subsidiaries are in the process of developing or completing various actions associated with these regulatory phases at certain of their facilities.
Sumter, SC. In 2003, the South Carolina Department of Health and Environmental Control ("DHEC"(“DHEC”) ordered Phibro-Tech, Inc., a subsidiary ("Phibro-Tech"(“Phibro-Tech”), to prepare a RCRA Facility Investigation ("RFI"(“RFI”) and to prepare and propose Corrective Action Plans. Phibro-Tech has done so, and such proposed investigatory activities and Corrective Action Plans are being reviewed by the State. Additional Corrective Action is also being undertaken by Phibro-Tech pursuant to prior agreements with DHEC to remedy certain deficiencies in the plant'splant’s hazardous waste closure, storage and management system.
Santa Fe Springs, CA. Phibro-Tech submitted an application for renewal of the Part B Permit for the Santa Fe Springs, California facility. Such application is presently under review by the State of California and may require certain corrective actions including, but not limited to, a pump and treat system utilizing existing water treatment facilities. Phibro-Tech has submitted a report to the State recommending that soil be remediated instead of groundwater. This recommendation is also under review by the State. 9 State and discussions with the state are ongoing.
Joliet, IL. Phibro-Tech has submitted an application for renewal of the Part B Permit for the Joliet, Illinois facility. In connection with this application, Phibro-Tech completed an initial investigation and determined that certain minor corrective action was required. Phase I and Phase II corrective action work has been completed. The application for renewal is presently pending and is expected to be issued in the corrective action is being done. third quarter of 2005.
Garland, TX. The renewal application for the Part B Permit at the Garland, Texas facility has been granted effective September 12, 2003. As part of an earlier site investigation, certain corrective action was required including upgrading of pollution control equipment and additional site characterization. Both of these are presently underway.
Powder Springs, Georgia. Phibro-Tech'sGA. Phibro-Tech’s facility in Powder Springs, Georgia has been operationally closed since 1985. Phibro-Tech retains environmental compliance responsibility for this facility and has effected a RCRA closure of the regulated portion of the facility, a surface impoundment. Post-closure monitoring and corrective action are required pursuant to a state-issued permit. As required by the permit, corrective action for groundwater has begun, and Phibro-Tech has submitted and received approval from the state for a remedial investigation plan. plan and the Company has commenced implementation.
Sewaren, NJ. Operations at the Sewaren facility were curtailed on or about September 30, 1999. In June, 2000, CPC.P. Chemicals, Inc., a subsidiary ("CP"(“CP”), transferred title to the Sewaren property to Woodbridge Township while, at the same time, entering into a 10-year lease with the Township providing for

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lease payments aggregating $2 million, and covering certain areas of the property, including those areas of the property relating to the existing hazardous waste storage, treatment and transfer permit, loading docks and pads, and a building, as well as access, parking, scale use and office space.
      The property is the subject of an Administrative Consent Order executed in March 1991 between the New Jersey Department of Environmental Protection (or “DEP”) and CP. CP has ongoing obligations under that Administrative Consent Order. CP is required to complete the implementation of the Remedial Action Work Plan approved by the Department of Environmental Protection.Protection and the United States Environmental Protection Agency. Remediation of soils at the Sewaren facility is complete, with the exception of long term maintenance, and groundwater remediation is underway. Although some of the obligations of the Administrative Consent Order, specifically with respect to groundwater, have been assumed by the Township under the Lease, for example, the maintenance of the groundwater recovery system, CP remains responsible to the Department of Environmental Protection underand the Administrative Consent Order.United States Environmental Protection Agency. CP is currently engaged in discussions with the Department of Environmental Protection, the United States Environmental Protection Agency and the Township concerning the ongoing groundwater remediation. CP has posted financial assurance, based on the estimated costs of implementation, under the Administrative Consent Order.
      The property is also regulated under the Corrective Action Program administered by the United States Environmental Protection Agency pursuant to the Resource Conservation and Recovery Act. The property has been designated as a RCRA facility for which achieving the Environmental Indicators is a priority. Currently, CP is interfacing with the Department of Environmental Protection and the Environmental Protection Agency to coordinate its efforts under this program and the Administrative Consent Order discussed above. Much of the effort required by CP in this program is already being conducted as part of the requirements of the Administrative Consent Order discussed above.
      The hazardous waste facility permit issued to CP for this facility expired in August 2003. CP has commencedcompleted the implementation of its approved closure plan.plan and is awaiting DEP approval. Based on a formula established by the Department of Environmental Protection, those closure costs were estimated at $292,823 and submitted to the Department in April 2003.$293,000. CP has also advised the New Jersey Division of Law of its intent to withdrawwithdrawal from the licensing program governing facilities.
Union City, CA. Closure of the Union City, California facility has been completed.
Union, IL. The facility in Union, Illinois, has been closed since 1986. A revised remedial action plan ("RAP"(“RAP”) has been submitted to the Illinois Environmental Protection Agency (the "IEPA"“IEPA”) and is presently under review. The work contemplated in the RAP is the result of negotiations. Negotiations between the IEPA and Phibro-Tech as part of a resolution of Phibro-Tech'shave resulted in an agreed closure plan consistent with the proposed RAP. The agreed closure plan is expected to resolve Phibro-Tech’s appeal of the IEPA'sIEPA’s initial closure requirements. That appeal is currently pending before the Illinois Pollution Control Board. Board but is expected to be voluntarily dismissed upon receipt of IEPA’s written approval of the negotiated closure plan.
Ramat Hovav, Israel. Koffolk (1949) Ltd's ("Ltd.’s (“Koffolk Israel"Israel”) Ramat Hovav plant produces a wide range of organic chemical intermediates for the animal health, chemical, pharmaceutical and veterinary industries. Israeli legislation enacted in 1997 amended certain environmental laws by authorizing the relevant administrative and regulatory agencies to impose certain sanctions, including issuing an order against any person that violates such environmental laws to remove the environmental hazard. In addition, this legislation imposes criminal liability on the officers and directors of a corporation that violates such environmental laws, and increases the monetary sanctions that such officers, directors and corporations may be ordered to pay as a result of such violations. The Ramat Hovav plant operates under the regulation of the Ministry of Environment of the State of Israel. The sewage system of the plant is connected to the Ramat Hovav Local Industrial Council'sCouncil’s central installation, where Koffolk Israel'sIsrael’s sewage is treated together with sewage of other local plants. Owners of the plants in the area, including Koffolk Israel, have been required by the Israeli Ministry of Environment to build facilities for pre-treatment of their sewage. Pursuant to additional requirements of the Ministry of the Environment, the Company is building a biological waste treatment facility, the construction of which is to be completed in 2006/2007. The estimated total cost of the project is $2.2 million, of which approximately $400,000 has been paid.

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Government Regulation
      Most of our Animal Health and Nutrition Group products require licensing by a governmental agency before marketing. In the 10 United States, governmental oversight of animal nutritionhealth and healthnutrition products is shared primarily by the United States Department of Agriculture ("USDA"(“USDA”) and the Food and Drug Administration. A third agency, the Environmental Protection Agency, has jurisdiction over certain products applied topically to animals or to premises to control external parasites.
      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 restrictions on the sale of such products, it could have a material adverse impact on our financial position, results of operations and cash flows.
      The FDA is responsible for the safety and wholesomeness of the human food supply. It regulates foods intended for human consumption and, through The Center for Veterinary Medicine, regulates the manufacture and distribution of animal drugs, including feed additives and drugs that will be given to animals from which human foods are derived, as well as feed additives and drugs for pet (or companion) animals.
      To protect the food and drug supply for animals, the FDA develops technical standards for animal drug safety and effectiveness and evaluates data bases necessary to support approvals of veterinary drugs. The USDA monitors the food supply for animal drug residues.
      FDA approval is based on satisfactory demonstration of safety and efficacy. Efficacy requirements are based on the desired label claim and encompass all species for which label indication is desired. Safety requirements include target animal safety and, in the case of food animals, drug residues and the safety of those residues must be considered. In addition to the safety and efficacy requirements for animal drugs used in food producing animals, the environmental impact must be determined. Depending on the compound, the environmental studies may be quite extensive and expensive. In many instances the regulatory hurdles for a drug which will be used in food producing animals are at least as stringent if not more so than those required for a drug used in humans. For FDA approval of a new animal drug it is estimated the cost is $100 million to $150 million and time for approval could be 8 to 10 years.
      The Office of New Animal Drug Evaluation ("NADE"(“NADE”) is responsible for reviewing information submitted by drug sponsors who wish to obtain approval to manufacture and sell animal drugs. A new animal drug is deemed unsafe unless there is an approved new animal drug application ("NADA"New Animal Drug Application (“NADA”). Virtually all animal drugs are "new“new animal drugs"drugs” within the meaning of the term in the Federal Food, Drug, and Cosmetic Act. Although the procedures for licensing products by the FDA are formalized, the acceptance standards of performance for any product are agreed upon between the manufacturer and the NADE. A NADA in animal health is analogous to a New Drug Application ("NDA"(“NDA”) in human pharmaceuticals. Both are administered by the FDA. The drug development process for human therapeutics can be more involved than that for animal drugs. However, for food-producing animals, food safety residue levels are an issue, making the approval process longer than for animal drugs for non-food producing animals, such as pets.
      The FDA may deny a NADA if applicable regulatory criteria are not satisfied, require additional testing or information, or require postmarketing testing and surveillance to monitor the safety or efficacy of a product. There can be no assurances that FDA approval of any NADA will be granted on a timely basis or at all. Moreover, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NADA approval is the requirement that the prospective manufacturer'smanufacturer’s quality control and manufacturing procedures conform to Current Good Manufacturing Practice ("cGMP"(“cGMP”). The plant must be inspected biannually by the FDA for determination of compliance with cGMP after an initial preapproval inspection. After FDA approval, any manufacturing changes that may have an impact on the safety and/or efficacy must be approved by the

15


FDA prior to implementation. In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure compliance.
      For clinical investigation and marketing outside the United States, we are also subject to foreign regulatory requirements governing investigation, clinical trials and marketing approval for animal drugs. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. Currently, in the EU, feed additives which are successfully sponsored by a manufacturer are assigned to an Annex. Initially, they are assigned to Annex II. During this period, member states may approve the feed additive for local use. After five years or earlier, the product passes to Annex I if no adverse reactions or trends develop over the probationary period.
      The EU is in the process of centralizinghas centralized the regulatory process for animal drugs for member states. In 1997, the EU drafted new regulations requiring the re-registration of feed additives, including coccidiostats. Part of these regulations include a provision for manufacturers to submit quality data for their own formulation, in effect adopting a Product License procedure similar to that of the FDA. The provision is known as Brand Specific Approval ("BSA"(“BSA”), and provides manufacturers with the opportunity to register their own unique brands, instead of simply the generic compound. The BSA process is being implemented over time. The new system is more like the U.S. system, where regulatory approval is for the formulated product or "brand."“brand.” A number of manufacturers, including 11 us, have completedsubmitted dossiers in order to re-register various anticoccidials for the purpose of obtaining regulatory approval from the European Commission. As a result of its review of said dossiers, the Commission withdrew marketing authorization of a number of anticoccidials, including nicarbazin, as the Commission did not consider the submissions to be in full compliance with its new regulations. We have subsequently completed the necessary data and resubmitted itsour nicarbazin dossier. Feasibility and timetable for new registration will depend on the nature of demands and remarks from the Commission. Notwithstanding the Commission'sCommission’s actions with respect to our nicarbazin dossier, we are able to sell, and do sell, nicarbazin as an active ingredient for another MFA marketer'smarketer’s product which has obtained a BSA and is sold in the EU. Miscellaneous
Market Share, Ranking And Other Industry Data
      The market share, ranking and other industry data contained in this Report, including our position and the position of our competitors within these markets, are based either on our management'smanagement’s knowledge of, and experience in, the markets in which we operate, or derived from industry data or third-party sources and, in each case, we believe these estimates are reasonable as of the date of this Report or, if an earlier date is specified, as of such earlier date. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information is subject to change and cannot always be verified due to limits on the availability and reliability of independent sources, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. In addition, purchasing patterns and consumer preferences can and do change. As a result, market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be reliable. 12
CONDITIONS IN ISRAEL
      The following information discusses certain conditions in Israel that could affect our Israeli subsidiary, Koffolk Israel. As of June 30, 2004 and for the year then ended, Israeli operations (excluding Koffolk Israel'sIsrael’s non-Israeli subsidiaries)subsidiary) accounted for approximately 14% of our consolidated assets as of June 30, 2005 and approximately 12%11% of our consolidated net sales.sales for fiscal 2005. We are, therefore, directly affected by the political, military and economic conditions in Israel.
Political and Military Conditions
      Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, since October 2000 there has been a significant increase in violence and terrorist activity in Israel. In April 2002, and from time to time thereafter,

16


Israel undertook military operations in several Palestinian cities and towns. We cannot predict whether the current violence and unrest will continue and to what extent it will have an adverse impact on Israel'sIsrael’s economic development or on Koffolk Israel'sIsrael’s or our results of operations. We also cannot predict whether or not any further hostilities will erupt in Israel and the Middle East and to what extent such hostilities, if they do occur, will have an adverse impact on Israel'sIsrael’s economic development or on Koffolk Israel'sIsrael’s or our results of operations.
      Certain countries, companies and organizations continue to participate in a boycott of Israeli firms and other companies doing business in Israel or with IsraelIsraeli companies. We do not believe that the boycott has had a material adverse effect on us, but we can notcannot provide assurance that restrictive laws, policies or practices directed toward Israel or Israeli businesses will not have an adverse impact on our operations or expansion of the our business.
      Generally, male adult citizens who are permanent residents of Israel under the age of 4540 are, unless exempt, obligated to perform certain military duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances and since April 2002 some reservists have been called to active duty.circumstances. Some of the employees of Koffolk Israel currently are obligated to perform annual reserve duty. While Koffolk Israel has operated effectively under these and similar requirements in the past, we cannot assess the full impact of such requirements on Koffolk Israel and us in the future, particularly if emergency circumstances occur and employees of Koffolk Israel are called to active duty.
Economic Conditions Israel is currently experiencing the longest recession since the establishment of Israel in 1948.
      Factors affecting Israel'sIsrael’s economy include the Intifada, which began in September 2000, the slowdown in world trade and the global slump in the high-tech industry. In addition, Israel'sIsrael’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980's,mid-1980’s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and security incidents. Further disruptions to the Israeli economy as a result of these or other factors could have a material adverse affect on Koffolk Israel'sIsrael’s and our results of operations.
      Koffolk Israel receives a portion of its revenues in U.S. dollars while its expenses are principally payable in New Israeli Shekels. Dramatic changesChanges in the currency rates could have an adverse effect on Koffolk Israel'sIsrael’s results of operations.
Investment Incentives
      Certain of our Israeli production facilities have been granted Approved Enterprise status pursuant to the Law for the Encouragement of Capital Investments, 1959, and consequently may enjoy certain tax benefits and investment grants. Taxable income of Koffolk Israel derived from these production facilities is subject to a lower rate of company tax than the normal rate applicable in Israel. Dividends distributed by Koffolk Israel out of the same income are subject to lower rates of withholding tax than the rate normally applicable to dividends distributed by an Israeli company to a non-resident corporate shareholder. The grant available to newly Approved Enterprises was decreased throughout recent years. Certain of our Israeli production facilities further enjoyed accelerated depreciation under regulation extended from time to time and other deductions. We cannot provide assurance that we will, in the future, be eligible for or receive such or similar grants. 13 Item 2 Properties We maintain

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Item 2.Properties
      In December 2004, we relocated our principal executive offices and a sales office in 23,500offices to 34,000 square feet of leased space in Fort Lee,Ridgefield Park, New Jersey. We operate company-owned manufacturing facilities and utilize third party toll manufacturers. The chart below sets forth the locations and sizes of the principal manufacturing and other facilities operated by us and uses of such facilities, all of which are owned, except as noted.
Approximate
LocationSquare FootageUses - -------------------------------------- -------------- ----------------------------------
Animal Health and Nutrition
Bangkok, Thailand(a).................. 500Sales
Braganca Paulista, Brazil............. Brazil35,000Sales, Manufacturing and Administrative
Bremen, Indiana....................... Indiana50,000Sales, Premixing and Warehouse
Buenos Aires, Argentina(a)............ 900Sales and Administrative Fairfield, New Jersey(a).............. 9,600
San Jose, Costa Rica(a)800Sales and Administrative
Guarulhos, Brazil(b).................. 1,234,000Sales, Premixing, Manufacturing and Administrative
Hong Kong, China(a)................... 750Sales and Administrative
Kuala Lumpur, Malaysia(a)............. 7,300Sales, Premixing and Warehouse
Ladora, Iowa.......................... Iowa9,500Warehouse Lee's
Lee’s Summit, Missouri(a)............. 1,500Sales
Marion, Iowa.......................... Iowa32,500Premixing and Warehouse
Petach Tikva, Israel.................. Israel60,000Sales, Premixing, Warehouse and Administrative
Pretoria, South Africa(a)............. 3,200Sales and Administrative
Quincy, Illinois(c)................... 50,000Sales, Warehouse, Research and Administrative
Rixensart, Belgium(d)................. 865,000Sales, Manufacturing, Research and Administrative
Ramat Hovav, Israel................... Israel140,000Manufacturing and Research
Regina, Canada(a)..................... 1,000Sales and Administrative
Queretaro, Mexico(a).................. 3,500Sales and Administrative Santiago, Chile(a).................... 6,500
Sydney, Australia(a)3,500Sales and Administrative Sydney, Australia(a).................. 3,500
Valencia, Venezuela(a)1,100Sales and Administrative Valencia, Venezuela(a)................ 1,100
Specialty Chemicals
Garland, Texas20,000Manufacturing
Joliet, Illinois34,500Manufacturing
Reading, United Kingdom(a)3,100Sales and Administrative Specialty Chemicals Garland, Texas........................ 20,000 Manufacturing Joliet, Illinois...................... 34,500 Manufacturing Reading, United Kingdom(a)............ 3,100 Sales and Administrative
Santa Fe Springs, California(e)....... 90,000Manufacturing Stradishall, United Kingdom........... 20,000 Sales, Manufacturing and Administrative
Sumter, South Carolina................ Carolina123,000Manufacturing and Research
- ---------- (a) This facility is leased. Our leases expire through 2027. For information concerning our rental obligations, see Note 15 to our Consolidated Financial Statements included herein. (b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the active ingredients semduramicin-mycelial and salinomycin. The plant also produces Aviax(R), Terramycin(R), Stafac(R) and Coxistac(R) Granular formulations. The plant is cGMP compliant and is FDA approved. (c) Comprises three facilities, including a warehouse, laboratory and office facility. (d) Our Rixensart, Belgium plant utilizes fermentation processes to produce the active ingredients semduramicin-crystalline and virginiamycin. The plant also produces Stafac(R) formulations and is responsible for all of our fermentation development activities. The plant has been approved by the FDA and is cGMP compliant. (e) We lease the land under this facility from a partnership owned by Jack Bendheim, Marvin Sussman and James Herlands. See "Certain Relationships and Related Transactions."
(a)This facility is leased. Our leases expire through 2027. For information concerning our rental obligations, see Note 17 to our Consolidated Financial Statements included herein.
(b)Our Guarulhos, Brazil plant utilizes fermentation processes to produce the active ingredients semduramicin-mycelial and salinomycin. The plant also produces Aviax®, Terramycin®, Stafac® and Coxistac® Granular formulations. The plant is cGMP compliant and is FDA approved.
(c)Comprises three facilities, including a warehouse, laboratory and office.

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(d)Our Rixensart, Belgium plant utilizes fermentation processes to produce the active ingredients semduramicin-crystalline and virginiamycin. The plant also produces Stafac® formulations and is responsible for all of our fermentation development activities. The plant has been approved by the FDA and is cGMP compliant. We have entered into an agreement to sell the Rixensart facility, and are in the process of transferring production and fermentation development activities to our Guarulhos, Brazil facility.
(e)We lease the land under this facility from a partnership owned by Jack Bendheim, Marvin Sussman and James Herlands. See “Certain Relationships and Related Party Transactions.”
      Our subsidiary, CPC.P. Chemicals, Inc., leases portions of a previously owned inactive, former manufacturing facility in Sewaren, New Jersey, and another of our subsidiaries owns inactive, former manufacturing facilities in Powder Springs, Georgia,Georgia; Union, Illinois and Union City, California and Wilmington, Illinois. 14 We believeCalifornia.
      The Company believes that our existing and planned facilities are and will be adequate for the conduct of our business as currently conducted and as currently contemplated to be conducted. We
      The Company and ourits subsidiaries are subject to extensive regulation by numerous governmental authorities, including the FDA and corresponding state and foreign agencies, and to various domestic and foreign safety standards. Our manufacturing facilities in Ramat Hovav, Israel, Rixensart, Belgium (which is to be sold), Braganca Paulista, Brazil and Guarulhos, Brazil manufacture products that conform to the FDA'sFDA’s cGMP regulations. Three domestic facilities involved with recycling have final RCRA Part B hazardous waste storage and treatment permits. Our regulatory compliance programs include plans to achieve compliance with international quality standards known as ISO 9000 standards, which became mandatory in Europe in 1999 and environmental standards known as ISO 14000. The FDA is in the process of adopting the ISO 9000 standards as regulatory standards for the United States, and it is anticipated that these standards will be phased in for U.S. manufacturers over a period of time. Our plant in Petach Tikva, Israel has achieved ISO 9000 certification. We do not believe that adoption of the ISO 9000 standards by the FDA will have a material effect on our financial condition, results of operations or cash flows. Item 3.
Item 3.Legal Proceedings
      Reference is made to the discussion above under "Item“Item 1. Business - Environmental Matters"Matters” for information as to various environmental investigation and remediation obligations of our subsidiaries associated principally with their recycling and production facilities and to certain legal proceedings associated with such facilities.
      In addition to such matters, we or certain of our subsidiaries are subject to certain litigation described below.
      On or about April 17, 1997, CPC.P. Chemicals, Inc., a subsidiary (“CP”), and wePAHC were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron"(“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 we,PAHC, as the parent of CP, areis 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. Our portion of the settlement for past costs and expenses through the entry of the Consent Order was $495,000 and is included in selling, general and administrative expenses in the June 30, 2002 statement of operations and comprehensive income. Such amount was paid in July 2002. The Consent Order then providesprovided for a period of due diligence investigation of the property owned by Chevron. The investigation has been conductedChevron and the results are under review. The investigation costs are being split with one other defendant, Vulcan Materials Company. Uponupon completion of the review of the results of the investigation, a decision willwas to be made whether to opt out of the settlement or proceed. If no party opts out of the settlement, Phibro Animal Health Corporation 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. We also have commenced negotiationsNegotiations with Chevron regarding its allocation of responsibility and associated costs under the Consent Order.Order reached an impasse and it became necessary for PAHC and another defendant, Vulcan Materials Company (“Vulcan”), to opt out of the settlement on April 21, 2005. Since then, settlement negotiations have continued and the parties are in the process of memorializing the terms of a revised settlement. The Court will reopen the case if a revised settlement is not finalized.
      As proposed, CP, PAHC and Vulcan, through an acquisition entity known as NFE, LLC (“NFE”), would acquire a portion of the property. NFE will then proceed with the remediation of the acquired property. Vulcan will pay a share of the remediation costs. Vulcan’s share has not yet been determined. Another defendant will also make a contribution toward the remediation costs to be incurred by NFE in an amount

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that has not yet been determined but which is estimated to be approximately $175,000. Chevron will retain title to a portion of the property and will also retain responsibility for further investigation and remediation of certain identified environmental conditions on the property. In addition, Chevron will also be required to complete any necessary remediation in a certain area of the property. While the costs and liabilities cannot be estimated with any degree of certainty at this time, we believethe Company believes that insurance recoveries will be available to offset somemost of those costs.
      The Company'sCompany’s subsidiary, Phibro-Tech, subsidiaryInc. (“Phibro-Tech”), was named in 1993 as a potentially responsible party ("PRP"(“PRP”) in connection with an action commenced under CERCLAthe Federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) by the EPA,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 we havesuch subsidiary agreed to contribute up to $900,000 of which $634,596$675,000 has been paid as of June 30, 2004.2005. Some recovery from insurance and other sources is expected. We haveexpected but has not been recorded. The Company also has accrued ourits best estimate of any future costs.
      Phibro-Tech Inc. has resolved certain alleged technical permit violations with the California Department of Toxic SubstanceSubstances Control ("DTSC"(“DTSC”) and has reached an agreement to pay $425,000make payments over a six (6) years as a result.year period ending October 2008. The annualremaining payments required under this agreement were $315,000 as of June 30, 2005.
      Phibro-Tech and the DTSC are not expected to have any material adverse impact on us. In February 2000,currently negotiating the EPA notified numerous partiessettlement of potential liability for waste disposedcertain alleged technical permit violations from 2003. A preliminary assessment of at a licensed Casmalia, California disposal site, including a business, assetspenalties in the amount of which were originally acquired by a subsidiary of ours in 1984. A settlement$49,000 has been reached inmade. Phibro-Tech, Inc. believes this matter and we have paid $171,103 in full settlement.amount will be reduced.
      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 is investigatinghas investigated the matter, which relates to events in the 1950's1950’s and 1960's, but1960’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 RCRAthe Resource Conservation and Recovery Act relating to possible discharges into Turkey Creek in Sumter, South Carolina. The Company is preparinghas submitted its response to the Request for Information and believes that, because its Sumter, South Carolina facility is distant from Turkey Creek and does not discharge into Turkey Creek, there is a low probabilitythe likelihood of liability associated with this matter. 15 Wematter is remote.
      By letter dated February 22, 2005, Phibro-Tech has been advised by the adjoining property owner of Phibro-Tech’s Powder Springs, Georgia property, of a potential claim for property damage as a result of certain alleged environmental conditions on Phibro-Tech’s Powder Springs property. No specific claim was made nor was any specific amount alleged. The Company has investigated this matter but does not, at this time, believe there will be any material liability resulting therefrom.
      The Company and ourits 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. We believeThe Company believes that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on ourits financial position or results of operations. Item 4.
Item 4.Submission of Matters to a Vote of Security Holders
      There were no matters submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended June 30, 2004. 16 2005.

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PART II Item 5. Market for Registrant's
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities
      (a) Market Information. There is no public trading market for our common equity securities.
      (b) Holders. As of June 30, 2004,September 23, 2005, there was one holder of our Class A Common Stock and two holders of our Class B Common Stock.
      (c) Dividends. We did not declare dividends on any of our common stock during the two years ended June 30, 2004. Item 6. 2005.
Item 6.Selected Financial Data
      The following selected consolidated financial data as of and for fiscal years ended June 30, 2000, 2001, 2002, 2003, 2004 and 20042005 have been derived from our audited consolidated financial statements. The selected consolidated financial data reflect our Odda, Carbide, MRT, and La Cornubia and Wychem businesses as discontinued operations for all periods presented. You should read the information set forth below in conjunction with our "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and our consolidated financial statements and related notes included elsewhere in this Report.
                     
  Fiscal Years Ended June 30,
   
  2001 2002 2003 2004 2005
           
  (Dollars in thousands)
Results of Operations:
                    
Net sales $299,047  $324,142  $337,818  $354,384  $364,379 
Cost of goods sold (includes Belgium Plant Transactions costs of $22,191 in the fiscal year ended June 30, 2005)  232,730   244,617   248,577   265,217   293,086 
                
Gross profit  66,317   79,525   89,241   89,167   71,293 
Selling, general and administrative expenses  60,639   69,429   63,346   63,417   66,911 
Costs of non-completed transaction           5,261    
                
Operating income  5,678   10,096   25,895   20,489   4,382 
Interest expense  18,358   18,735   17,455   20,724   25,342 
Interest (income)  (566)  (346)  (85)  (130)  (120)
Other expense (income), net  (1,463)  3,346   1,548   (788)  (1,859)
Net (gain) on extinguishment of debt           (23,226)   
                
Income (loss) from continuing operations before income taxes  (10,651)  (11,639)  6,977   23,909   (18,981)
Provision (benefit) for income taxes  (230)  14,340   9,830   7,804   2,120 
                
Income (loss) from continuing operations  (10,421)  (25,979)  (2,853)  16,105   (21,101)
Income (loss) from discontinued operations, net of income taxes  (4,474)  (25,791)  (14,023)  (1,166)  671 
(Loss) on disposal of discontinued operations, net of income taxes        (683)  (2,089)  765 
                
Net income (loss)  (14,895)  (51,770)  (17,559)  12,850   (19,665)
Change in derivative instruments, net of income taxes     1,062   (981)  (72)  114 
Change in foreign currency translation Adjustment, net of income taxes  (5,146)  (6,125)  7,377   (776)  8,810 
                
Comprehensive income (loss) $(20,041) $(56,833) $(11,163) $12,002  $(10,741)
                

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  Fiscal Years Ended June 30,
   
  2001 2002 2003 2004 2005
           
  (Dollars in thousands, except ratios)
Net income (loss) $(14,895) $(51,770) $(17,559) $12,850  $(19,665)
 Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions           20,138   4,973 
 Dividends and equity value accreted on Series B and C redeemable preferred stock  (8,172)  (7,623)  (12,278)  (11,463)  (1,723)
                
Net income (loss) attributable to common shareholders $(23,067) $(59,393) $(29,837) $21,525  $(16,415)
                
Balance Sheet Data:
                    
Cash and cash equivalents $14,845  $6,419  $11,179  $5,568  $13,001 
Total assets  330,019   296,444   274,347   241,369   253,057 
Long-term debt and other liabilities  148,344   164,014   123,504   180,304   197,966 
Series B and C redeemable preferred stock  48,980   56,602   68,881   24,678    
Total stockholders’ equity (deficit)  3,405   (61,189)  (84,510)  (63,833)  (44,924)
Fiscal Years Ended June 30, ------------------------------------------------------------- 2000 2001 2002 2003 2004 --------- --------- --------- --------- --------- (Dollars in thousands, except ratios) Results of Operations: Net sales $ 261,769 $ 302,328 $ 328,676 $ 341,746 $ 358,274 Cost of goods sold 201,320 234,784 247,411 251,200 267,871 --------- --------- --------- --------- --------- Gross profit 60,449 67,544 81,265 90,546 90,403 Selling, general and administrative expenses 47,528 61,624 70,636 65,050 66,128 Curtailment of operations at manufacturing facility (1,481) -- -- -- -- Costs of non-completed transaction -- -- -- -- 5,261 --------- --------- --------- --------- --------- Operating income 14,402 5,920 10,629 25,496 19,014 Interest expense 14,520 17,919 18,070 16,281 18,618 Interest (income) (600) (566) (346) (85) (130) Other expense (income), net (1,452) (1,463) 3,349 1,539 (781) Net (gain) on extinguishment of debt -- -- -- -- (23,226) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes 1,934 (9,970) (10,444) 7,761 24,533 Provision (benefit) for income taxes 1,143 (24) 14,767 10,060 7,969 --------- --------- --------- --------- --------- Income (loss) from continuing operations 791 (9,946) (25,211) (2,299) 16,564 Income (loss) from discontinued operations 9,262 (4,949) (26,559) (14,577) (1,625) (Loss) on disposal of discontinued operations -- -- -- (683) (2,089) --------- --------- --------- --------- --------- Net income (loss) 10,053 (14,895) (51,770) (17,559) 12,850 Change in derivative instruments -- -- 1,062 (981) (72) Change in foreign currency translation adjustment 55 (5,146) (6,125) 7,377 (776) --------- --------- --------- --------- --------- Comprehensive income (loss) $ 10,108 $ (20,041) $ (56,833) $ (11,163) $ 12,002 ========= ========= ========= ========= =========
17
Fiscal Years Ended June 30, ------------------------------------------------------------- 2000 2001 2002 2003 2004 --------- --------- --------- --------- --------- Net income (loss) $ 10,053 $ (14,895) $ (51,770) $ (17,559) $ 12,850 Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions -- -- -- -- 20,138 Dividends and equity value accreted on Series B and C redeemable preferred stock -- (8,172) (7,623) (12,278) (11,463) --------- --------- --------- --------- --------- Net income (loss) available to common shareholders $ 10,053 $ (23,067) $ (59,393) $ (29,837) $ 21,525 ========= ========= ========= ========= ========= Balance Sheet Data: Cash and cash equivalents $ 2,403 $ 14,845 $ 6,419 $ 11,179 $ 5,568 Total assets 258,450 330,019 296,444 274,347 241,369 Long-term debt 139,685 139,455 136,641 102,263 158,018 Series B and C redeemable preferred stock -- 48,980 56,602 68,881 24,678 Total stockholders' equity (deficit) 31,618 3,405 (61,189) (84,510) (63,833)
Item 7. Management'sItem 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
      This information should be read in conjunction with the consolidated financial statements and related notes contained in this Report. The Company'sCompany’s Odda, Carbide, MRT, LaCornubia and LaCornubiaWychem 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. All references to years 2005, 2004, and 2003 and 2002 in this discussionthese financial statements refer to the fiscal year ended June 30 of that year.
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 preventativelypreventively and therapeutically in animal feedsfeed 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'sCompany’s products provide critical performance attributes to customers'customers’ products, while representing a relatively small percentage of total end-product cost. In August 2003,
Holding Company and HoldCo Notes
      During February 2005, PAHC Holdings Corporation (“Holdings”) was formed to hold the Company completedcapital stock of PAHC, except for its Series C Preferred Stock. On February 10, 2005, Holdings issued $29.0 million aggregate principal amount of its 15% Senior Secured Notes due 2010 (the “HoldCo Notes”) in a private placement. Interest is payable at the option of Holdings in cash or pay-in-kind HoldCo Notes in its sole discretion. PAHC is not obligated for the HoldCo Notes. PAHC’s ability to make payments to Holdings is subject to the terms of PAHC’s Senior Secured Notes, its Senior Subordinated Notes, its domestic senior credit facility, and to applicable law.

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      The proceeds from the sale of MRTthe HoldCo Notes were used by Holdings to make a capital contribution to PAHC to contemporaneously finance the redemption of PAHC’s Series C Preferred Stock in the amount of $26.4 million on February 28, 2005.
      On May 16, 2005, Holdings completed the exchange of its privately placed HoldCo Notes with new HoldCo Notes that have been registered with the SEC.
      Holdings was formed by the holders of all of PAHC’s capital stock, other than the holders of PAHC’s Series C Preferred Stock. In particular, Jack Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his family exchanged all of their shares of Series A Preferred Stock and Class B Common Stock and Mr. Bendheim exchanged all of his shares of Class A Common Stock, for the same number and class of shares of Holdings, having the same designations, relative rights, privileges and limitations as PAHC’s shares of such class (except to the extent that Holdings is a Delaware corporation and PAHC is a New York corporation). Holdings owns all the outstanding capital stock of all classes of PAHC.
      The HoldCo Notes are collateralized by all of Holdings’ assets (now consisting substantially of all the outstanding capital stock of PAHC). The HoldCo Notes and such security interest are effectively subordinated to all liabilities, including PAHC’s and its subsidiaries’ trade payables, as well as PAHC’s indenture indebtedness.
Redemption of Series C Preferred Stock
      On February 28, 2005, PAHC, Palladium Equity Partners II, LP and certain of its affiliates (“Palladium”), Holdings and the principal stockholders of Holdings entered into an agreement to redeem PAHC’s Series C Preferred Stock with respect to (i) the redemption price of $26.4 million (consisting of $19.6 million of liquidation preference and $6.8 million of equity value), (ii) amending the terms of the post-redemption redemption price adjustment set forth in the certificate of incorporation of PAHC (a) from an amount payable upon occurrence of certain capital stock transactions determined with respect to the value of the Company upon the occurrence of such capital stock transaction, to a liquidated amount of $4.0 million, payable only after the occurrence of certain capital stock transactions and the receipt by the current stockholders of PAHC, on a cumulative basis, of an aggregate of $24.0 million of dividends and distributions in respect of such capital stock transactions, and (b) to remove the one year time period for such adjustment of the redemption price, and (iii) eliminating the backstop indemnification obligation of up to $4.0 million of PAHC to Palladium incurred in connection with the sale by PAHC to Palladium in December 2003 of The Prince Manufacturing Company (“PMC”). The excess of the redemption price over the carrying value of the Series C Preferred Stock and the elimination of the backstop indemnification obligation have been reflected as adjustments to stockholder’s deficit on the consolidated balance sheet at June 30, 2005. The redemption agreement also eliminated PAHC’s agreement to pay $0.1 million per year to Palladium for certain treasury services. The Company has determined the fair value of the liability for the post-redemption redemption price adjustment to be insignificant to the consolidated financial statements, due to the uncertainty of the ultimate timing of such payment, if any. Future changes in the fair value of the liability for the post-redemption redemption price adjustment will be recorded through earnings in the period in which such change occurs.
Discontinued Operations — Wychem
      On April 29, 2005, the Company sold the shares of Wychem, an indirect wholly-owned subsidiary, for cash proceeds of $4.8 million to an investor group that included the former head of the Company’s Specialty Chemicals Group, who retired in August 2004, and the Managing Director of Wychem. The Company owned 75% of Wychem through Koffolk (1949), Ltd. (Israel) and 25% through Ferro Metal and Chemical Corporation Limited (U.K.). The Company recorded a gain on the sale of Wychem of $0.5 million in 2005. Wychem was included in the Company’s All Other segment.
Belgium Plant Transactions
      On December 16, 2004, Phibro Animal Health SA (“PAH Belgium”), entered into an agreement with GlaxoSmithKline Biologicals (“GSK”) to sell to GSK substantially all of PAH Belgium’s facilities in

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Rixensart, Belgium (the “Belgium Plant”). Such sale, when completed (the “Belgium Plant Transactions”), will include the following elements (U.S. dollar amounts at the June 30, 2005 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of PAH Belgium for a purchase price of EUR 6.2 million ($7.5 million), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 0.7 million ($0.8 million) for such cleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million ($1.8 million) within six months from the closing date, EUR 1.5 million ($1.8 million) within eighteen months from the closing date, EUR 1.5 million ($1.8 million) within thirty months from the closing date, and EUR 0.5 million ($0.6 million) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 0.4 million ($0.5 million)) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions; 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 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 2.1 million ($2.5 million) as of the projected closing date of November 30, 2005. The Company recorded incremental depreciation expense of EUR 5.8 million ($7.5 million) during 2005 and will record an additional EUR 3.8 million ($4.6 million) of incremental depreciation expense ratably through November 2005.
      The Company recorded accrued severance expense of EUR 10.2 million ($12.8 million) during 2005, representing the estimated total cost of severance and early-retirement programs for those employees not transferring to GSK. The expense includes $0.9 million for enhanced pension benefits agreed as part of the early-retirement program. The Company estimates $6.5 million will be payable at or around the closing date, and $6.3 million will be payable in subsequent periods.
      The Company also recorded $1.9 million of other transaction-related expense during 2005.
      The incremental depreciation expense of $7.5 million, severance expense of $12.8 million and other transaction-related expense of $1.9 million recorded in 2005 are included in cost of goods sold on the Company’s consolidated statements of operations and comprehensive income (loss).
      The Company expects to record an estimated $6.2 million of additional net expense during fiscal 2006 for employee retention agreements, plant dismantling and decommissioning, plant shutdown and other costs associated with the completion of the sale of the Belgium Plant. The estimated net expense includes an estimated $1.1 million gain from the curtailment of the Belgium pension plan. The Company estimates no material gain or loss during fiscal 2006 resulting from the sale of the Belgium Plant.
      The Company has determined that the carrying amount of the Belgium Plant at June 30, 2005 is recoverable based on the estimated future cash flows arising from the use of the assets.
      In anticipation of transferring production of virginiamycin from the Belgium Plant to an alternative production location, the Company has been increasing inventory levels of virginiamycin to ensure adequate supplies during the transfer period. Virginiamycin inventories were approximately $38.8 million and

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$24.1 million at June 30, 2005 and 2004, respectively and are expected to continue to increase through November 2005, based on current production rates.
Issuance of Additional 13% Senior Secured Notes
      On December 21, 2004, PAHC completed a private placement pursuant to which PAHC (the “Parent Issuer”) and Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of PAHC (the “Dutch Issuer” and together with PAHC, the “Issuers”) issued and sold 22,491 additional units consisting of $18.2 million 13% Senior Secured Notes due 2007 of the Parent Issuer (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 after transactionof $23.4 million. The proceeds were used to refinance indebtedness outstanding under PAHC’s domestic senior credit facility. PAHC incurred financing costs of approximately $13.8 million. In$2.3 million in connection with the issuance of the Additional Notes. The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the “Indenture”) under which the Issuers previously issued 105,000 units consisting of $85.0 million aggregate principal amount of U.S. Notes and $20.0 million aggregate principal amount of Dutch Notes.
      On March 9, 2005, PAHC completed the exchange of its privately placed 127,491 units of 13% Senior Secured Notes due 2007 with 127,491 new units of 13% Senior Secured Notes due 2007 that have been registered with the SEC.
Amendment to the Domestic Senior Credit Facility
      On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, PAHC 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 Phibro Saude International Ltda. (“PAH Brazil”) or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the sale of the Belgium Plant and related transactions.
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 (see discussion below under "Prince Transactions"(“PMC”). On June 30, 2004, one) to a company (“Buyer”) formed by Palladium Equity Partners II, LP and certain of its affiliates (“Palladium”), and the related reduction of the Company's French subsidiaries,Company’s preferred stock held by Palladium (collectively the “Prince Transactions”).
Segments
      Certain of the Company’s discontinued operations (MRT, La Cornubia SA ("La Cornubia"), filed for bankruptcy underand Wychem) were previously included in the insolvency laws of France. The Company believes that, as a resultAll Other segment. Contract manufacturing, also previously included in the All Other segment, has been aggregated with the Industrial Chemicals segment due to the similar nature, management and economic characteristics of the bankruptcy filing by La Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent,businesses as well as common copper-based raw materials and production facilities. In addition, certain product lines previously included in the Animal Health and Nutrition segment have been included in the Distribution segment due to a holding Company with no assets exceptchange in management and marketing responsibilities. Prior years segment data have been revised for its investment in La Cornubia, may also file for bankruptcy in France.comparability.

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Other Risks and Uncertainties
      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. During 2004, the Company incurred $5.3 million of costs in connection with a potential acquisition transaction that was not completed. The Company has charged the costs to expense in its 2004 results. The costs primarily consisted of professional fees for services in connection with the transaction. The Company'sCompany’s ability to fund its operating plan relies upon the continued availability of borrowing under the domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the amendeddomestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's 2005Company’s 2006 operating plan projects adequate liquidity throughout the year, with periods of reduced availability around the dates of the semi-annual interest payments due NovemberDecember 1 2004 and June 1 2005.related to its senior secured notes and its 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 would be available as needed. The Company also has undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future flexibility and reduce cost. There can be no assurance the Company will be successful in any of the above-noted actions. 18 Refinancing
      The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company’s business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company’s financial position, results of operations and cash flows.
      The testing, manufacturing, and marketing of certain of the Company’s products are subject to extensive regulation by numerous government authorities in the United States and other countries.
      The Company has significant assets located outside of the United States, and a significant portion of the Company’s sales and earnings are attributable to operations conducted abroad.
      The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company.
      The Company’s operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company’s current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters.
Summary Consolidated Results of Continuing Operations
             
  Year Ended June 30,
   
  2005 2004 2003
       
  (Thousands)
Net Sales $364,379  $354,384  $337,818 
Gross profit  71,293   89,167   89,241 
Selling, general and administrative expenses  66,911   63,417   63,346 
Costs of non-completed transaction     5,261     
Operating Income  4,382   20,489   25,895 
Interest expense, net  25,222   20,594   17,370 
Other (income) expense, net  (1,859)  (788)  1,548 
Net (gain) on extinguishment of debt     (23,226)   
Provision for income taxes  2,120   7,804   9,830 
Income (loss) from continuing operations $(21,101) $16,105  $(2,853)

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2005 Compared with 2004
Net Salesof $364.4 million increased $10.0 million, or 3%. Animal Health and Nutrition sales of $278.8 million grew $15.4 million, or 6%, due to volume increases and higher average selling prices. Specialty Chemical Group (comprised of the Industrial Chemicals and Distribution segments) sales of $85.6 million decreased $5.4 million. Excluding PMC, Specialty Chemical Group sales increased by $5.7 million, or 7%, primarily due to higher average selling prices. The Specialty Chemical Group included PMC sales of $11.1 million for 2004.
Gross Profitof $71.3 million decreased $17.9 million to 19.6% of net sales. The Belgium Plant Transactions increased costs by $22.2 million for the current period. Excluding this charge, Animal Health and Nutrition gross profit increased due to higher average selling prices and unit volumes offset in part by higher unit costs. The Specialty Chemical Group, excluding PMC, also contributed to the improvement due to expanded sales of the Company’s new copper-based wood treatment product and higher average selling prices in its Distribution segment. The Specialty Chemical Group included PMC gross profit of $3.6 million for the 2004 period.
      Gross profit included $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA. The Company acquired the rights to sell amprolium in most international markets. In payment for the acquired rights, the Company relinquished its claims against the seller for certain purchase order commitments and agreed to pay the seller $2.1 million over a five year period.
Selling, General and Administrative Expensesof $66.9 million increased $3.5 million. Expenses in the operating segments, excluding PMC, increased over the prior year due to higher research and development costs associated with registration trials, unfavorable foreign exchange rates, advertising and promotion expenditures and severance costs. Corporate expenses increased due to higher professional fees, costs associated with the relocation of the Company’s corporate office and lower PMC advisory fees income offset in part by the elimination of the Palladium management fee in fiscal 2004. In addition, the Company recognized additional income of$1.0 million during 2005 related to the previous sale of its etchant business during fiscal 2003. PMC expenses were $1.3 million for the 2004 period. The amortization of deferred financing costs, previously included in selling, general and administrative expenses, is now included in interest expense. Prior year amounts have been revised for comparability.
Costs of Non-completed Transaction. During 2004, the Company incurred $5.3 million of costs in connection with a potential acquisition transaction that was not completed. The Company charged the costs to expense in its 2004 results. The costs primarily consisted of professional fees for services in connection with the transaction.
Net Gain on Extinguishment of Debt. During 2004, the Company recorded a net gain on the extinguishment of debt of $23.2 million due to the repurchase of senior subordinated notes ($16.7 million), and the repayment of Pfizer obligations ($7.5 million) offset in part by a loss on repayment of a senior credit facility ($1.0 million).
Operating Incomeof $4.4 million decreased $16.1 million due to $22.2 million of expenses for the Belgium Plant Transactions in 2005, offset in part by $5.3 million of non-completed transaction costs in 2004. Excluding the Belgium Plant Transactions and the non-completed transaction costs, operating income would have improved by $0.8 million. Operating income, excluding PMC, improved in the Specialty Chemical Group with increased gross profit offset in part by higher selling, general and administrative expenses. Operating income, excluding the Belgium Plant Transactions, declined slightly in Animal Health and Nutrition. PMC contributed $2.3 million for the 2004 period offset in part by the elimination of the $1.1 million Palladium management fee.
Interest Expense, Netof $25.2 million increased $4.6 million from the 2004 period, primarily due to higher average interest rates and also higher borrowing levels associated with the issuance of the Company’s senior secured notes. The amortization of deferred financing costs was $3.0 million and $2.1 million for 2005 and 2004, respectively.

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Other (Income) Expense, Netprincipally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. In addition, the Company recorded gains of $0.8 million on the sale of its Wilmington, Illinois property and $0.7 million on the redemption of its preferred stock investment in Penick Holding Company.
Income Taxesof $2.1 million were recorded on a consolidated pre-tax loss of $19.0 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.
2004 Compared with 2003
Net Salesof $354.4 million increased $16.6 million, or 5%. Animal Health and Nutrition sales of $263.4 million grew $15.2 million, or 6%, due to volume increases. Specialty Chemical Group (comprised of the Industrial Chemicals and Distribution segments) sales of $91.0 million increased $1.4 million, or 2%, primarily due to volume increases in all segments, offset by a decrease in PMC sales. The Specialty Chemical group included PMC sales of $11.1 million and $22.3 million for 2004 and 2003, respectively.
Gross Profitof $89.2 million decreased $0.1 million to 25.2% of net sales, compared with 26.4% in 2003. Animal Health and Nutrition gross profit decreased due to lower average selling prices and unfavorable currency related to the effect of the Euro on Belgium manufacturing costs. Improvements in the Specialty Chemical Group partially offset the Animal Health and Nutrition decline. The Specialty Chemical Group included PMC gross profit of $3.6 million and $6.2 million, respectively, for the 2004 and 2003 periods.
      Gross profit included $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA. The Company acquired the rights to sell amprolium in most international markets. In payment for the acquired rights, the Company relinquished its claims against the seller for certain purchase order commitments and agreed to pay the seller $2.1 million over a five year period.
Selling, General and Administrative Expensesof $63.4 million increased $0.1 million. Expenses in the operating segments, excluding PMC, approximated the prior year primarily due to lower environmental and severance accruals offset in part by unfavorable foreign exchange rates. Corporate expenses in 2004 reflect the elimination of the Palladium annual management fee of $2.25 million as of December 31, 2003 and income of $0.5 million from the PMC Advisory fee. Corporate expenses increased in 2004 due to higher insurance costs offset by lower benefit charges. Corporate expenses in 2003 included vitamin settlement income of $3.0 million. PMC expenses were $1.3 million and $2.6 million for 2004 and 2003, respectively. The amortization of deferred financing costs, previously included in selling, general and administrative expenses, is now included in interest expense. Prior year amounts have been revised for comparability.
Costs of Non-completed Transaction. During 2004, the Company incurred $5.3 million of costs in connection with a potential acquisition transaction that was not completed. The Company has charged the costs to expense in its 2004 results. The costs primarily consisted of professional fees for services in connection with the transaction.
Net Gain on Extinguishment of Debt. During 2004, the Company recorded a net gain on the extinguishment of debt of $23.2 million due to the repurchase of senior subordinated notes ($16.7 million), and the repayment of Pfizer obligations ($7.6 million) offset in part by a loss on repayment of a senior credit facility ($1.0 million).
Operating Incomeof $20.5 million decreased $5.4 million to 5.7% of sales. The decrease was primarily due to the non-completed transaction costs described above. In addition, gross profit declined in the Animal Health and Nutrition segment but was offset in part by improved operating performance of the Specialty Chemical group. PMC contributed $2.3 million and $3.6 million for 2004 and 2003, respectively.

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Interest Expense, Netof $20.6 million increased $3.2 million from the prior year, primarily due to higher borrowing levels and also higher average interest rates associated with the issuance of the Company’s Senior Secured Notes. The amortization of deferred financing costs was $2.1 million and $1.2 million for 2004 and 2003, respectively.
Other (Income) Expense, Netof ($0.8) million improved in comparison with $1.5 million of expense in 2003. During 2004, the Company’s Phibro-Tech subsidiary received $1.0 million in exchange for the sale of certain assets related to the manufacture and sale of ferric chloride from its plant in Joliet, Illinois and recognized a net gain of $0.7 million. The balance of other (income) expense principally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses.
Income Taxesof $7.8 million were 33% of consolidated pre-tax income of $23.9 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 contract manufacturing of crop protection chemicals, and includes Phibro-Tech and, until its divestiture, PMC. The Distribution segment markets a variety of specialty chemicals, and includes PhibroChem and Ferro operations. Due to the divestiture of PMC in December 2003, PMC’s results are shown separately for comparability.
      Certain of the Company’s discontinued operations (MRT, La Cornubia and Wychem) were previously included in the All Other segment. Contract manufacturing, also previously included in the All Other segment, has been aggregated with the Industrial Chemicals segment due to the similar nature, management and economic characteristics of the businesses as well as common copper-based raw materials and production facilities. In addition, certain product lines previously included in the Animal Health and Nutrition segment have been included in the Distribution segment due to a change in management and marketing responsibilities. Prior years segment data has been revised for comparability.
              
  Year Ended June 30,
   
  2005 2004 2003
       
  (Thousands)
Net Sales
            
 Animal Health & Nutrition $278,837  $263,417  $248,262 
 Industrial Chemicals — ex PMC  52,305   46,984   34,708 
 Industrial Chemicals — PMC     11,118   22,332 
 Distribution  33,237   32,865   32,516 
          
  $364,379  $354,384  $337,818 
          
Operating Income
            
 Animal Health & Nutrition $10,073  $32,605  $37,325 
 Industrial Chemicals — ex PMC  4,835   2,291   (5,589)
 Industrial Chemicals — PMC     2,278   3,579 
 Distribution  4,671   3,602   4,354 
 Corporate expenses and adjustments  (15,197)  (20,287)  (13,774)
          
  $4,382  $20,489  $25,895 
          

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Operating Segments 2005 Compared to 2004
Animal Health and Nutrition
Net Salesof $278.8 million increased $15.4 million, or 6%. MFA net sales increased by $6.5 million. Revenues were higher primarily for 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 $8.9 million principally due to higher average selling prices and volume increases. NFA sales were notably higher for the Company’s specialty products, trace mineral premixes and other feed ingredient products.
Operating Incomeof $10.1 million decreased $22.5 million from the 2004 period. Operating income, excluding costs relating to the Belgium Plant Transactions of $22.2 million, declined slightly due to higher selling, general and administrative expenses and manufacturing costs offset in part by higher average selling prices and sales unit volumes.
Specialty Chemicals Group
Industrial Chemicalsnet sales of $52.3 million, increased $5.3 million, or 11% excluding PMC. Sales of copper-related products to the wood treatment markets increased due to new copper based wood treatment products and higher sales of other specialty copper products arising from capacity expansion. Revenues for contract manufacturing increased due to higher average selling prices and increased volumes. PMC, divested in December 2003, generated revenues of $11.1 million for the 2004 period. Operating income, excluding PMC, of $4.8 million improved by $2.5 million from the 2004 period. This improvement was due to new product introductions and savings from previously implemented headcount reductions and facility restructurings. PMC provided operating income of $2.3 million for the 2004 period.
Distributionnet sales of $33.2 million increased $0.4 million. Higher domestic unit volumes and average selling prices were offset in part by lower sales volumes in Europe. Distribution operating income of $4.7 million improved by $1.1 million from the 2004 period due to increased sales of higher margin products. As a percentage of sales, operating income was 14% and 11% in 2005 and 2004, respectively.
Operating Segments 2004 Compared to 2003
Animal Health and Nutrition
Net Salesof $263.4 million increased $15.2 million, or 6%. MFA net sales decreased by $7.3 million. Revenues were lower primarily for anticoccidials but were offset in part by higher sales of other medicated feed additives. Sales of anticoccidial products were lower due to contract negotiations with a major customer that were completed in the fourth quarter of 2004. The decrease in MFA revenues also was due to lower average selling prices offset in part by favorable currency effect on international sales. NFA net sales increased by $22.5 million, principally due to volume increases in core inorganic minerals, trace mineral premixes and other ingredients.
Operating Incomeof $32.6 million decreased $4.7 million, or 13%. Operating income declined due to product mix, higher cost of goods reflecting the stronger Euro’s effect on Belgian manufacturing cost and unfavorable currency effects on international selling, general and administrative expense. Lower average selling prices also contributed to the decrease. Operating income increased $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA.
Specialty Chemicals Group
Industrial Chemicalsnet sales of $47.0 million, excluding PMC, increased $12.3 million, or 35%. Sales of copper related products to the wood treatment markets increased due to the introduction of new copper based wood treatment chemicals which offset the divestiture of the Company’s Eastern United States etchant business in mid 2003. The Company continues its existing etchant business at one remaining facility. Revenues for contract manufacturing improved due to increased volumes and average selling prices. PMC,

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divested in December 2003, generated revenues of $11.1 million and $22.3 million for 2004 and 2003, respectively. Operating income of $2.3 million improved by $7.9 million from the prior year. This improvement was due to new product introductions and savings from headcount reductions and facility restructurings. Operating income also improved due to higher revenues and increased margins on contract manufacturing. PMC provided operating income of $2.3 million and $3.6 million for 2004 and 2003, respectively.
Distributionnet sales of $32.9 million increased $0.3 million, or 1%. Higher sales volumes in Europe were offset in part by lower domestic unit volumes and lower average selling prices. Distribution operating income of $3.6 million decreased $0.8 million from the prior year. As a percentage of sales, operating income was 11% and 13% in 2004 and 2003, respectively.
Discontinued Operations
      On October 21,April 29, 2005, the Company sold the shares of Wychem, an indirect wholly-owned subsidiary, for cash proceeds of $4.8 million to an investor group that included the former head of the Company’s Specialty Chemicals Group, who retired in August 2004, and the Managing Director of Wychem. The Company owned 75% of Wychem through Koffolk (1949), Ltd. (Israel) and 25% through Ferro Metal and Chemical Corporation Limited (U.K.). The Company recorded a gain on the sale of Wychem of $0.5 million in 2005. Wychem was included in the Company’s All Other segment.
      During 2004, the Company shut down its operations at La Cornubia and divested MRT. During 2003, the Company issued 105,000 units consistingshut down or divested Odda Smelteverk (Norway), and Carbide Industries (U.K.). 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 $85.0the discontinued operations.
                     
  Year Ended June 30, 2005
   
  Odda/Carbide MRT LaCornubia Wychem Total
           
Net Sales $  $  $  $4,431  $4,431 
                
Operating Income $  $  $   940  $940 
Other Expense (Income), net           6   6 
Provision (benefit) for income tax           263   263 
                
Net Income from discontinued operations $  $  $  $671  $671 
                
Depreciation and Amortization $  $  $  $344  $344 
                
                     
  Year Ended June 30, 2004
   
  Odda/Carbide MRT LaCornubia Wychem Total
           
Net Sales $  $3,327  $13,918  $3,890  $21,135 
                
Operating Loss $  $(124) $(1,491)  631  $(984)
Interest Expense, net        94      94 
Other Expense (Income), net        (102)  7   (95)
Provision (benefit) for income tax        18   165   183 
                
Net Income (loss) from discontinued operations $  $(124) $(1,501) $459  $(1,166)
                
Depreciation and Amortization $  $  $400  $419  $819 
                

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  Year Ended June 30, 2003
   
  Odda/Carbide MRT LaCornubia Wychem Total
           
Net Sales $11,217  $18,671  $13,479  $3,928  $47,295 
                
Operating Loss $(13,462) $(3,454) $(359)  775  $(16,500)
Interest Expense, net          60       60 
Other Expense (Income), net  (2,327)     (389)  (9)  (2,725)
Provision (benefit) for income tax  (58)     16   230   188 
                
Net Income (loss) from discontinued operations $(11,077) $(3,454) $(46) $554  $(14,023)
                
Depreciation and Amortization $894  $1,309  $359  $364  $2,926 
                
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 Provided (Used) by Operating Activities. Cash provided (used) by operations for 2005 and 2004 was ($6.3) million and $2.9 million, respectively. Cash used was due to higher working capital requirements. The Company is currently increasing inventory levels of virginiamycin to enhance future supply flexibility and reduce cost as part of the planned exit of the Belgium Plant. Total inventories increased by $14.3 million in the current fiscal year. In addition, the Company paid $4.0 million of itscosts related to a non-completed transaction that was charged to expense in fiscal 2004.
Net Cash Provided by Investing Activities. Net cash provided by investing activities for 2005 and 2004 was $0.0 million and $9.1 million, respectively. Capital expenditures of $7.5 million and $6.1 million for 2005 and 2004, respectively, were for new product capacity, for maintaining the Company’s existing asset base and for environmental, health and safety projects. Discontinued operations, primarily from the sale of Wychem and MRT, provided funds of $4.8 million and $14.8 million in 2005 and 2004, respectively. Proceeds from sales of fixed assets and other investing activities accounted for the remainder of cash provided by investing activities in 2005 and 2004, respectively.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used) by financing activities for 2005 and 2004 was $13.8 million and ($17.8) million, respectively. For 2005, 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 2007 (the "US Senior Notes") and $20.0 million 13% of Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Notes" and, together withto the US Senior Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiaryreduced outstanding balance of the Company (the "Dutch issuer"). The Company used the proceeds from the issuance to: (i) repurchase $52.0 million of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal to 60% of the principal amount thereof, plus accrued and unpaid interest; (ii) repay its senior credit facility of $34.9 million outstanding at the repayment date; (iii) satisfy, for a payment of approximately $29.3 million certain of its outstanding obligations to Pfizer Inc., including: (a) $20.1 million aggregate principal amount of its promissory note plus accrued and unpaid interest, (b) $9.7 million of accounts payable, (c) $9.0 million of accrued expenses, and (d) future contingent purchase price obligations under its agreements with Pfizer Inc. by which the Company acquired Pfizer's medicated feed additive business; and (iv) pay fees and expenses relating to the above transactions. A net gain on extinguishment of debt is included in the Company's condensed consolidated statement of operations, calculated as follows (amounts in thousands): Net Gain on Repurchase of 9 7/8% Senior Subordinated Notes due 2008: Principal amount of repurchased notes $ 51,971 Repurchased at 60% of principal amount (31,183) Transaction costs (4,107) -------- Net gain on repurchase of notes 16,681 -------- Loss on repayment of senior credit facility (1,018) -------- Net Gain on Payment of Pfizer Obligations: Obligations paid: -promissory note 20,075 -accrued interest on promissory note 1,015 -accounts payable and accrued expenses 18,788 -------- Total obligations paid 39,878 Cash payment to Pfizer (29,315) Transaction costs (3,000) -------- Net gain on payment of Pfizer obligations 7,563 -------- Net gain on extinguishment of debt $ 23,226 ======== The US Senior Notes and the Dutch Senior Notes are senior secured obligations of each of the Company (the "US Issuer") and the Dutch issuer, respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a senior secured basis by all the US Issuer's domestic restricted subsidiaries, and the Dutch Senior Notes are guaranteed on a senior secured basis by the US Issuer and by the restricted subsidiaries of the Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior Notes and related guarantees are collateralized by substantially all of the US Issuer's assets and the assets of its domestic restricted subsidiaries, other than real property and interests therein, including a pledge of all the capital stock of such domestic restricted subsidiaries. The Dutch Senior Notes and related guarantees are collateralized by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries and substantially all of the assets of the U.S. guarantors, other than real property and interests therein. The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires the Company to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture). The Company timely filed a registration statement with the SEC on Form S-4 with respect to an exchange offer for the Senior Secured Notes, but due to pending confidential acquisition negotiations, such registration statement has not become effective. 19 Also, on October 21, 2003, the Company entered into a new replacement domestic senior credit facility ("primarily funded from proceeds of additional long-term debt. Payments of long-term debt reflect the repayments of Koffolk Israel borrowings. The Company used $26.4 million of capital contribution from Holdings to redeem for $26.4 million, the remaining Series C Preferred Stock.
Working Capital and Capital Expenditures. Working capital as of June 30, 2005 was $78.8 million compared to $54.4 million at June 30, 2004, an increase of $24.4 million. The fiscal 2005 increase in working capital primarily was due to higher inventory levels and to reduced short-term debt levels related to the issuance of new long-term debt.

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      The Company anticipates spending approximately $18.0 million for capital expenditures in fiscal 2006, primarily for expansion of virginiamycin production capacity at the Brazil facility and 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 June 30, 2005 the amount of credit extended under PAHC’s domestic senior credit facility") with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities initially could not exceed $25.0totaled $8.0 million including aggregate borrowings under the working capital facility up to $15.0 million. On April 29, 2004,and $11.0 million under the Company amended the senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25.0facility, and PAHC had $9.5 million to $27.5 million and to increase the amount of aggregate borrowings available under the working capital facility from $15.0facility. In addition, certain of PAHC’s foreign subsidiaries also had availability totaling $7.2 million to $17.5 million.under their respective loan agreements.
      As of September 24, 2004, the CompanyPAHC amended theits domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27.5 million 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 all other items. Borrowings underitem (v).
      On December 21, 2004, concurrent with the senior credit facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. Under the senior credit facility, the Company may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit facility is secured by a first priority lien on substantially allcompletion of the Company's assets and assets of substantially alloffering of the Company's domestic subsidiaries. The Company is required to pay an unused line fee of 0.375% on the unused portion of the senior credit facility, a monthly servicing fee and standard letter of credit fees to issuing banks. Borrowings under the senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior SecuredAdditional Notes, has not been extended, as required by the senior credit facility, by that date. Pursuant to the terms of an intercreditor agreement, the security interest securing the Senior Secured Notes and the guarantees made by the Company's domestic restricted subsidiaries is subordinated to a lien securing the senior credit facility. Prince Transactions Effective December 26, 2003 (the "Closing Date"), the Company completed the divestiture of substantially all of the business and assets of 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"). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements: (i) the transfer of substantially all of the business and assets of PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72.2 million to $16.5 million (accreted through the Closing Date) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii) the termination of $2.2 million in annual management advisory fees payable by the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; (v) the agreement of the Buyer to pay the Company for advisory fees for the next three years of $1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid at closing by the Buyer and satisfied for $1.3 million, the net present value of such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron oxide products and to provide certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer with certain laboratory, MIS and telephone services, all on terms substantially consistent with the historic relationship between Prince Agri and PMC, and to lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an agreement to receive certain treasury services from Palladium for $0.1 million per year. Pursuant to definitive agreements, the Company made customary representations, warranties and environmental and other indemnities, agreed to a post-closing working capital adjustment, paid $4.0 million in full satisfaction of all intercompany debt owed to PMC, paid a closing fee to Palladium of $0.5 million, made certain capital expenditure adjustments included as part of the intercompany settlement amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million of its accounts receivable. The Company established a $1.0 million letter of credit escrow for two years to secure its working capital adjustment and certain indemnification obligations. 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 Buyer for less than $21.0 million up to a maximum payment by the Company of $4.0 million (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 Buyer by January 1, 2009. The definition of "Equity Value" in the Company's Certificate of 20 Incorporation was amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5. The amount of consideration paid and payable in connection with the Prince Transactions and all matters in connection therewith were determined pursuant to arm's length negotiations. The excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions was recorded as a decrease to accumulated deficit on the Company's condensed consolidated balance sheet at December 31, 2003, and was calculated as follows (amounts in thousands): Series B & C Redeemable Preferred Stock: Accreted value pre-transaction $72,184 Accreted value post-transaction 16,517 ------- Reduction in redeemable preferred stock 55,667 ------- Assets Divested and Costs Incurred: PMC net assets divested 7,430 Cash paid to Palladium Investors for: -reduction of redeemable preferred stock 10,000 -settlement of PMC intercompany debt 3,958 -working capital adjustment 1,331 -closing fee 500 Transaction costs 8,310 Contingent Backstop Indemnification Amount accrued 4,000 ------- Total assets divested and costs and liabilities incurred 35,529 ------- Excess amount recorded as a decrease to accumulated deficit $20,138 ======= PMC is included in the Company's Industrial Chemicals segment. The divestiture of PMC has not been reflected as a discontinued operation due to the existence of the Backstop Indemnification and continuing supply and service agreements. Other Risks and Uncertainties The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain products are subject to extensive regulation by numerous government authorities in the United States and other countries. The Company has significant assets located outside of the United States, and a significant portion of the Company's sales and earnings are attributable to operations conducted abroad. The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company. The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the 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. 21 Summary Consolidated Results of Continuing Operations Year Ended June 30, ------------------------------ 2004 2003 2002 ---- ---- ---- (Thousands) Net sales $ 358,274 $ 341,746 $ 328,676 Gross margin 90,403 90,546 81,265 Selling, general and administrative expenses 66,128 65,050 70,636 Costs of non-completed transaction 5,261 -- -- Operating income 19,014 25,496 10,629 Interest expense, net 18,488 16,196 17,724 Other expense (income), net (781) 1,539 3,349 Net (gain) on extinguishment of debt (23,226) -- -- Income (loss) from continuing operations $ 24,533 $ 7,761 $ (10,444) 2004 Compared with 2003 Net Sales of $358.3 million increased $16.5 million, or 5%. Animal Health and Nutrition sales of $265.4 million grew $14.7 million, or 6%, due to volume increases. Specialty Chemical group sales (comprised of the Industrial Chemicals, Distribution and All Other segments) of $92.9 million increased $1.8 million, or 2%, primarily due to volume increases in all segments, offset by a decrease in PMC sales. The Specialty Chemical group included PMC sales of $11.1 million and $22.3 million for 2004 and 2003, respectively. Gross Profit of $90.4 million decreased $0.1 million to 25.2% of net sales, compared with 26.5% in 2003. Animal Health and Nutrition gross profit decreased due to lower average selling prices and unfavorable currency related to the effect of the Euro on Belgium manufacturing costs. Improvements in the Specialty Chemical group partially offset the Animal Health and Nutrition decline. The Specialty Chemical group included PMC gross profit of $3.6 million and $6.2 million, respectively, for the fiscal 2004 and 2003 periods. Gross profit increased $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA. The Company acquired the rights to sell amprolium in most international markets. In payment for the acquired rights, the Company relinquished its claims against the seller for certain purchase order commitments, and will make $2.1 22 million of cash payments to the seller over the next five years. The present value of these payments is $1.9 million and was recorded as a liability. The $2.4 million value of the purchase order commitments was recorded as a reduction in cost of goods sold and inventory, and an intangible asset of $4.3 million was recorded representing the fair value of the acquired rights and is included on the Company's balance sheet at June 30, 2004. The Company will amortize this intangible over a 10 year period. No amortization was recorded in 2004. Amortization expense for each of the next five years from 2005 to 2009 is expected to be $0.4 million per year. Selling, General and Administrative Expenses of $66.1 million increased $1.1 million. Expenses in the operating segments, excluding PMC, approximated the prior year primarily due to lower environmental and severance accruals offset in part by unfavorable foreign exchange rates. Corporate expenses in the current fiscal year reflect the elimination of the Palladium annual management fee of $2.25 million as of December 31, 2003 and income of $0.5 million from the PMC Advisory fee. Corporate expenses increased in fiscal 2004 due to higher depreciation and amortization charges and insurance costs offset by lower benefit charges. Corporate expenses in fiscal 2003 included vitamin settlement income of $3.0 million. PMC expenses were $1.3 million and $2.6 million for 2004 and 2003, respectively. Costs of non-completed transaction. During 2004, the Company incurred $5.3 million of costs in connection with a potential acquisition transaction that was not completed. The Company has charged the costs to expense in its 2004 results. The costs primarily consisted of professional fees for services in connection with the transaction. Net gain on extinguishment of debt. The Company recorded a net gain on the extinguishment of debt of $23.2 million due to the repurchase of senior subordinated notes ($16.7 million), and the repayment of Pfizer obligations ($7.6 million) offset in part by a loss on repayment of the senior credit facility ($1.0 million). Operating Income of $19.0 million decreased $6.5 million to 5.3% of sales. The decrease was primarily due to the non-completed transaction costs described above. In addition, gross profit declined in the Animal Health and Nutrition segment but was offset in part by improved operating performance of the Specialty Chemical group. PMC contributed $2.3 million and $3.6 million for 2004 and 2003, respectively. Interest Expense, Net of $18.5 million increased $2.3 million from the prior year, primarily due to higher borrowing levels and also higher average interest rates associated with the issuance of the Company's Senior Secured Notes. Other (Income) Expense, Net of ($0.8) million improved in comparison with $1.5 million of expense last year. During 2004, the Company's Phibro-Tech subsidiary received $1.0 million in exchange for the sale of certain assets related to the manufacture and sale of ferric chloride from its plant in Joliet, Illinois and recognized a net gain of $0.7 million. The balance of other (income) expense principally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. Income Taxes of $8.0 million were 32% of consolidated pre-tax income of $24.5 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. 2003 Compared with 2002 Net Sales of $341.7 million increased $13.1 million, or 4%. Animal Health and Nutrition sales of $250.7 million grew $11.1 million, or 5%, due to volume increases. Specialty Chemical sales of $91.0 million increased $2.0 million, or 2%, primarily due to volume increases in the Distribution and All Other businesses. Gross Profit of $90.5 million improved $9.3 million to 26.5% of net sales, compared with 24.7% in 2002. Animal Health and Nutrition gross profit improvements were responsible for the overall increase. Purchase accounting adjustments related to the MFA acquisition resulted in a $3.3 million increase to cost of goods sold in 2002. Excluding the purchase accounting adjustment, the gross profit ratio would have been 25.7% in 2002. Selling, General and Administrative Expenses of $65.1 million decreased $5.6 million, or 8%. Expenses declined $6.5 million in the Specialty Chemicals businesses due to downsizing and restructuring of the Industrial Chemicals segment, reflecting the decline in the printed circuit board market. Industrial Chemicals included expense for additional environmental reserves and write-offs of unamortized permit fees at closed facilities of $1.0 million and $1.6 million for 2003 and 2002, respectively. Animal Health and Nutrition expenses decreased by approximately $0.4 million. Corporate expenses increased $1.3 million, primarily due to increased staff levels. Corporate expenses included a vitamin settlement income of $3.0 million and $0.7 million in 2003 and 2002, respectively, from the settlement of class action litigation against European vitamin manufacturers. Debt restructuring costs of $0.8 million, 23 severance of $0.4 million, and expense related to a divested business of $0.2 million were also recorded in 2003. Included in 2002 was $0.4 million non-cash income to reflect the decrease in value of redeemable common stock; no amount was recorded in 2003. Operating Income of $25.5 million increased $14.9 million to 7.5% of sales. The improvement was due to sales growth, gross margin improvements in Animal Health and Nutrition, and operating expense reductions. Interest Expense, Net of $16.2 million decreased $1.5 million, compared with $17.7 million in 2002, primarily due to lower average interest rates and reduced average borrowing levels. Other Expense, Net of $1.5 million in fiscal 2003 improved in comparison with $3.4 million in the prior year. The expense principally reflects foreign currency transaction and translation net losses related to short-term inter-company balances. Income Taxes of $10.1 million were primarily due to a $5.6 million increase in valuation allowances for deferred tax assets in foreign jurisdictions where future profitability is not currently considered more likely than not, and income tax provisions in profitable foreign jurisdictions. 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 Israel, and Planalquimica, Brazil. The Industrial Chemicals segment manufacturers and market specialty chemicals for use in the pressure treated wood, brick, glass, and chemical industries, and includes Phibro-Tech and PMC. The Distribution segment markets a variety of specialty chemicals, and includes PhibroChem and Ferro operations. The All Other segment includes contract manufacturing of crop protection chemicals, Wychem and all other operations. Due to the divestiture of PMC in December 2003, PMC's results are shown separately for comparability. Year Ended June 30, ------------------------------------ 2004 2003 2002 --------- --------- --------- (Thousands) Net Sales Animal Health & Nutrition $ 265,421 $ 250,706 $ 239,602 Industrial Chemicals - ex PMC 31,135 26,465 29,403 Industrial Chemicals - PMC 11,118 22,332 21,451 Distribution 30,861 30,072 27,852 All other 19,739 12,171 10,368 --------- --------- --------- $ 358,274 $ 341,746 $ 328,676 ========= ========= ========= Year Ended June 30, ------------------------------------ 2004 2003 2002 --------- --------- --------- (Thousands) Operating Income Animal Health & Nutrition $ 33,307 $ 38,472 $ 28,298 Industrial Chemicals - ex PMC 621 (5,434) (10,964) Industrial Chemicals - PMC 2,278 3,579 3,640 Distribution 2,900 3,207 2,345 All other 2,301 620 1,164 Corporate expenses and adjustments (22,393) (14,948) (13,854) --------- --------- --------- $ 19,014 $ 25,496 $ 10,629 ========= ========= ========= 24 Operating Segments 2004 Compared to 2003 Animal Health and Nutrition Net Sales of $265.4 million increased $14.7 million, or 6%. Medicated Feed Additives net sales decreased by $7.8 million. Revenues were lower primarily for anticoccidials but were offset in part by higher sales of other medicated feed additives. Sales of anticcoccidial products were $7.1 million lower due to contract negotiations with a major customer that were completed in the fourth quarter of 2004. The decrease in MFA revenues also was due to lower average selling prices offset in part by favorable currency effect on international sales. Nutritional Feed Additives net sales increased by $22.5 million, principally due to volume increases in core inorganic minerals, trace mineral premixes and other ingredients. Operating Income of $33.3 million decreased $5.2 million, or 13%. Operating income declined due to product mix, higher cost of goods reflecting the stronger Euro's effect on Belgian manufacturing cost and unfavorable currency effects on international selling, general and administrative expense. Lower average selling prices also contributed to the decrease. Operating income increased $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA. Specialty Chemicals Industrial Chemicals net sales of $31.1 million, excluding PMC, increased $4.7 million, or 18%. Sales of copper related products to the wood treatment markets increased due to the introduction of new copper based wood treatment chemicals which offset the divestiture of the Company's Eastern United States etchant business in mid 2003. The Company continues its existing etchant business at one remaining facility. PMC, divested in December 2003, generated revenues of $11.1 million and $22.3 million for 2004 and 2003, respectively. Operating income of $0.6 million improved by $6.1 million from the prior year. This improvement was due to new product introductions and savings from headcount reductions and facility restructurings in Phibro-Tech operations. PMC provided operating income of $2.3 million and $3.6 million for 2004 and 2003, respectively. Distribution net sales of $30.9 million increased $0.8 million, or 3%. Higher sales volumes in Europe were offset in part by lower domestic unit volumes and lower average selling prices. Distribution operating income of $2.9 million decreased $0.3 million from the prior year. As a percentage of sales, operating income was 9% and 11% in 2004 and 2003, respectively. All Other net sales of $19.7 million increased $7.6 million, or 62%. Revenues for contract manufacturing increased $7.6 million due to increased volumes and average selling prices. Specialized lab projects and formulations approximated the prior year. Operating income of $2.3 million improved by $1.7 million from the prior year due to higher revenues and increased margins on contract manufacturing. Operating Segments 2003 Compared to 2002 Animal Health and Nutrition Net Sales of $250.7 million increased $11.1 million, or 5%. Medicated Feed Additives net sales increased by $6.7 million. Revenues were higher for antibacterials, antibiotics and anticoccidials but were offset in part by lower sales of anthelmintics and other medicated feed additives. The increased revenues were due to volume increases offset in part by lower average selling prices, including the effect of currency devaluations in Latin America. Nutritional Feed Additives net sales increased by $4.4 million, principally due to volume increases in core inorganic minerals, trace mineral premixes and other ingredients. Operating Income of $38.5 million increased $10.2 million, or 36%. Purchase accounting adjustments relating to inventory in the MFA acquisition resulted in a $3.3 million increase to 2002 cost of goods sold. The operating income ratio increased to 15% in 2003 from 13% in 2002 (excluding the purchase accounting adjustments). The improvement in operating income resulted from increased sales of higher margin products and close control of operating expenses. Specialty Chemicals Industrial Chemicals net sales of $26.5 million, excluding PMC, decreased $2.9 million, or 10%. Industrial Chemicals net sales decreased due to the divestiture of the Company's Eastern United States etchant business in mid-fiscal 2003 and reduced sales of etchants to the printed circuit board market. PMC, divested in December 2003, generated revenues of $22.3 million and $21.5 million for fiscal periods 2003 and 2002, respectively. Industrial Chemicals operating loss of $5.4 million improved by $5.5 million from the year earlier loss. The improvement principally was due to the partial disposal during 2003 of the ammoniacal etchant business and savings from headcount reductions and facility restructurings. The gain on the transaction was not material. PMC provided operating income of $3.6 million in each of the 2003 and 2002 fiscal periods. 25 Distribution net sales of $30.1 million increased $2.2 million, or 8%. Higher sales volumes in Europe and improved product mix in domestic operations accounted for the increase. Distribution operating income of $3.2 million increased $0.9 million, or 37%. As a percentage of sales, operating income increased to 11% in 2003 from 8% in 2002. The improvement in operating income margins resulted principally from increased sales of higher margin products. All Other net sales of $12.2 million increased $1.8 million, or 17%. Revenues for contract manufacturing increased $2.4 million due to increased volumes. Revenues from specialized lab projects and formulations declined $0.6 million. Operating income of $0.6 million decreased primarily due to specialized lab projects and formulations. Discontinued Operations During 2004, the Company shutdown its operations at La Cornubia. During 2003, the Company shutdown or divested Odda Smelteverk (Norway), Carbide Industries (U.K.), and Mineral Resource Technologies, Inc. These businesses have been classified as discontinued operations. The Company's consolidated financial statements have been reclassified to report separately the operating results, financial position, and cash flows of the discontinued operations. Prior year financial statements have been reclassified to conform to the 2004 presentation.
Year Ended June 30, 2004 --------------------------------------------- La Cornubia Odda/Carbide MRT Total ----------- ------------ --- ----- Net Sales $ 13,918 $ -- $ 3,327 $ 17,245 ======== ======== ======== ======== Operating Loss $ (1,491) $ -- $ (124) $ (1,615) Interest Expense, net 94 94 Other Expense (Income), net (102) -- -- (102) Provision (benefit) for income tax 18 -- -- 18 -------- -------- -------- -------- Net Income (loss) from discontinued operations $ (1,501) $ -- $ (124) $ (1,625) ======== ======== ======== ======== Depreciation and Amortization $ 400 $ -- $ -- $ 400 ======== ======== ======== ========
Year Ended June 30, 2003 --------------------------------------------- La Cornubia Odda/Carbide MRT Total ----------- ------------ --- ----- Net Sales $ 13,479 $ 11,217 $ 18,671 $ 43,367 ======== ======== ======== ======== Operating Loss $ (359) $(13,462) $ (3,454) $(17,275) Interest Expense, net 60 60 Other Expense (Income), net (389) (2,327) -- (2,716) Provision (benefit) for income tax 16 (58) -- (42) -------- -------- -------- -------- Net Income (loss) from discontinued operations $ (46) $(11,077) $ (3,454) $(14,577) ======== ======== ======== ======== Depreciation and Amortization $ 359 $ 894 $ 1,309 $ 2,562 ======== ======== ======== ========
Year Ended June 30, 2002 --------------------------------------------- La Cornubia Odda/Carbide MRT Total ----------- ------------ --- ----- Net Sales $ 11,873 $ 31,219 $ 17,045 $ 60,137 ======== ======== ======== ======== Interest Expense, net Operating Loss (912) $(27,709) $ (2,930) $(31,551) Interest Expense, net 78 78 Other Expense (Income), net (263) (3,699) (3,962) Provision (benefit) for income tax 62 (1,170) -- (1,108) -------- -------- -------- -------- Net Income (loss) from discontinued operations $ (789) $(22,840) $ (2,930) $(26,559) ======== ======== ======== ======== Depreciation and Amortization $ 325 $ 17,676 $ 1,192 $ 19,193 ======== ======== ======== ========
26 Odda and Carbide. During 2003, the Company determined that it would permanently shutdown and no longer fund the operations of Odda. On February 28, 2003, Odda filed for bankruptcy in Norway. The bankruptcy is proceeding in accordance with Norwegian law. The Company removed all assets, liabilities (except as noted below), and cumulative translation adjustments related to Odda from the Company's consolidated balance sheet as of June 30, 2003, and recorded the net result as a loss on disposal of discontinued operations. The Company has been advised that, as a result of the bankruptcy, the creditors of Odda have recourse only to the assets of Odda, except in the case of certain debt guaranteed by the Company. During 2004, the Company paid the remaining guaranteed debt of $5.7 million. The Company has been advised by Norwegian counsel that it has obtained the benefit of the banks' position as a secured creditor upon payment pursuant to the guarantees. During 2003, the Company sold Carbide, previously a distributor for one of Odda's product lines. Proceeds from the divestiture were not material. Odda was included in the Company's Industrial Chemicals segment and Carbide was included in the Company's Distribution segment. The Company recorded a $0.7 million loss on disposal of Odda and Carbide. The loss primarily related to the write-off of Odda's remaining net assets, including the related cumulative currency translation adjustment. Mineral Resource Technologies, Inc. ("MRT"). During 2003, the Company decided to pursue a sale of MRT. MRT provides management and recycling of coal combustion residues, principally fly ash. The sale was completed in August 2003 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 Provided by Operating Activities. Cash provided by operations for 2004 and 2003 was $2.9 million and $34.7 million, respectively. Cash provided in 2004 was due to income from continuing operations offset in part by working capital requirements. In addition, payment of the Pfizer obligations (shown in financing activities) eliminated additional working capital requirements that otherwise would have been necessary. Cash provided in 2003 was due to improved income from continuing operations and aggressive working capital management. The Company incurred $5.3 million of costs for a non-completed acquisition transaction and paid approximately $1.4 million of these charges in 2004. Net Cash Provided (Used) by Investing Activities. Net cash provided (used) by investing activities for 2004 and 2003 was $9.1 million and ($4.0) million, respectively. Discontinued operations, primarily from the sale of MRT, provided funds of $14.9 million in 2004. Discontinued operations provided $1.4 million in 2003. Capital expenditures of $6.2 million and $8.6 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. Proceeds from sales of fixed assets and other investing activities accounted for the remainder of cash provided by investing activities in 2004. Net Cash Provided (Used) by Financing Activities. Net cash (used) by financing activities for 2004 and 2003 was ($17.8) million and ($26.4) million, respectively. Short-term debt decreased due to the reduction of the senior credit facility of $21.2 million, debt payments related to Odda of $5.7 million and by other increases of $0.1 million. Proceeds from long-term debt reflect the issuance of $105.0 million Senior Secured Notes and an increase of $4.6 million in foreign bank loans. Payments of long-term debt primarily reflect the retirement of Senior Subordinated Notes. Payments of the Pfizer obligations, the Prince transactions and costs related to the refinancing account for the remainder of funds used by financing activities. Working Capital and Capital Expenditures. Working capital as of June 30, 2004 was $54.4 million compared to $9.1 million at fiscal year end June 30, 2003, an increase of $45.3 million. The increase in working capital was due to reduced current debt, accounts payable and accrued expense levels, principally as a result of the Company's refinancing and satisfaction of its obligations due Pfizer. The Company anticipates spending approximately $8.0 million for capital expenditures in 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. 27 Liquidity. At June 30, 2004, the amount of credit extended under the Company's senior credit facility totaled $11.0 million under the revolving credit facility and $9.3 million under the letter of credit facility, and the Company had $6.5 million available under the borrowing base formula in effect. In addition, certain of the Company's foreign subsidiaries also had availability totaling $4.8 million under their respective loan agreements. On April 29, 2004, the CompanyPAHC amended the senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25.0 million to $27.5 million and to increase the amount of aggregate borrowings available under the working capital facility from $15.0 million to $17.5 million. As of September 24, 2004, the Company amended thedomestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27.5 million 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 financingsthe sale of the Belgium Plant in an aggregate amount not to exceed $5.3$26.8 million for purposes of calculating a certain financial covenant; (ii) amend the period beginning January 1, 2004 and ending June 30, 2004;Indenture reserve definition to include scheduled payments of interest due on the Additional Notes; (iii) amend the definitionmaximum aggregate amount of Additional Indebtedness to exclude advancesborrowing available under the working capital facility;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 definition of Permitted Investments definition to allowinclude investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other investments made duringassets and rights related to the period from January 1, 2004 through June 30, 2004production of virginiamycin, to PAH Brazil or in an aggregate amount not to exceed $336,000;connection with alternative production arrangements; and (v) establish covenant EBITDA levelsprovide for the periods ending after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii)issuance of the Additional Notes and (iii); effective January 1, 2004 for item (iv);the sale of the Belgium Plant and effective September 24, 2004 for all other items. Therelated transactions.
      PAHC’s domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the condensed consolidated balance sheet.
      The Company'sCompany’s ability to fund its operating plan reliesdepends upon the continued availability of borrowing under theits domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the amendeddomestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's 2005 operating plan projectsCompany expects adequate liquidity throughout the year,2006, with periods of reduced availability around the dates of the semi-annual interest payments due NovemberDecember 1 2004 and June 1 2005.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 as needed. The Company also has undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future flexibility and reduce cost.available. There can be no assurance the Company will be successful in any of the above-noted actions.
      As of June 30, 2005, PAHC was in compliance with the financial covenants of its domestic senior credit facility. The Company anticipates taxable gainsdomestic 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 extinguishmenta monthly basis, and an acceleration clause should an event of debtdefault (as defined in the

33


agreement) occur. In addition, there are certain restrictions on additional borrowings, additional liens on PAHC’s assets, guarantees, dividend payments, redemption or purchase of PAHC’s stock, sale of subsidiaries’ stock, disposition of assets, investments, and other aspects of the refinancing structure will be substantially offset by existing net operating loss carry forwards,mergers and that the Company will not incur significant cash income tax payments related to these gains.acquisitions.
      The Company'sCompany’s contractual obligations (in millions) at June 30, 20042005 mature as follows:
Years ------------------------------------------------ Within 1 Over 1 to 3 Over 3 to 5 Total -------- ----------- ----------- ----- (Dollars in thousands) Loans payable to banks $ 11.0 $ -- $ -- $ 11.0 Lease commitments 1.6 1.4 0.6 3.6 Long-term debt (including current portion) 1.4 4.1 153.9 159.4 Interest payments 19.2 38.4 11.8 69.4 Acquisition of rights 0.7 1.2 0.2 2.1 ------ ------- ------ ------ Total contractual obligations $ 33.9 $ 45.1 $166.5 $245.5 ====== ======= ====== ======
                      
  Years  
     
    Over Over    
  Within 1 1 to 3 3 to 5 Over 5 Total
           
  (Dollars in millions)
Loans payable to banks $8.0  $  $  $  $8.0 
Long-term debt (including current portion)  1.6   176.5         178.1 
Interest payments  22.1   34.9         57.0 
Lease commitments  1.5   2.6   1.8   1.7   7.6 
Acquisition of rights  0.5   0.7   0.2      1.4 
                
 Total contractual obligations $33.7  $214.7  $2.0  $1.7  $252.1 
                
      A significant portion of the Company’s debt becomes due in December, 2007 and June 2008. The Company anticipates that it will refinance these obligations prior to maturity.
Supplemental Information (Unaudited)
      The Company shutdownshut down Odda and divested Carbide during 2003, sold MRT in August 2003, and shutdownshut down La Cornubia in June 2004.2004 and sold Wychem in April 2005. These businesses have been classified as discontinued operations. The Company'sCompany’s consolidated financial statements have been reclassified to report separately the operating results, financial position, and cash flows of the discontinued operations. In addition, the Company completed the Prince Transactions in December 2003, including the divestiture of PMC and the termination of management fees to the Palladium Investors. 28
      To facilitate quarterly comparisons, the following unaudited statements present the quarterly operating results of continuing operations, for each quarter of the fiscal years ended June 30, 2005, 2004 2003 and 2002.2003. Amounts are in thousands. 29
Quarters ended ----------------------------------------------- Year ended Sept 30, Dec 31, March 31, June 30, June 30, 2003 2003 2004 2004 2004 --------- --------- --------- --------- ---------- Net sales: Animal Health & Nutrition $ 59,841 $ 68,687 $ 64,819 $ 72,074 $ 265,421 Industrial Chemicals - ex PMC 6,299 6,244 10,000 8,592 31,135 Industrial Chemicals - PMC 5,683 5,435 -- -- 11,118 Distribution 7,939 7,656 7,916 7,350 30,861 All Other 5,188 4,518 4,302 5,731 19,739 --------- --------- --------- --------- --------- Total net sales 84,950 92,540 87,037 93,747 358,274 Cost of goods sold 63,790 69,991 63,843 70,247 267,871 --------- --------- --------- --------- --------- Gross profit 21,160 22,549 23,194 23,500 90,403 Selling, general and administrative expenses 15,785 16,824 16,165 17,354 66,128 Costs of non-completed transaction -- -- -- 5,261 5,261 --------- --------- --------- --------- --------- Operating income (loss): Animal Health & Nutrition 6,900 7,655 8,370 10,382 33,307 Industrial Chemicals - ex PMC (391) (287) 1,136 163 621 Industrial Chemicals - PMC 1,213 1,065 -- -- 2,278 Distribution 841 692 789 578 2,900 All Other 669 657 557 418 2,301 Corporate Expenses (3,377) (4,132) (4,116) (9,729) (21,354) Eliminations 82 638 293 (927) 86 Palladium management fee (562) (563) -- -- (1,125) --------- --------- --------- --------- --------- Total operating income (loss) 5,375 5,725 7,029 885 19,014 Other: Interest expense 3,933 4,549 4,918 5,218 18,618 Interest (income) (242) 168 (43) (13) (130) Other expense, net (585) 127 (131) (192) (781) Net (gain) on extinguishment of debt -- (23,226) -- -- (23,226) Income (loss) from continuing operations before income taxes 2,269 24,107 2,285 (4,128) 24,533 Provision for income taxes 783 2,880 2,209 2,097 7,969 --------- --------- --------- --------- --------- Income/(loss) from continuing operations 1,486 21,227 76 (6,225) 16,564 Discontinued operations: Income (loss) from operations (462) 59 (471) (751) (1,625) Gain (loss) on disposal 231 -- -- (2,320) (2,089) --------- --------- --------- --------- --------- Net income/(loss) $ 1,255 $ 21,286 $ (395) $ (9,296) $ 12,850 ========= ========= ========= ========= ========= Depreciation and amortization from continuing operations: Animal Health & Nutrition $ 2,029 $ 2,059 $ 2,086 $ 2,089 $ 8,263 Industrial Chemicals - ex PMC 406 395 403 432 1,636 Industrial Chemicals - PMC 243 244 -- -- 487 Distribution 3 4 3 1 11 All Other 115 98 105 101 419 Corporate Expenses 372 576 660 759 2,367 --------- --------- --------- --------- --------- Total depreciation and amortization $ 3,168 $ 3,376 $ 3,257 $ 3,382 $ 13,183 ========= ========= ========= ========= =========
30
Quarters ended ----------------------------------------------- Year ended Sept 30, Dec 31, March 31, June 30, June 30, 2002 2002 2003 2003 2003 --------- --------- --------- --------- --------- Net sales: Animal Health & Nutrition $ 59,976 $ 66,650 $ 62,675 $ 61,405 $ 250,706 Industrial Chemicals - ex PMC 8,138 5,946 6,449 5,932 26,465 Industrial Chemicals - PMC 5,756 5,285 5,743 5,548 22,332 Distribution 8,096 7,197 7,612 7,167 30,072 All Other 1,711 2,190 3,793 4,477 12,171 --------- --------- --------- --------- --------- Total net sales 83,677 87,268 86,272 84,529 341,746 Cost of goods sold 61,638 63,366 63,306 62,890 251,200 --------- --------- --------- --------- --------- Gross profit 22,039 23,902 22,966 21,639 90,546 Selling, general and administrative expenses 15,544 15,874 17,496 16,136 65,050 Operating income (loss): Animal Health & Nutrition 9,420 11,593 8,902 8,557 38,472 Industrial Chemicals - ex PMC (1,035) (1,815) (1,555) (1,029) (5,434) Industrial Chemicals - PMC 1,127 901 839 712 3,579 Distribution 750 802 900 755 3,207 All Other 13 245 356 6 620 Corporate Expenses (3,051) (3,440) (3,324) (2,905) (12,720) Eliminations (167) 305 (86) (30) 22 Palladium management fee (562) (563) (562) (563) (2,250) --------- --------- --------- --------- --------- Total operating income (loss) 6,495 8,028 5,470 5,503 25,496 Other: Interest expense 4,489 3,641 3,958 4,193 16,281 Interest (income) (126) 31 (39) 49 (85) Other expense, net 1,155 235 201 (52) 1,539 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes 977 4,121 1,350 1,313 7,761 Provision for income taxes 432 1,409 599 7,620 10,060 --------- --------- --------- --------- --------- Income/(loss) from continuing operations 545 2,712 751 (6,307) (2,299) Discontinued operations: Income (loss) from operations (702) (10,547) (1,681) (1,647) (14,577) Gain (loss) on disposal -- -- (1,342) 659 (683) --------- --------- --------- --------- --------- Net income/(loss) $ (157) $ (7,835) $ (2,272) $ (7,295) $ (17,559) ========= ========= ========= ========= ========= Depreciation and amortization from continuing operations: Animal Health & Nutrition $ 1,892 $ 1,920 $ 1,890 $ 1,988 $ 7,690 Industrial Chemicals - ex PMC 587 699 498 164 1,948 Industrial Chemicals - PMC 232 239 240 245 956 Distribution 3 3 2 4 12 All Other 87 90 94 93 364 Corporate Expenses 355 395 405 399 1,554 --------- --------- --------- --------- --------- Total depreciation and amortization $ 3,156 $ 3,346 $ 3,129 $ 2,893 $ 12,524 ========= ========= ========= ========= =========
31
Quarters ended ------------------------------------------------ Year ended Sept 30, Dec 31, March 31, June 30, June 30, 2001 2001 2002 2002 2002 --------- --------- --------- --------- --------- Net sales: Animal Health & Nutrition $ 57,943 $ 63,156 $ 59,378 $ 59,125 $ 239,602 Industrial Chemicals - ex PMC 6,591 6,253 7,258 9,301 29,403 Industrial Chemicals - PMC 5,062 5,218 5,418 5,753 21,451 Distribution 7,590 6,640 6,753 6,869 27,852 All Other 2,377 2,448 2,595 2,948 10,368 --------- --------- --------- --------- --------- Total net sales 79,563 83,715 81,402 83,996 328,676 Cost of goods sold 59,592 60,128 60,885 66,806 247,411 --------- --------- --------- --------- --------- Gross profit 19,971 23,587 20,517 17,190 81,265 Selling, general and administrative expenses 16,431 17,614 17,577 19,014 70,636 --------- --------- --------- --------- --------- Operating income (loss): Animal Health & Nutrition 7,365 10,259 6,246 4,428 28,298 Industrial Chemicals - ex PMC (2,759) (2,160) (1,175) (4,870) (10,964) Industrial Chemicals - PMC 821 588 1,058 1,173 3,640 Distribution 612 544 496 693 2,345 All Other 214 367 108 475 1,164 Corporate Expenses (2,204) (2,708) (2,733) (3,746) (11,391) Eliminations 53 (354) (498) 586 (213) Palladium management fee (562) (563) (562) (563) (2,250) --------- --------- --------- --------- --------- Total operating income (loss) 3,540 5,973 2,940 (1,824) 10,629 Other: Interest expense 4,596 4,660 4,590 4,224 18,070 Interest (income) (65) (231) (6) (44) (346) Other expense, net 1,263 753 368 965 3,349 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes (2,254) 791 (2,012) (6,969) (10,444) Provision for income taxes (197) 1,203 1,264 12,497 14,767 --------- --------- --------- --------- --------- Income/(loss) from continuing operations (2,057) (412) (3,276) (19,466) (25,211) Discontinued operations: Income (loss) from operations (308) (1,287) (5,796) (19,168) (26,559) Gain (loss) on disposal -- -- -- --------- --------- --------- --------- --------- Net income/(loss) $ (2,365) $ (1,699) $ (9,072) $ (38,634) $ (51,770) ========= ========= ========= ========= ========= Depreciation and amortization from continuing operations: Animal Health & Nutrition $ 1,810 $ 1,589 $ 1,996 $ 2,043 $ 7,438 Industrial Chemicals - ex PMC 633 579 609 748 2,569 Industrial Chemicals - PMC 242 240 242 242 966 Distribution 7 (1) 3 3 12 All Other 81 78 80 82 321 Corporate Expenses 264 268 263 254 1,049 --------- --------- --------- --------- --------- Total depreciation and amortization $ 3,037 $ 2,753 $ 3,193 $ 3,372 $ 12,355 ========= ========= ========= ========= =========
32

34


                       
  Quarters Ended  
    Year Ended
  Sept 30, Dec 31, March 31, June 30, June 30,
  2004 2004 2005 2005 2005
           
Net sales:                    
 Animal Health & Nutrition $65,342  $69,952  $68,405  $75,138  $278,837 
 Industrial Chemicals  13,430   13,205   13,412   12,258   52,305 
 Distribution  8,125   8,860   8,438   7,814   33,237 
                
  Total net sales  86,897   92,017   90,255   95,210   364,379 
Cost of goods sold  64,727   68,915   67,132   70,121   270,895 
Belgium Plant Transactions costs     9,536   4,372   8,283   22,191 
                
  Gross profit  22,170   13,566   18,751   16,806   71,293 
Selling, general and administrative expenses  15,838   16,914   17,019   17,140   66,911 
                
Operating income (loss):                    
 Animal Health & Nutrition  7,625   7,610   7,529   9,500   32,264 
 Belgium Plant Transactions costs     (9,536)  (4,372)  (8,283)  (22,191)
 Industrial Chemicals  1,191   979   1,371   1,294   4,835 
 Distribution  1,054   1,202   1,158   1,257   4,671 
 Corporate Expenses  (3,575)  (3,892)  (3,895)  (4,120)  (15,482)
 Eliminations  37   289   (59)  18   285 
                
  Total operating income (loss)  6,332   (3,348)  1,732   (334)  4,382 
Other:                    
 Interest expense  5,837   6,062   6,757   6,686   25,342 
 Interest (income)  (25)  (33)  (19)  (43)  (120)
 Other expense, net  24   (792)  77   (1,168)  (1,859)
                
  Income (loss) from continuing operations before income taxes  496   (8,585)  (5,083)  (5,809)  (18,981)
Provision for income taxes  844   (918)  773   1,421   2,120 
                
  Income/(loss) from continuing operations  (348)  (7,667)  (5,856)  (7,230)  (21,101)
Discontinued operations:                    
 Income (loss) from operations (net of income taxes)  207   96   272   96   671 
 Gain (loss) on disposal (net of income taxes)           765   765 
                
  Net income/(loss) $(141) $(7,571) $(5,584) $(6,369) $(19,665)
                
Depreciation and amortization from continuing operations:                    
 Animal Health & Nutrition $2,195  $2,172  $2,208  $2,201  $8,776 
 Belgium Plant Transactions costs     533   3,095   3,839   7,467 
 Industrial Chemicals  403   413   374   407   1,597 
 Distribution  2   6   6   6   20 
 Corporate Expenses  64   52   63   67   246 
                
  Total depreciation and amortization $2,664  $3,176  $5,746  $6,520  $18,106 
                

35


                       
  Quarters Ended  
    Year Ended
  Sept 30, Dec 31, March 31, June 30, June 30,
  2003 2003 2004 2004 2004
           
Net sales:                    
 Animal Health & Nutrition $59,290  $68,354  $64,240  $71,533  $263,417 
 Industrial Chemicals — ex PMC  10,579   9,786   13,241   13,378   46,984 
 Industrial Chemicals — PMC  5,683   5,435         11,118 
 Distribution  8,490   7,989   8,495   7,891   32,865 
                
  Total net sales  84,042   91,564   85,976   92,802   354,384 
Cost of goods sold  63,016   69,401   63,246   69,554   265,217 
                
  Gross profit  21,026   22,163   22,730   23,248   89,167 
Selling, general and administrative expenses  15,324   16,150   15,406   16,537   63,417 
Costs of non-completed transaction           5,261   5,261 
                
Operating income (loss):                    
 Animal Health & Nutrition  6,731   7,587   8,147   10,140   32,605 
 Industrial Chemicals — ex PMC  304   145   1,390   452   2,291 
 Industrial Chemicals — PMC  1,213   1,065         2,278 
 Distribution  1,010   760   1,012   820   3,602 
 Corporate Expenses  (3,076)  (3,619)  (3,518)  (3,774)  (13,987)
 Eliminations  82   638   293   (927)  86 
 Palladium management fee  (562)  (563)        (1,125)
 Costs of non-completed transaction           (5,261)  (5,261)
                
  Total operating income (loss)  5,702   6,013   7,324   1,450   20,489 
Other:                    
 Interest expense  4,234   5,062   5,516   5,912   20,724 
 Interest (income)  (242)  168   (43)  (13)  (130)
 Other expense, net  (586)  126   (134)  (194)  (788)
 Net (gain) on extinguishment of debt     (23,226)        (23,226)
                
  Income (loss) from continuing operations before income taxes  2,296   23,883   1,985   (4,255)  23,909 
Provision for income taxes  800   2,819   2,126   2,059   7,804 
                
  Income/(loss) from continuing operations  1,496   21,064   (141)  (6,314)  16,105 
Discontinued operations:                    
 Income (loss) from operations (net of income taxes)  (472)  222   (254)  (662)  (1,166)
 Gain (loss) on disposal (net of income taxes)  231         (2,320)  (2,089)
                
  Net income/(loss) $1,255  $21,286  $(395) $(9,296) $12,850 
                
Depreciation and amortization from continuing operations:                    
 Animal Health & Nutrition $2,029  $2,059  $2,086  $2,089  $8,263 
 Industrial Chemicals — ex PMC  406   395   403   432   1,636 
 Industrial Chemicals — PMC  243   244         487 
 Distribution  3   4   3   1   11 
 Corporate Expenses  71   63   62   65   261 
                
  Total depreciation and amortization $2,752  $2,765  $2,554  $2,587  $10,658 
                

36


                       
  Quarters Ended  
    Year Ended
  Sept 30, Dec 31, March 31, June 30, June 30,
  2002 2002 2003 2003 2003
           
Net sales:                    
 Animal Health & Nutrition $59,277  $65,943  $62,373  $60,669  $248,262 
 Industrial Chemicals — ex PMC  9,056   7,210   9,015   9,427   34,708 
 Industrial Chemicals — PMC  5,756   5,285   5,743   5,548   22,332 
 Distribution  8,795   7,904   7,914   7,903   32,516 
                
  Total net sales  82,884   86,342   85,045   83,547   337,818 
Cost of goods sold  60,977   62,756   62,527   62,317   248,577 
                
  Gross profit  21,907   23,586   22,518   21,230   89,241 
Selling, general and administrative expenses  15,134   15,461   17,046   15,705   63,346 
                
Operating income (loss):                    
 Animal Health & Nutrition  9,024   11,165   8,851   8,285   37,325 
 Industrial Chemicals — ex PMC  (1,022)  (1,767)  (1,498)  (1,302)  (5,589)
 Industrial Chemicals — PMC  1,127   901   839   712   3,579 
 Distribution  1,146   1,230   951   1,027   4,354 
 Corporate Expenses  (2,773)  (3,146)  (3,023)  (2,604)  (11,546)
 Eliminations  (167)  305   (86)  (30)  22 
 Palladium management fee  (562)  (563)  (562)  (563)  (2,250)
                
  Total operating income (loss)  6,773   8,125   5,472   5,525   25,895 
Other:                    
 Interest expense  4,767   3,935   4,259   4,494   17,455 
 Interest (income)  (126)  31   (39)  49   (85)
 Other expense, net  1,155   235   208   (50)  1,548 
                
  Income (loss) from continuing operations before income taxes  977   3,924   1,044   1,032   6,977 
Provision for income taxes  416   1,348   520   7,546   9,830 
                
  Income/(loss) from continuing operations  561   2,576   524   (6,514)  (2,853)
Discontinued operations:                    
 Income (loss) from operations (net of income taxes)  (718)  (10,411)  (1,454)  (1,440)  (14,023)
 Income (loss) on disposal (net of income taxes)        (1,342)  659   (683)
                
  Net income/(loss) $(157) $(7,835) $(2,272) $(7,295) $(17,559)
                
Depreciation and amortization from continuing operations:                    
 Animal Health & Nutrition $1,892  $1,920  $1,890  $1,988  $7,690 
 Industrial Chemicals — ex PMC  587   699   498   164   1,948 
 Industrial Chemicals — PMC  232   239   240   245   956 
 Distribution  3   3   2   4   12 
 Corporate Expenses  77   101   104   98   380 
                
  Total depreciation and amortization $2,791  $2,962  $2,734  $2,499  $10,986 
                

37


Critical Accounting Policies
      Critical accounting policies are those that require application of management'smanagement’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. The Company's significant accounting policies are described in Note 2 to the Consolidated Financial Statements.
      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. Significant estimates include reserves for bad debts, inventory obsolescence, environmental matters, depreciation and amortization periods of long-lived assets, recoverability of long-lived assets, realizability of deferred tax assets and actuarial assumptions related to the Company’s pension plans. 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. Following are some of the Company's criticalThe Company’s significant accounting policies impacted by judgments, assumptions and estimates. Revenue Recognition Revenues are recognized when title to products and risk of loss are transferred to customers. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations. Net sales are comprised of total sales billed, less reductions for returned goods, trade discounts and customer allowances. Litigation The Company is subject to legal proceedings and claims arising out of the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of the reserves required for these contingencies is based on an analysis of the various issues, historical experience, other third party judgments and outside specialists, where required. The required reserves may changedescribed in the future due to new developments in each matter. For further discussion, see Note 152 to the Consolidated Financial Statements. Environmental Matters The Company determines
New Accounting Pronouncements
      During the costs of environmental remediation of its facilities and formerly owned properties onyear, the basis of current law and existing technologies. Uncertainties exist in these evaluations primarily due to unknown conditions, changing governmental regulations and legalFinancial Accounting Standards Board released several new standards. These standards regarding liability, and evolving technologies. The liabilities are adjusted periodically as remediation efforts progress or as additional information becomes available. The Company has recorded liabilities of $2.9 million at June 30, 2004 for such activities. Long Lived Assets Long-lived assets, including plant and equipment, and other intangible assets are reviewed for impairment when events or circumstances indicate that a diminution in value may have occurred, based on a comparison of undiscounted future cash flows to the carrying amount of the long-lived asset. If the carrying amount exceeds undiscounted future cash flows, an impairment charge is recorded based on the difference between the carrying amount of the asset and its fair value. The assessment of potential impairment for a particular asset or set of assets requires certain judgments and estimateswill be adopted by the Company including the determination of an event indicating impairment; the future cash flows to be generated by the asset, including the estimated life of the assetduring fiscal 2006 and likelihood of alternative courses of action; the risk associated with those cash flows; and the Company's cost of capital or discount rate to be utilized. Useful Lives of Long-Lived Assets Useful lives of long-lived assets, including plant and equipment and other intangible assets are based on management's estimates of the periods that the assets will be productively utilizeddiscussed in the revenue-generation process. Factors that affect the determination of lives include prior experience with similar assets and product life expectations and management's estimate of the period that the assets will generate revenue. Inventories Inventories are valued at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) and average methods for most inventories. The determination of market value to compare to cost involves assessment of numerous factors, including costs to 33 dispose of inventory and estimated selling prices. Reserves are recorded for inventory determined to be damaged, obsolete, or otherwise unsaleable. Income Taxes Deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. The Company records a valuation allowance on deferred tax assets when appropriate to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, certain judgments are made relating to recoverability of deferred tax assets, use of tax loss carryforwards, level of expected future taxable income and available tax planning strategies. These judgments are routinely reviewed by management. For further discussion, see Note 142 to the Consolidated Financial Statements. New Accounting Pronouncements
Off-Balance Sheet Arrangements
      The Company adopted the following new and revised accounting pronouncements in fiscal 2004: Statement of Financial Accounting Standards No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS No. 149 didhas not result in a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a financial instrument, that is within its scope, as a liability (or an asset in some circumstances). SFAS No. 150 also revises the definition of liabilities to encompass certain obligations that can, or must, be settled by issuing equity shares, depending on the nature of the relationship established between the holder and the issuer. The adoption of SFAS No. 150 did not result in a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment to FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This revision to SFAS No. 132 relates to employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132 now requires additional disclosures to describe the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods of defined pension plans and other defined postretirement plans. The additional disclosures required by this revision to SFAS No. 132 have been provided. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The adoption of FIN No. 46 did not result in a material impact on the Company's financial statements. entered into any off-balance sheet arrangements.
Effect of Inflation; Foreign Currency Exchange RatesInflation
      Inflation generally affects the Company by increasing the cost of labor, equipment and raw materials. The Company does not believe that inflation has had any material effect on the Company'sCompany’s business over the last two years. The Company's substantial foreign operations expose it to risk of exchange rate fluctuations. Financial position and results of operations of the Company's international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in shareholders' equity. Income statement accounts are translated at the average rates of exchange prevailing during the year. A business unit of Koffolk and all of Planalquimica operate primarily in U.S. dollars. The U.S. dollar is designated as the functional currency for these businesses and translation gains and losses are included in determining net income or loss. Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction and translation (gains) losses were ($116), $789 and $3,385 for 2004, 2003 and 2002, respectively, and were included in other expense, net in the consolidated statements of operations. 34
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.
Interest Rate Risk
      The Company uses sensitivity analysis to assess the market risk of its debt-related financial instruments and derivatives. Market risk is defined for these purposes as the potential change in the fair value resulting from an adverse movement in interest rates.
      The Company'sCompany’s debt portfolio is comprised of fixed rate and variable rate debt of approximately $170.4$186.2 million as of June 30, 2004.2005. Approximately 10%4% of the debt is variable and would be interest rate sensitive. For further details, see Note 9,12 to the Consolidated Financial Statements of the Company appearing elsewhere herein.Company.

38


      For the purposes of the sensitivity analysis, an immediate 10% change in interest rates would not have a material impact on the Company'sCompany’s cash flows and earnings over a one year period.
      As of June 30, 2004,2005, the fair value of the Company'sCompany’s senior secured and senior subordinated notes are estimated based on quoted market rates at $158$182.0 million and the related carrying amount is $153$175.5 million.
Foreign Currency Exchange Rates — Translation Risk
      The Company’s substantial foreign operations expose it to risk of exchange rate fluctuations. Financial position and results of operations of the Company’s international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive income (loss) in stockholders’ deficit. Income statement accounts are translated at the average rates of exchange prevailing during the year.
      Koffolk and Planalquimica operate primarily in U.S. dollars. The U.S. dollar is designated as the functional currency for these businesses and translation gains and losses are included in determining net income or loss.
      Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction and translation (gains) losses were $(0.3) million, $(0.1) million and $0.8 million for 2005, 2004 and 2003, respectively, and were included in other (income) expense, net in the consolidated statements of operations and comprehensive income (loss).
Foreign Currency Exchange Rate — Transaction Risk
      A significant portion of the financial results of the Company is derived from activities conducted outside the U.S. and denominated in currencies other than the U.S. dollar. Because the financial results of the Company are reported in U.S. dollars, they are affected by changes in the value of the various foreign currencies in relation to the U.S. dollar. Exchange rate risks are reduced, however, by the diversity of the Company'sCompany’s foreign operations and the fact that international activities are not concentrated in any single non-U.S. currency. Short-term exposures to changing foreign currency exchange rates are primarily due to operating cash flows denominated in foreign currencies. From time to time, the Company may cover known and anticipated operating exposures by using purchased foreign currency exchange option and forward contracts. The primary currencies for which the Company has foreign currency exchange rate exposure are the Euro and the Brazilian Real, and Japanese yen.Real.
      The Company uses sensitivity analysis to assess the market risk associated with its foreign currency transactions. Market risk is defined for these purposes as the potential change in fair value resulting from an adverse movement in foreign currency exchange rates. The fair value associated with the foreign currency contracts has been estimated by valuing the net position of the contracts using the applicable spot rates and forward rates as of the reporting date. Based on the limited amount of foreign currency contracts at June 30, 2004, the Company does not believe that an instantaneous 10% adverse movement in foreign currency rates from their levels at June 30, 2004,2005, with all other variables held constant, would have a material effect on the Company'sCompany’s results of operations, financial position or cash flows.
Commodity Price Risk
      The Company purchases certain raw materials, such as copper, under short-term supply contracts. The purchase prices thereunder are generally determined based on prevailing market conditions. The Company uses commodity derivative instruments to modify some of the commodity price risks. Assuming a 10% change in the underlying commodity price, the potential change in the fair value of commodity derivative contracts held at June 30, 20042005 would not be material when compared to the Company'sCompany’s operating results and financial position.
      The foregoing market risk discussion and the estimated amounts presented are Forward-Looking Statements that assume certain market conditions. Actual results in the future may differ materially from

39


these projected results due to developments in relevant financial markets and commodity markets. The methods used above to assess risk should not be considered projections of expected future events or results. 35
Certain Factors Affecting Future Operating Results
Forward-Looking Statements
      This Report on Form 10-K contains "forward-looking statements"“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,"“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'smanagement’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following: o our substantial leverage and potential inability to service our debt o our dependence on distributions from our subsidiaries o risks associated with our international operations and significant foreign assets o our dependence on our Israeli operations o competition in each of our markets o potential environmental liability o potential legislation affecting the use of medicated feed additives o extensive regulation by numerous government authorities in the United States and other countries o our reliance on the continued operation and sufficiency of our manufacturing facilities o our reliance upon unpatented trade secrets o the risks of legal proceedings and general litigation expenses o potential operating hazards and uninsured risks o the risk of work stoppages o
• 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, including the transition of virginiamycin production from our Belgium to our Brazil facility.
• 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 "Other Risks“Risks, Uncertainties and Uncertainties"Liquidity” in Note 2 of our 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

40


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. 36 Item 7A.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
      Information regarding quantitative and qualitative disclosures about market risk is set forth in Item 7 of this Form 10-K. Item 8.
Item 8.Financial Statements and Supplementary Data
      The financial statements are set forth commencing on page F-1 hereto. Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      No response required. Item 9A.
Item 9A.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 not effective for gathering, analyzing and disclosing information we are required to disclose in periodic reports that we furnish to the Securities and Exchange Commission, for the specific reasons noted in paragraph (b) below. The corrective actions we are taking are also noted in paragraph (b).effective.
      (b) As of the end of the period covered by this report,Report there have been no significant changes in our internal control over financial reportingcontrols that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During September 2004, as part of the audit of the financial statements for the year ended June 30, 2004, the Company's auditors determined and communicated to the Company's management significant deficiencies in internal control that, when viewed collectively, constituted a material weakness in the Company's internal control. A material weakness is defined as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The significant deficiencies noted related to the failure to perform timely review, substantiation and evaluation of certain general ledger account balances, principally related to bank account reconciliations and accrued pension liabilities. The Company is addressing the material weakness by completing a review of significant balance sheet accounts and enhancing the review process by requiring supervisory review and sign-off on bank account reconciliations and other balance sheet account analyses. Additionally, the Company plans to remediate the matters discussed above through further improvements in processes and procedures related to the review, substantiation and evaluation of general ledger account balances.
      It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote. Item 9B.
Item 9B.Other Information
      No response required. 37

41


PART III Item 10.
Item 10.Directors and Executive Officers of the Registrant
      Set forth below is certain information with respect to our directors and executive officers.
NameAgePosition
Jack C. Bendheim58Chairman of the Board of Directors; President
Gerald K. Carlson62Chief Executive Officer
Marvin S. Sussman58Vice Chairman of the Board of Directors and President, Prince Agri
James O. Herlands63Director and Executive Vice President
Richard G. Johnson56Chief Financial Officer
Daniel M. Bendheim33President, Specialty Chemicals Group(1)
Steven L. Cohen61Vice President, General Counsel and Secretary
Keith R. Collins50President, Animal Health Division(2)
Daniel A. Welch55Senior Vice President, Human Resources
Sam Gejdenson57Director, Noteholder Representative
Mary Lou Malanoski48Director
(1) William A. Mathison, the former President, Specialty Chemicals Group, retired in August 2004.
(2) David G. McBeath, the former President, Animal Health Group, returned, as planned, to his private consulting business in December 2004.
      Peter A. Joseph and Marco Rodriguez served on PAHC’s board of directors as designees of the Registrant The following table sets forth information regarding our executive officers and directors: Name Age Position - ---------------------------- --- ------------------------------------------ Jack C. Bendheim............ 57 Chairmanholders of Series C Preferred Stock of PAHC. Upon the redemption of the Board of Directors; President Gerald K. Carlson........... 61 Chief Executive Officer Marvin S. Sussman........... 57 Vice Chairman ofSeries C Preferred Stock by PAHC on February 28, 2005, Messrs. Joseph and Rodriguez tendered their resignations from the Board of Directors and President, Prince Agri James O. Herlands........... 62 Director and Executive Vice President Richard G. Johnson.......... 55 Chief Financial Officer Daniel M. Bendheim.......... 32 President, Specialty Chemicals Group* Steven L. Cohen............. 60 Vice President, General Counsel and Assistant Secretary David G. McBeath............ 57 President, Animal Health Group Daniel A. Welch............. 54 Senior Vice President, Human Resources Sam Gejdenson .............. 56 Director, Noteholder Representative Peter A. Joseph............. 52 Director Mary Lou Malanoski.......... 47 Director Marcos Rodriguez............ 43 Director * William A. Mathison, the former President, Specialty Chemicals Group, retired in August 2004. board effective February 28, 2005.
Jack C. BendheimChairman of the Board of Directors and President. Mr. Bendheim has been President since 1988. He was Chief Operating Officer from 1988 to 1998, and was Chief Executive Officer from 1998 to May 2002. He has been a director since 1984. Mr. Bendheim joined us in 1969 and served as Executive Vice President and Treasurer from 1983 to 1988 and as Vice President and Treasurer from 1975 to 1983. Mr. Bendheim is also a director of The Berkshire Bank in New York, New York, and Empire Resources, Inc., a metals tradingdistribution company in Fort Lee, New Jersey.
Gerald K. CarlsonChief Executive Officer. Mr. Carlson joined us in May 2002 and has served as our Chief Executive Officer since then. Prior to joining us, Mr. Carlson served as the Commissioner of Trade and Development for the State of Minnesota from January 1999 to March 2001. Mr. Carlson served as Senior Vice President--President — Corporate Planning and Development from June 1996 to his retirement in October 1998 from Ecolab, Inc. During his thirty-two year career at Ecolab, Mr. Carlson also served as Senior Vice President of International as well as Senior Vice President and General Manager--Manager — Institutional North America.
Marvin S. SussmanVice Chairman of the Board of Directors and President of our Prince Agri subsidiary. He has been a director since 1988 and was Chief Operating Officer from 1998 to 2002. Mr. Sussman joined us in 1971. Since then, he has served in various executive positions with us. Mr. Sussman was President of our Prince Group from 1988 to 2002. Mr. Sussman is the brother-in-law of Jack Bendheim.
James O. Herlands Director;Director and Executive Vice President. Mr. Herlands joined us in 1964. Since then, he has served in various capacities in sales/marketing and purchasing. He has been a director since 1988 and served as President of our CP/PhibroChem division since 1992. In addition, Mr. Herlands has served as our Executive Vice President since 1988. Mr. Herlands is the first cousin of Jack Bendheim.

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Richard G. JohnsonChief Financial Officer. Mr. Johnson joined us in September 2002 and has served as our Chief Financial Officer since then. Prior to joining us, Mr. Johnson served as Director of Financial Management for Laserdyne Prima, Inc. from 2001 to 2002 and as Vice President--President — Planning and Control, Latin America for Ecolab, Inc. from 1992 to 1999. In addition, Mr. Johnson served in various senior financial positions at Ecolab over a fifteen year period.
Daniel M. BendheimPresident, Specialty Chemicals Group. Mr. Bendheim joined the Companyus in 1998. In 2001 he was appointed Vice President of Business Development, and was appointed to his current position of President, Specialty Chemicals Group in September, 2004. Prior to joining the Companyus, Mr. Bendheim worked as an analyst at SouthCoast Capital. Mr. Bendheim received a JD from Harvard Law School in 1996 and a BA from Yeshiva University in 1993. Mr. Bendheim is a son of Jack Bendheim.
Steven L. CohenVice President, General Counsel and General Counsel.Secretary. Mr. Cohen joined us in October 2000 and has served as our Vice President--President — Regulatory and General Counsel since then. Prior to joining us, Mr. Cohen was, from 1997 to 2000, General Counsel of Troy Corporation, a multi-national chemical company. From 1994 to 1997, Mr. Cohen was in the private practice of law. 38 David G. McBeath
Keith R. CollinsPresident, Animal Health Group. Dr. McBeathDivision. Mr. Collins joined us in August 2004 and was initially accountable for Business Development, Latin American and European Operations for the Animal Health Division. Mr. Collins was appointed President of the Animal Health Division on AugustJanuary 1, 2003.2005. Prior to joining us he was CEOMr. Collins served as Director, Global Marketing, Large Animal Global Enterprise, Merial Limited from 2002 to 2004 and Director of Scottish Health Innovations Ltd., a company created to identify and exploit intellectual property arisingBusiness Development, Merial Limited from research carried out within the National Health Service in Scotland. From March 2001 to December 2002, he served on the Management Committee of Merial as Head of the Production Animal business; and prior2002. Prior to this Mr. Collins was onArea Director, North and Eastern Europe based in Holland for Intervet Limited. Mr. Collins has spent 30 years of his career in the Board of Hoechst Roussel Vet GmbH, with direct responsibility for R&D and Regulatory Affairs. animal health industry.
Daniel A. WelchSenior Vice President Human Resources. Mr. Welch joined us on August 9, 2004. Prior to joining us, he was Director of Human Resources offor Pfizer Inc. since 2001. From 1998 to 2001, Mr. Welch was the President of Value Growth Dynamics, LLC, a consulting firm focused on strategic change.
Sam Gejdenson Director,Director. From 1981 to 2000, Congressman Sam Gejdenson served eastern Connecticut in the U.S. House of Representatives. Mr. Gejdenson was the senior Democrat on the House International Relations Committee. He received an A.S. degree from Mitchell College in New London, Connecticut in 1968 and a B.A. from the University of Connecticut in Storrs, Connecticut in 1970. In 1974, he was elected to the Connecticut House of Representatives, serving two terms before accepting a post in the administration of Connecticut Governor Ella T. Grasso. Mr. Gejdenson is now involved in international trade in his own company Sam Gejdenson International. Peter A. Joseph Director. Mr. Joseph has served as one of our Directors since February 2001. From 1998 to present, he has been a member of Palladium Equity Partners, LLC. From 1986 to 1997, Mr. Joseph was a general partner of Joseph Littlejohn & Levy, a buyout firm.
Mary Lou MalanoskiDirector. Ms. Malanoski currently serves as a managing directorManaging Director at Morgan Joseph & Co. Inc. From 1994 until June 2001, Ms. Malanoski served as Managing Director and Chief Financial Officer of New Street Advisors LP, a private equity firm that she co-founded. Ms.MalanoskiMs. Malanoski began her career at Drexel Burnham Lambert in 1980 in the Corporate Finance Department. She subsequently served in various positions, finally serving as Managing Director in the Mergers and Acquisitions Department and Chair of the Corporate Finance Underwriting Commitment Committee. Following Drexel'sDrexel’s bankruptcy filing in 1990, Ms. Malanoski was responsible for formulating the firm'sfirm’s plan of reorganization, which was successfully consummated in 1992. She remained at the reorganized firm, which was renamed New Street Capital Corp., as a Managing Director responsible for many of the firm'sfirm’s merchant banking investments. Following New Street Capital'sCapital’s sale in 1994, Ms. Malanoski co-founded New Street Advisors. She is a Trustee of Rosemont College, from which she received a B.A. degree in Mathematics, and she also received an MBA from
Board Composition
      Since the Johnson School of Cornell University. Marcos A. Rodriguez Director. Mr. Rodriguez founded Palladium Equity Partners in 1997 and serves as Managing Member. Prior to forming Palladium, Mr. Rodriguez was a partner of Joseph Littlejohn & Levy (JLL), a buyout firm which he joined in 1989. He was responsible for spearheading a number of JLL's major investments. Before launching his private equity career 14 years ago, Mr. Rodriguez worked in operations for General Electric Company in the U.S., Mexico and France and graduated from GE's Manufacturing Management Program. Mr. Rodriguez serves on the Board of Directors of portfolio companies Haden International, The Hilsinger Company and Wise Foods. In addition, Mr. Rodriguez serves as Chairmanredemption of the Development Committee and TreasurerSeries C Preferred Stock of the Board of Directors of The Robert Toigo Foundation, a not-for-profit organization that supports the advancement of exceptional minority business degree students and alumni within the finance industry through scholarships, mentoring, internships and job placement. He is also a member of the New America Alliance. Mr. Rodriguez earned a B.S. in Mechanical Engineering from Columbia University, an M.B.A from the Wharton School and an M.A. in International Studies from the Lauder Institute of the University of Pennsylvania. Board Composition OurPAHC on February 28, 2005, PAHC’s entire Board of Directors consists of 7five members, all of whom are currently designated and serving as directors. Our boardPAHC’s Board of directorsDirectors is elected annually, and ourPAHC’s directors hold office until the next annual meeting of our shareholders or until their successors are elected and qualified. Each officer serves at the discretion of the Board of Directors.

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Compensation of Directors
      Except for the payment of $50,000 annually to Mr. Sam Gejdenson, the director of PAHC designated by the holders of the Senior Secured Notes ourof PAHC, none of PAHC’s directors do not receive any cash compensation for service on ourPAHC’s Board of Directors. Directors may be reimbursed for certain expenses in connection with attendance at board meetings, however. We have entered into certain transactions with certain of the directors. See "Certain“Certain Relationships and Related Transactions." 39
Code of Ethics Our
      PAHC’s Board of Directors has not adopted a code of ethics applicable to our principal executive, financial or accounting officers. TheSuch Board of Directors believes that our current internal control procedures and business practices are adequate to promote honest and ethical conduct and to deter wrongdoing by these executives.
Committees of the Board of Directors Audit Committee
      We are not a "listed issuer"“listed issuer” as defined under Section 10A-3 of the Exchange Act and are therefore not required to have an audit committee comprised of independent directors. We currently do not have an audit committee and ourPAHC’s Board of Directors has determined that we doPAHC does not need to have an audit committee financial expert. The Board of Directors believes that each of its members has the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have, and therefore does not believe that it is necessary at this time to search for a person who would qualify as an audit committee financial expert. Our
      PAHC’s Board of Directors has not created any committees other than thea compensation committee.
      The duties of the Compensation Committee of the Board of Directors of PAHC are to recommend to the Board of Directors of PAHC a compensation program, including incentives, for the Chief Executive Officer and other senior officers of the Company,PAHC for approval by the full Board of Directors.Directors of PAHC.
      The current members of the Compensation Committee of PAHC are Mr. Jack C. Bendheim Mr. Joseph and Mr. Gejdenson. Item 11.

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Item 11.Executive Compensation
      The following table sets forth the cash compensation paidrecorded by us and our subsidiaries for services during fiscal 2005, 2004, 2003, and 20022003 to our Chief Executive Officer and to the next four most highly compensated executive officers:
                      
    Annual Compensation  
       
      Other Annual All Other
Name and Principal Position Year Salary Bonus(7) Compensation Compensation(1)
           
Jack C. Bendheim  2005  $1,650,000  $300,000  $  $2,100 
 Chairman of the Board; President  2004   1,650,000         2,050 
    2003   1,650,000      150,000(2)  6,500 
Gerald K. Carlson(3)  2005   500,000   544,000   24,000   2,642 
 Chief Executive Officer  2004   500,000   500,000   24,000   1,458 
    2003   500,000   575,000   24,000    
Marvin S. Sussman(4)  2005   1,000,000   152,000      24,000(6)
 Vice Chairman of the Board;  2004   1,000,000   151,600      24,581(6)
 President of Prince Agri  2003   1,000,000   101,372      24,500(6)
James O. Herlands  2005   400,000   139,000      4,375 
 Executive Vice President  2004   400,000   55,000      6,581 
    2003   400,000   95,519      6,500 
Richard G. Johnson(5)  2005   297,917   114,000      7,407 
 Chief Financial Officer  2004   268,750   194,800   13,500   6,703 
    2003   192,308   100,000   39,000    
Annual Compensation --------------------------------------------------------------------- Name
(1) Represents contributions by us under our 401(k) Retirement and Other Annual All Other Principal Position Year Savings Plan. See “Compensation Pursuant to Plans.”
(2) In fiscal 2003, Mr. Bendheim was paid $150,000 for temporary deferral of fiscal 2002 compensation.
(3) In fiscal 2005, 2004 and 2003, Mr. Carlson received $24,000 housing assistance.
(4) Pursuant to a Stockholders Agreement between us and Mr. Sussman, we are required to purchase, at book value, all shares of our Class B Common Stock owned by Mr. Sussman in the event of his retirement, death, disability or the termination of his employment by us. Should Mr. Sussman elect to sell his shares, we have a right of first offer and an option to purchase the shares. See “Certain Relationships and Related Transactions.” As a result, each year, we are required to record as compensation expense (income) in our results of operations the change in our book value attributable to Mr. Sussman’s shares. For 2005, 2004 and 2003, the expense (income) attributable to Mr. Sussman’s shares was $0. No distributions have been made to Mr. Sussman under this agreement.
(5) Salary Bonus Compensation Compensation(1) - ------------------------------- ----- ------ ----- ------------ --------------- Jack C. Bendheimis since date of employment for 2003. In fiscal 2004 $ 1,650,000 $ -- $ -- $ 2,050 Chairmanand 2003, Mr. Johnson received $13,500 and $39,000, respectively, for relocation and housing assistance.
(6) Of such amount, $18,000 represents the cost of the Board; President 2003 1,650,000 -- 150,000(2) 6,500 2002 1,500,000 265,000 -- 6,000 Gerald K. Carlson(3) 2004 500,000 575,000 24,000 1,458 Chief Executive Officer 2003 500,000 -- 24,000 -- 2002 49,350 -- -- -- Marvin S. Sussman(4) 2004 1,000,000 101,372 -- 24,581(6) Vice Chairmanterm portion of a life insurance policy purchased by the Board; 2003 1,000,000 -- -- 24,500(6) PresidentCompany in the face amount of Prince Agri 2002 1,000,000 -- -- 6,000 James O. Herlands 2004 400,000 95,519 -- 6,581 Executive Vice President 2003 400,000 150,000 -- 6,500 2002 400,000 150,000 -- 6,000 Richard G. Johnson(5) 2004 268,750 200,000 13,500 6,703 Chief Financial Officer 2003 192,308 -- 39,000 -- $10 million on the life of Mr. Sussman, with a required premium of $252,000 per year. The policy commenced in April 2002.
(7) Bonuses include annual awards under the Company’s management incentive plan and are reported in the year in which the bonus was earned. Prior year information has been revised for consistency of presentation.
- ---------- (1) Represents contributions by us under our 401(k) Retirement and Savings Plan. See "Compensation Pursuant to Plans." (2)
      In fiscal 2003, Mr. Bendheim was paid $150,000 for temporary deferral of fiscal 2002 compensation. (3) 2002 salary is for a partial year commencing May 2002. In fiscal 2004 and 2003, Mr. Carlson received $24,000 for relocation and housing assistance. (4) Pursuant to a Stockholders Agreement between us and Mr. Sussman, we are required to purchase, at book value, all shares of our Class B Common Stock owned by Mr. Sussman in the event of his retirement, death, disability or the termination of his employment by us. Should Mr. Sussman elect to sell his shares, we have a right of first offer and an option to purchase the shares. 40 See "Certain Relationships and Related Transactions." As a result, each year, we are required to record as compensation expense (income) in our results of operations the change in our book value attributable to Mr. Sussman's shares. For 2004, 2003 and 2002, the expense (income) attributable to Mr. Sussman's shares was $0, $0 and ($378,000), respectively. No distributions have been made to Mr. Sussman under this agreement. (5) Salary is since date of employment for 2003. In fiscal 2004 and 2003, Mr. Johnson received $13,500 and $39,000, respectively, for relocation and housing assistance. (6) Of such amount, $18,000 represents the cost of the term portion of a life insurance policy purchased by the Company in the face amount of $10 million on the life of Mr. Sussman, with a required premium of $252,000 per year. The policy commenced in April 2002. In fiscal 2004,2005, no options were granted to the named executive officers and no options were held or exercised by any of the named executive officers.
Employment and Severance Agreements We
      The Company entered into an employment agreement with Gerald K. Carlson in May 2002, whereby Mr. Carlson will serve as our Chief Executive Officer. The agreement provides for a base salary of $500,000 during the first year of its term. Mr. Carlson is eligible to receive an annual bonus of up to 150% of his base

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salary based on our achievement of certain specified EBITDA growth targets. If Mr. Carlson is terminated without Cause (as defined) or he voluntarily terminates the agreement with Good Reason (as defined), he is entitled to receive the accrued portion of the target annual bonus, as well as an amount ranging from two to eight months of base salary depending on when such termination occurs. If, within six months after a Change of Control (as defined), Mr. Carlson is terminated without cause or he voluntarily terminates the agreement with Good Reason, he will be entitled to receive a lump sum payment equal to the amount of annual target bonus accrued to the date of termination, plus 100% of base salary and 50% of annual target bonus. We are obligated under the agreement to provide separate indemnification insurance to Mr. Carlson in the amount of the current coverage provided to our current board of directors. We
      The Company entered into an employment agreement with Marvin S. Sussman in December 1987. The term of employment is from year-to-year, unless terminated by us at any time or by his death or permanent disability. Our UK subsidiary, PAH Management Company Ltd., entered into an employment agreement with
      In December 2004, David McBeath in May 2003, commencing August 1, 2003, whereby Mr. McBeath will serveresigned as President, of our Animal Health Group. PAHC entered into a consulting agreement with Mr. McBeath in November 2004, pursuant to which Mr. McBeath agreed to provide to PAHC consulting services through December 2005. The consulting agreement provides for a base salary of $250,000. The agreement also provides for additional payments tothat during such time Mr. McBeath shall work ten days per month at a rate of $100,000 upon commencementGBP1,000 per day from January through June 2005 and five days per month at a rate of his employment and $130,000 upon completion of his term of employment (the "Completion Fee"). If Mr. McBeath dies during the term of the agreement or the agreement is terminated because of his disability or Mr. McBeath is terminated other than for cause, he, or his estate, as the case may be, would be entitled to receive, in lieu of severance, a prorated portion of the Completion Fee.GBP1,100 per day through December 2005.
      In 1995, James O. Herlands purchased stock in Phibro-Tech. In connection therewith, we entered into a severance agreement with him. The agreement provides that, upon his Actual or Constructive Termination or a Change in Control Event (as such terms are defined), he is entitled to receive a cash Severance Amount (as defined therein), based upon a multiple of Phibro-Tech'sPhibro-Tech’s pre-tax earnings (as defined therein). In addition, if an Extraordinary Event (as defined) occurs within 12 months after the occurrence of an Actual or Constructive Termination, the executive is entitled to receive an additional Catch-up Payment (as defined). At June 30, 2004,2005, no severance payments would have been due to Mr. Herlands if he were terminated. See "Certain“Certain Relationships and Related Transactions."
Compensation Pursuant to Plans
401(k) Plan. We maintain for the benefit of our employees a 401(k) Retirement and Savings Plan (the "Plan"“Plan”), which is a defined contribution, profit sharing plan qualified under SectionSections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"“Code”). Our employees are eligible for participation in the Plan once they have attained age 21 and completed a yearsix months of service (in which the employee completed 1,000 hours of service).service. Up to $200,000$210,000 (indexed for inflation) of an employee'semployee’s base salary may be taken into account for Plan purposes. Under the Plan, employees may make pre-tax contributions of up to 60.0%60% of such employee'semployee’s base salary, and we will make non-matching contributions equal to 1% of an employee'semployee’s base salary and matching contribution equal to 50.0%50% of an employee'semployee’s pre-tax contribution up to 3.0%3% of such employee'semployee’s base salary and 25.0%25% of such employee'semployee’s pre-tax contribution from 3.0%3% to 6.0%6% of base salary. Participants are vested in employer contributions in 20% increments beginning after completion of the second year of service and become fully vested after five years of service. Distributions are generally payable in a lump sum after termination of employment, retirement, death, disability, plan termination, attainment of age 59 1/1/2, disposition of substantially all of our assets or upon financial hardship. The Plan also provides for Plan loans to participants. 41
      The accounts of Messrs. Bendheim, Carlson, Sussman, Herlands, and Johnson were credited with employer contributions of $2,050, $1,458, $6,581, $6,581,$2,100, $2,642, $6,000, $4,375, and $6,703,$7,407, respectively, for fiscal 2004. 2005.
Retirement Plan. We have adoptedmaintain for the benefit of our employees The Retirement Plan of Phibro Animal Health Corporation and Subsidiaries and Affiliates, which is a defined benefit pension plan (the "Retirement Plan"“Retirement Plan”). qualified under Section 401(a) of the Code. Our employees are eligible for participation in the Retirement Plan once they have attained age 21 and completed a year of service (which is a Plan Year in which the employee completes 1,000 hours of service). The Retirement Plan provides benefits equal to the sum of (a) 1.0% of an employee's "average salary"employee’s “average salary” plus 0.5% of the employee's "average salary"employee’s “average salary” in excess of the average of the employee'semployee’s social security taxable wage base, times years of service after July 1, 1989, plus (b) the employee'semployee’s frozen accrued benefit, if any, as of June 30, 1989 calculated under the Retirement Plan

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formula in effect at that time. For purposes of calculating the portion of the benefit based on "average salary"“average salary” in excess of the average wage base, years of service shall not exceed 35. "Average salary"“Average salary” for these purposes means the employee'semployee’s salary over the consecutive five year period in the last ten years preceding retirement or other termination of employment which produces the highest average; or, if an employee has fewer than five years of service, all such years of service. An employee becomes vested in his plan benefit once he completes five years of service with us. In general, benefits are payable after retirement or disability in the form of a 50%, 75% or 100% joint orand survivor annuity, life annuity or life annuity with a five or ten year term.term certain. In some cases benefits may also be payable under the Retirement Plan in the event of an employee'semployee’s death.
      The following table shows estimated annual benefits payable upon retirement in specified compensation and years of service classifications, assuming a life annuity with a ten year term. Years of Service Average ------------------------------------------------------------ Compensation 15 20 25 30 35 - ------------ -------- -------- -------- -------- -------- $ 25,000 ..... $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750 $ 50,000 ..... $ 7,500 $ 10,000 $ 12,500 $ 15,000 $ 17,500 $ 75,000 ..... $ 11,420 $ 15,000 $ 18,750 $ 22,500 $ 26,250 $ 100,000 ..... $ 17,040 $ 22,000 $ 26,980 $ 31,990 $ 37,280 $ 150,000 ..... $ 28,290 $ 37,000 $ 45,730 $ 54,490 $ 63,530 $ 200,000 ..... $ 39,540 $ 52,000 $ 64,480 $ 76,990 $ 89,780
                     
  Years of Service
   
Average Compensation 15 20 25 30 35
           
$ 25,000 $3,750  $5,000  $6,250  $7,500  $8,750 
$ 50,000 $7,500  $10,000  $12,500  $15,000  $17,500 
$ 75,000 $11,280  $15,000  $18,750  $22,500  $26,250 
$100,000 $16,910  $21,850  $26,800  $31,830  $37,120 
$150,000 $28,160  $36,850  $45,550  $54,330  $63,370 
$200,000 $39,410  $51,850  $64,300  $76,830  $89,620 
      As of June 30, 2004,2005, Messrs. Bendheim, Carlson, Sussman, Herlands, and Johnson had 35, 2, 33, 4036, 3, 34, 41 and 23 estimated credited years of service, respectively, under the Retirement Plan. The compensation covered by the Retirement Plan for each of these officers as of June 30, 20042005 is $205,000.$210,000. Such individuals, at normal retirement age 65, will have 43, 6, 41, 43 and 12 credited years of service, respectively. The annual expected benefit after normal retirement at age 65 for each of these individuals, based on the compensation taken into account as of June 30, 2004,2005, is $118,200, $16,580, $134,110, $129,240,$119,680, $16,940, $135,660, $129,910, and $32,000,$32,880, respectively.
      Most of our foreign subsidiaries have retirement plans covering substantially all employees. Contributions to these plans are generally deposited under fiduciary-type arrangements. Benefits under these plans are primarily based on levels of compensation. Funding policies are based on applicable legal requirements and local practices.
Deferred Compensation Plan. In 1994, we adopted a non-qualified Deferred Compensation Plan and Trust, as an incentive for certain executives. The plan provides for (i) a Retirement Income Benefit (as defined), (ii) a Survivor'sSurvivor’s Income Benefit (as defined), and (iii) Deferred Compensation Benefit (as defined). Three employees currently participate in this plan. A grantor trust has been established to provide the benefits described above.
      The following table shows the estimated benefits from this plan as of June 30, 2004. Annual Survivor's Deferred Retirement Income Compensation Income Benefit Benefit Benefit -------------- ------- ------- Jack C. Bendheim.................. $35,309 $1,500,000 $386,368 Marvin S. Sussman................. $35,309 $1,000,000 $128,451 James O. Herlands................. $35,085 $ 400,000 $347,1042005.
             
  Annual Survivor’s Deferred
  Retirement Income Compensation
  Income Benefit Benefit Benefit
       
Jack C. Bendheim $39,786  $1,500,000  $416,265 
Marvin S. Sussman $39,786  $1,000,000  $147,481 
James O. Herlands $39,086  $400,000  $402,673 
      We determine the Retirement Income Benefit based upon the employee'semployee’s salary, years of service and age at retirement. At present, it is contemplated that a benefit of 1% of each participant'sparticipant’s eligible compensation will be accrued each year. The benefit is payable upon retirement (after age 65 with at least 10 years of service) in monthly installments over a 15 year period to the participant or his named beneficiary. The Survivor'sSurvivor’s Income Benefit for the current participants is one times annualized compensation at the time of death, capped at $1,500,000, payable in 24 equal monthly installments. The Deferred Compensation Benefit is substantially funded by compensation deferred by the participants. Such benefit is based upon a participant making an election to defer no less than $3,000 and no more than $20,000 of his compensation in excess of $150,000,

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$150,000, payable in a lump sum or in monthly installments for up to 15 years. We make a matching contribution of $3,000. Participants have no claim against us other than as unsecured creditors. We intend to fund the payments using the cash value or the death benefit from the life insurance policies insuring each Executive'sExecutive’s life. 42
Executive Income Program. On March 1, 1990, we entered into an Executive Income Program to provide a pre-retirement death benefit and a retirement benefit to certain of our executives. The Program consists of a Split-Dollar Agreement and a Deferred Compensation Agreement with Jack Bendheim, Marvin S. Sussman and James O. Herlands (the "Executives"“Executives”). The Split Dollar Agreement provides for us to own a whole life insurance policy in the amount of $1,000,000 (plus additions) on the life of each Executive.
      Each policy also contains additional paid-up insurance and extended term insurance. On the death of the Executive prior to his 60th birthday or his actual retirement date, whichever is later: (i) the first $1,000,000 of the death benefit is payable to the Executive'sExecutive’s spouse, or issue; (ii) the excess is payable to us up to the aggregate amount of premiums paid by us; and (iii) any balance is payable to the Executive'sExecutive’s spouse or issue. The Split-Dollar Agreement terminates and no benefit is payable if the Executive dies after his retirement. The Deferred Compensation Agreement provides that upon the Executive'sExecutive’s retirement, at or after attaining age 65, we will make retirement payments to the Executive during his life for 10 years or until he or his beneficiaries have received a total of 120 monthly payments. Participants have no claim against us other than as unsecured creditors. We intend to fund the payments using the cash value or the death benefit from the life insurance policies insuring each Executive'sExecutive’s life. The retirement benefits are as follows: Jack Bendheim $30,000; Marvin S. Sussman $30,000; and James O. Herlands $20,000.
1993 Split Dollar Agreement. On August 12, 1993, we entered into a Split Dollar Agreement with David Butler and Gail Bendheim, as trustees under an Indenture of Trust dated August 12, 1993 (the "Trust"“Trust”). This Agreement provides for the Trust to purchase and own life insurance policies on the life of Jack C. Bendheim in the aggregate face amount of $5,000,000 (plus additions). The premiums for such insurance are paid in part by the Trust (to the extent of the lesser of the P.S. 58 rates, or the insurers'insurers’ current published premium rate for annually renewable term insurance for standard risks) and in part by us (we pay the balance of the premiums not paid by the Trust). Upon the death of Jack C. Bendheim or upon the cancellation of the policies or the termination of the Agreement, we have the right to be repaid the total amount we advanced toward payment of premiums. To secure our right to be repaid, the Trust has assigned each policy to us as collateral. After repayment of the amount due to us, the remaining cash surrender value or the remaining death benefit is payable to the Trust, the beneficiaries of which are the wife and issue of Jack C. Bendheim.
Meetings of Directors
      During fiscal 2004,2005, the Board of Directors took certain actions by both written consent and at regular meetings. Directors are elected annually and serve until the next annual meeting of Shareholdersshareholders or until their successors are elected and qualified.
Report of the Compensation Committee
      The compensation committee was established during fiscal 2004. The responsibility of the compensation committee is to recommend to the Board of Directors a compensation program, including incentives, for the Chief Executive Officer and other senior officers, for approval by the full Board of Directors. The compensation committee will prepare recommendations to the Board of Directors for the 20052006 fiscal year. Executive compensation for the 20042005 fiscal year was determined by the Board as a whole. During fiscal 20042005 the directors participated in deliberations regarding compensation of our officers.
Compensation Committee Interlocks and Insider Participation
      Jack Bendheim, Marvin S. Sussman and James O. Herlands are members of our Board of Directors and are executive officers. Jack Bendheim Peter Joseph and Sam Gejdenson are members of the compensation committee.committee of PAHC. None of our executive officers serve as a member of the Board of Directors of any other non-Company entity which has one or more members serving as a member of our Board of Directors, except that Jack Bendheim and Peter Joseph serve as directors of Penick Holding Company. Directors.

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Messrs. Bendheim, Sussman, Herlands, Joseph and RodriguezHerlands have participated in certain transactions with us and our subsidiaries and affiliates. See Item 13, Certain“Certain Relationships and Related Transactions. Item 12.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
      The table sets forth certain information as of June 30, 20042005 regarding beneficial ownership of our capital stock by each of our directors and named executive officers, each beneficial owner of 5% or more of the outstanding shares of capital stock and all directors and officers as a group. 43 Number of Common Shares (Percentage of Class) --------------------------------------- Name Class A Voting(1) Class B Voting(2) - --------------------------------------- ------------------ ----------------- Jack Bendheim(3)....................... 12,600 (100)% 10,699.65(90%)(4) Marvin S. Sussman...................... -- 1,188.85(10%) All other officers and directors(5).... -- -- All officers and directors as a group.. 12,600 (100)% 11,888.50(100%) - ---------- (1) The entire voting power is exercised by the holders of Class A Common Stock, except that the holders of Class A Common Stock currently are entitled to elect all but three of the directors. The holders of Class B Common Stock are entitled to elect one and the holders of Series C Preferred Stock are entitled to elect two directors but do not vote on any other matters. In addition, the holders of the units of senior secured notes have the right to designate one member of the Board of Directors. (2) Class B Common shareholders will receive the entire equity upon our liquidation, after payment of preferences to holders of all classes of preferred stock and Class A Common Stock. (3) Jack Bendheim also owns 5,207 (100%) shares of Series A Preferred Stock. (4) Includes 6,308.527 shares owned by trusts for the benefit of Jack Bendheim, his spouse, his children and their spouses and his grandchildren. (5) Peter A. Joseph and Marcos Rodriguez have been designated as directors of the Company by Palladium Equity Partners II, LP ("Palladium") which beneficially owns 10,591 shares of our Series C Preferred Stock. Palladium has the right to designate two directors to the Board of Directors. See "Certain Relationships and Related Transactions." Item 13.
Number of Common Shares
(Percentage of Class)
NameClass A Voting(1)Class B Non-Voting(2)
PAHC Holdings Corporation(3)12,600 (100%)11,888.50 (100%)
65 Challenger Road
Ridgefield Park, NJ 07660
Jack Bendheim(4)12,600 (100%)11,888.50 (100%)
65 Challenger Road
Ridgefield Park, NJ 07660
All other officers and directors
All officers and directors as a group12,600 (100%)11,888.50 (100%)
(1) The entire voting power is exercised by the holder of Class A Common Stock, except that the holder of Class A Common Stock currently is entitled to elect all but two of the directors. The holder of Class B Common Stock is entitled to elect one director but does not vote on any other matters. In addition, the holders of the units of senior secured notes have the right to designate one member of the Board of Directors.
(2) Class B Common shareholders will receive the entire equity upon our liquidation, after payment of preferences to holders of all classes of preferred stock and Class A Common Stock.
(3) PAHC Holdings Corporation also owns 5,207 (100%) shares of Series A Preferred Stock.
(4) Deemed to be a beneficial owner through his security ownership of PAHC Holdings Corporation. Jack Bendheim is also deemed to be a beneficial owner of 5,207 (100%) shares of Series A Preferred Stock through his security ownership of PAHC Holdings Corporation.
Item 13.Certain Relationships and Related Transactions
      Our Phibro-Tech subsidiary leases the property underlying its Santa Fe Springs, California facility from First Dice Road Company, a California limited partnership ("(“First Dice"Dice”), in which Jack Bendheim, our President and principal stockholder, Marvin S. Sussman and James O. Herlands, directors, own 39.0%, 40.0% and 20.0% limited partnership interests, respectively. The general partner, having a 1% interest in the partnership, is Western Magnesium Corp., a wholly-owned subsidiary of ours, of which Jack Bendheim is the president. The lease expires on June 30, 2008. The annual rent is $250,000. Phibro-Tech is also required to pay all real property taxes, personal property taxes and liability and property insurance premiums. In June 2001, Jack Bendheim entered into a secured $1.4 million revolving credit arrangement with First Union National Bank, which replaced a prior loan from Fleet Bank. Mr. Bendheim reloans borrowings under the First Union credit line to First Dice on the same terms as his borrowing from First Union. We believe that the terms of such lease and loan are on terms no less favorable to Phibro-Tech than those that reasonably could be obtained at such time in a comparable arm's-lengtharm’s-length transaction from an unrelated third-party.
      Pursuant to a Shareholders Agreement dated December 29, 1987 between Marvin S. Sussman and us, we are required to purchase, at book value, all shares of our Class B Common Stock owned by Mr. Sussman, in the event of his retirement, death, permanent disability or the termination of his employment by us. Should Mr. Sussman elect to sell his shares, we have a right of first offer and an option to purchase the shares.

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      A Shareholders Agreement initially entered into by Phibro-Tech and three executives of Phibro-Tech, including James O. Herlands (the "Executives"“Executives”) provides, among other things, for restrictions on their shares as to voting, dividends, liquidation and transfer rights. The Shareholders Agreement also provides that upon the death of an Executive or termination of an Executive'sExecutive’s employment, Phibro-Tech must purchase the Executive'sExecutive’s shares at their fair market value, as determined by a qualified appraiser. In the event of a Change of Control (as defined), the Executive has the option to sell his shares to Phibro-Tech at such value. The Shareholders Agreement provides, that, upon the consent of Phibro-Tech, the Executives and us, the Executives'Executives’ shares of Phibro-Tech Common Stock may be exchanged for a number of shares of our Common Stock, which may be non-voting Common Stock, having an equivalent value, and upon any such exchange such shares of our Common Stock will become subject to the Shareholders Agreement. We and Phibro-Tech also entered into Severance Agreements with the Executives which provide, among other things, for certain severance payments. See Item 11, Executive Compensation -- Employment and Severance Agreements.
      We advanced $200,000 to Marvin Sussman and his wife in 1987, pursuant to a secured promissory note that is payable on demand and bears interest at the annual rate of 9%.
      Certain relatives of Jack Bendheim, other than Mr. Sussman and Mr. Herlands named above, provide services to us, in one case through a consulting firm controlled by a relative, and in other cases as employees, and received directly or through such consulting firm annual aggregate payments of approximately $650,000$670,000 for the fiscal year ended June 30, 2004. 44 2005.
      On January 5, 2000, the United States Bankruptcy Court for the Eastern District of New York confirmed a Plan of Reorganization for Penick Corporation and Penick Pharmaceutical, Inc. (collectively, "Penick"“Penick”) which prior to such confirmation were debtors in proceedings in such Court for reorganization under Chapter 11 of the Bankruptcy Code, and awarded Penick to Penick Holding Company ("PHC"(“PHC”). PHC is a corporation formed to effect such acquisition by the Company, PBCI LLC, a limited liability company controlled by Mr. Bendheim, and several other investors, including Peter A. Joseph, a former director of the Company. PursuantIn May 2005, in connection with the sale PHC, the Company received the return of its $2,418,000 investment in preferred interests in PHC Holdings LLC, the company formed by the investors to a Shareholders' Agreement among the shareholdershold, receive and sell their interest in PHC (net carrying value of $1,711,000). The principal common stockholder of Holdings owns approximately 15% voting common stock interest in PHC Messrs. Bendheim and Joseph have been designated as two of three directors of PHC, and Mr. Katzenstein, our Secretary, has been designated as Secretary and Treasurer of PHC.Holdings LLC. The Company has invested approximately $2,300,000 for shares of Series A Preferred Stock of PHC bearing an 8.5 percent annual cumulative dividend, and PBCI LLC invested approximately $500,000 for approximately 15 percentrecorded a gain on the sale of the Common Stockinvestment of PHC. Mr. Joseph owns or controls approximately 12 percent of the Common Stock of PHC.$0.7 million.
      In connection with the sale by PAHC of ourits Series B and Series C Preferred Stock to the Palladium Investors, wePAHC and Jack Bendheim entered into a Stockholders Agreement (the "Palladium“Palladium Stockholders Agreement"Agreement”) dated November 30, 2000 with the Palladium Investors. The Palladium Stockholders Agreement providesprovided for ourPAHC’s Board to include two directors to be designated by the Palladium Investors. Peter A. Joseph and Marcos Rodriguez are currently the two designees of the Palladium Investors serving as directors. If and for so long as we fail to redeem any share of Series B or Series C Preferred Stock requested for redemption by a Palladium Investor after the earliest to occur of June 1, 2008 (the maturity date of our 9 7/8% Senior Subordinated Notes due 2008), the redemption of such Notes in full prior thereto or a change in control of us, then (x) the Palladium Investors may take control of our Board of Directors, and (y) Jack C. Bendheim has agreed to cause all equity securities owned by him to be voted in the manner directed by the Palladium Investors; provided, that, we must pay Jack Bendheim and Marvin Sussman, whether or not employed by us, an amount not less than their respective annual base salaries in effect immediately prior to such assumption of control, until the earlier to occur of the expiration of control by the Palladium Investors, and the fifth anniversary of their assumption of control. The Palladium Stockholders Agreement containscontained covenants which restrict,restricted without the consent of at least one director designated by the Palladium Investors, (or, if no such director is then serving on the Board, at least one Palladium Investor), among other things, certain (a) issuances of any equity securities, unless the purchaser agrees to be bound by the Palladium Stockholders Agreement, (b)purchases and sales of assets, in excess of $10 million, (c) purchases of businessesborrowings and other investments in excesstransactions by PAHC. Peter A. Joseph and Marcos Rodriguez were the two most recent designees of $10 million, (d) the incurrencePalladium Investors serving as directors of indebtedness for borrowed money, including guarantees, in excess of $12.5 million, (e) redemptions, acquisitions or other purchases of equity securities, (f) transactions with officers, directors, stockholders or employees or any family member or affiliate thereof in excess of $500,000, (g) compensation and benefits of certain officers, and (h) transactions involving a change of control.PAHC. The Palladium Stockholders Agreement also provides that we shall furnishterminated upon the redemption by PAHC of all of its outstanding Series C Preferred Stock owned by the Palladium Investors certain financial reporting and environmental information each year and grant toon February 28, 2005. The directors of PAHC representing the Palladium Investors registration rights comparable to anytendered their resignations effective on such rights granted to any third party, and requires us to maintain certain key man life insurance on Jack C. Bendheim for the benefit of the Palladium Investors. The Palladium Stockholders Agreement provides certain limitations on the ability of Jack C. Bendheim to transfer voting shares, and certain limitations on the ability of the Palladium Investors to transfer their shares, including a right of first refusal in favor of us and Mr. Bendheim.date.
      Pursuant to the Amended and Restated Management and Advisory Services Agreement dated November 30, 2000as of October 21, 2003 between usPAHC and the Palladium Investors, weCapital Management, L.L.C., PAHC agreed to pay, on a quarterly basis, the Palladium InvestorsCapital an annual management advisory fee of $2.25 million until such time as all shares of Series B and Series C Preferred Stock are redeemed. Pursuant to the sale of PMC described below, ourPAHC’s obligations for this fee have been terminated.
      Our policy with respect to the sale, lease or purchase of assets or property of any related party is that such transaction should be on terms that are no less favorable to us or our subsidiary, as the case may be, than those that could reasonably be obtainable at such time in a comparable arm'sarm’s length transaction from an unrelated third party. The indentureindentures and the new domestic senior credit facility botheach include a similar restriction on us

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and our domestic subsidiaries with respect to the sale, purchase, exchange or lease of assets, property or services, subject to certain limitations as to the applicability thereof.
      Effective December 26, 2003 (the "Closing Date"“Closing Date”), the CompanyPAHC completed the divestiture of substantially all of the business and assets of The Prince Manufacturing Company ("PMC"(“PMC”) to a company ("Buyer"(“Buyer”) formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"“Palladium Investors”), and the related reduction of the Company'sPAHC’s preferred stock held by the Palladium Investors (collectively the "Prince Transactions"“Prince Transactions”).
      Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements: (i) the transfer of substantially all of the business and assets of PMC to Buyer; (ii) the reduction of the value of the Company'sPAHC’s Preferred Stock owned by the Palladium Investors from $72.2 million to $16.5 million (accreted through the Closing Date) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii) the termination of $2.2$2.25 million in annual management advisory fees payable by the CompanyPAHC to Palladium; (iv) a cash payment of $10.0 million to the Palladium Investors in respect of the portion of the Company'sPAHC’s Preferred Stock not exchanged in consideration of the business and assets of PMC; (v) the agreement of the Buyer to pay the CompanyPAHC for advisory fees for the next 45 three years of $1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid at closing by the Buyer and satisfied for $1.3 million, the net present value of such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron oxide products and to provide certain mineral blending services to the Company'sPAHC’s Prince Agriproducts subsidiary ("(“Prince Agri"Agri”). Prince Agri agreed to continue to provide the Buyer with certain laboratory, MIS and telephone services, all on terms substantially consistent with the historic relationship between Prince Agri and PMC, and to lease to Buyer office space used by PMC in Quincy, Illinois. The CompanyPAHC has an agreement to receive certain treasury services from Palladium for $0.1 million per year. Pursuant to definitive agreements, the CompanyPAHC made customary representations, warranties and environmental and other indemnities, agreed to a post-closing working capital adjustment, paid $4.0 million in full satisfaction of all intercompany debt owed to PMC, paid a closing fee to Palladium of $0.5 million, made certain capital expenditure adjustments included as part of the intercompany settlement amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million of its accounts receivable. The CompanyPAHC established a $1.0 million letter of credit escrow for two years to secure its working capital adjustment and certain indemnification obligations. The CompanyPAHC 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 Buyer for less than $21.0 million up to a maximum payment by the CompanyPAHC of $4.0 million (the "Backstop“Backstop Indemnification Amount"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'sPAHC’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'sPAHC’s obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of Buyer by January 1, 2009. The definition of "Equity Value"“Equity Value” in the Company'sPAHC’s Certificate of Incorporation was amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5. The amount of consideration paid and payable in connection with the Prince Transactions and all matters in connection therewith were determined pursuant to arm'sarm’s length negotiations. 46 Item 14. Principal AccountantIn connection with the redemption by PAHC of all of its Series C Preferred Stock, the Palladium Investors agreed to terminate the Backstop Indemnification.
      On February 28, 2005, PAHC consummated the redemption of its Series C Preferred Stock, all of which was held by Palladium Equity Partners II, L.P. and certain of its affiliates, for $26.4 million. The funds used for such redemption were contributed to the capital of PAHC by Holdings.
      In connection with the redemption, Holdings, PAHC, the Palladium investors and the principal stockholders of Holdings entered into an agreement dated as of February 28, 2005 with respect to (1) the redemption price (consisting of $19.6 million of liquidation preference and $6.8 million of equity value), (2) amending the terms of the post-redemption redemption price adjustment set forth in the certificate of incorporation of PAHC (A) from an amount payable upon the occurrence of certain capital stock transactions determined with respect to the value of PAHC upon the occurrence of such capital stock transaction, to a

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liquidated amount of $4 million, payable only after the occurrence of certain capital stock transactions and the receipt by the current stockholders of Holdings, on a cumulative basis, of an aggregate of $24 million of dividends and distributions in respect of such capital stock transactions, and (B) to remove the one-year time period for such adjustment of the redemption price, and (3) eliminating the backstop indemnification obligation of PAHC to the Palladium investors of up to $4 million incurred in connection with the sale by PAHC to the Palladium investors in December 2003 of The Prince Manufacturing Company. In addition, the directors of PAHC designated by the Palladium investors resigned, the Palladium investors released PAHC and Holdings from certain claims, and confirmed the termination of the Palladium Stockholders Agreement.
Item 14.Principal Accounting Fees and Services
      Aggregate fees for professional services rendered for us by PricewaterhouseCoopers LLP ("PwC"(“PwC”), our independent registered public accounting firm, for the fiscal years ended June 30, 2005 and 2004 and 2003 were: 2004 2003 ---- ---- Audit $1,629,000 $ 795,000 Audit Related 1,328,000 -- Tax Tax Planning 180,000 123,000 Tax Compliance and Other 29,000 ---------- ---------- Total Tax 180,000 152,000 All Other -- -- ---------- ---------- Total $3,137,000 $ 947,000 ========== ==========
           
  2005 2004
     
Audit $938,000  $1,066,000 
Audit Related  1,314,000   1,891,000 
Tax        
 Tax Planning  175,000   180,000 
 Tax Compliance and Other  68,000     
       
  Total Tax  243,000   180,000 
All Other      
       
Total $2,495,000  $3,137,000 
       
      Our Board of Directors pre-approves audit and non-audit services performed for us by PwC. Our Board
      Audit and audit related fees in 2004 were revised to reflect $563,000 of Directors has considered whether the provisionfees incurred as a part of non-audit services by PwC to us is compatible with maintaining PwC's independence. PwC advised our Board of Directors that PwC was and continues to be independent with respect to us. 47 2004 debt issuance as audit related.

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PART IV Item 15.
Item 15.Exhibits and Financial Statement Schedules
      (a) The following documents are filed as part of this Report:
      (1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements appearing on page F-1 of this Report.
      (2) Financial Statement Schedules
All supplemental schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the consolidated financial statements or notes thereto or in other supplemental schedules.
      (3) Exhibits
     
Exhibit No. Description of Exhibit
   
 3.1 Composite Certificate of Incorporation of Registrant(15)
 
 3.1(a) Certificate of Amendment of Certificate of Incorporation of Registrant dated February 28, 2005(21)
 
 3.2 By-laws of Registrant(1)
 
 4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits thereto, including Form of 97/8% Senior Subordinated Note due 2008 of Company(1)
 
 4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(10)
 
 4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(10)
 
 4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(10)
 
 4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(11)
 
 4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(12)
 
 4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(16)
 
 4.2 Indenture, dated as of October 21, 2003, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent(13)
 
 4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent(16)
 
 4.2.2 Second Supplemental Indenture, dated as of December 8, 2004, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent(17)

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Exhibit No. Description of Exhibit
   
 
 4.2.3 Third Supplemental Indenture, dated as of March 10, 2005, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent(22)
 
    Certain instruments which define the rights of holders of long-term debt of Registrant and its consolidated subsidiaries have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis, as of June 30, 2005. For a description of such indebtedness, see Note 12 of Notes to Consolidated Financial Statements. Registrant hereby agrees to furnish copies of such instruments to the Securities and Exchange Commission upon its request
 
 10.1 Lease, dated September 27, 2004, between Registrant and Hartz Mountain Industries, Inc.(19)
 
 10.2 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech, Inc., as amended May 1998(1)
 
 10.3 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel Land Administration(1)
 
 10.4 Master Lease Agreement, dated February 27, 1998, between General Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1)
 
 10.5 Stockholders Agreement, dated December 29, 1987, by and between Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman(1)
 
 10.6 Employment Agreement, dated December 29, 1987, by and between Registrant and Marvin S. Sussman(1)††
 
 10.7 Stockholders Agreement, dated February 21, 1995, between James O. Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1)
 
 10.8 Form of Severance Agreement, dated as of February 21, 1995, between Registrant and James O. Herlands(1)††
 
 10.9 Agreement of Limited Partnership of First Dice Road Company, dated June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S. Sussman and James O. Herlands, as amended November 1985(1)
 
 10.10 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan Trust, dated as of January 1, 1994, by and between Registrant on its own behalf and on behalf of C.P. Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated March 18, 1994 (“Retirement Income and Deferred Compensation Plan”)(1)††
 
 10.10.1 First, Second and Third Amendments to Retirement Income and Deferred Compensation Plan(2)††
 
 10.11 Form of Executive Income Deferred Compensation Agreement, each dated March 11, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman(1)††
 
 10.12 Form of Executive Income Split Dollar Agreement, each dated March 1, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman(1)††
 
 10.13 Administrative Consent Order, dated March 11, 1991, issued by the State of New Jersey Department of Environmental Protection, Division of Hazardous Waste Management, to C.P. Chemicals, Inc.(1)
 
 10.14 Agreement for Transfer of Ownership, dated as of June 8, 2000, between C. P. Chemicals, Inc. (“CP”) and the Township of Woodbridge (“Township”), and related Environmental Indemnification Agreement, between CP and Township, and Lease, between Township and CP(2)
 
 10.15 Stockholders’ Agreement, dated as of January 5, 2000, among shareholders of Penick Holding Company (“PHC”), and Certificate of Incorporation of PHC and Certificate of Designation, Preferences and Rights of Series A Redeemable Cumulative Preferred Stock of PHC(2)

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Exhibit No. Description of Exhibit
   
 
 10.16 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant, and various exhibits and certain Schedules thereto(3)†
 
 10.16.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant(10)
 
 10.17 Stock Purchase Agreement, dated as of November 30, 2000, between Registrant and the Purchasers (as defined therein)(4)
 
 10.18 Stockholders’ Agreement, dated as of November 30, 2000, among Registrant, the Investor Stockholders (as defined therein) and Jack C. Bendheim(4)
 
 10.19 United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001(5)
 
 10.19.1 Amendment No. 1 to United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001(6)
 
 10.20 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001(5)
 
 10.21 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001(5)
 
 10.22 Amended and Restated Management and Advisory Services Agreement dated as of October 21, 2003 between Registrant and Palladium Capital Management, L.L.C.(15)††
 
 10.23 Employment Agreement, dated May 28, 2002, by and between Registrant and Gerald K. Carlson(8)††
 
 10.24 Consulting Agreement dated as of November 1, 2004, by and between Registrant and David McBeath(19)††
 
 10.25 Consulting Agreement dated as of December 13, 2004, by and between Registrant and David McBeath(19)††
 
 10.26 Stock Purchase Agreement, dated August 14, 2003, by and between Registrant and Cemex, Inc.(9)
 
 10.27 Loan and Security Agreement, dated October 21, 2003, by and among, the lenders identified on the signature pages thereto, Wells Fargo Foothill, Inc., and Registrant, and each of Registrant’s Subsidiaries identified on the signature pages thereto(12)
 
 10.27.1 Amendment Number One to Loan and Security Agreement dated November 14, 2003(12)
 
 10.27.2 Amendment Number Two to Loan and Security Agreement dated April 29, 2004(14)
 
 10.27.3 Amendment Number Three to Loan and Security Agreement dated as of September 24, 2004(16)
 
 10.27.4 Amendment Number Four to Loan and Security Agreement dated December 20, 2004(18)
 
 10.28 Intercreditor and Lien Subordination Agreement, dated as of October 21, 2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA, Registrant and those certain subsidiaries of the Registrant party thereto(12)
 
 10.28.1 Amendment One to Intercreditor Agreement dated December 20, 2004(18)
 
 10.29 Purchase and Sale Agreement dated as of December 26, 2003 by and among Registrant, Prince MFG, LLC, (“Prince MFG”), The Prince Manufacturing Company (“Prince” and together with Registrant and Prince MFG, the “Phibro Parties”), Palladium Equity Partners II, L.P. (“PEP II”), Palladium Equity Partners II-A, L.P., (“PEP II-A”), Palladium Equity Investors II, L.P., (“PEI II”, and together with PEP II and PEP II-A, the “Investor Stockholders”), and Prince Mineral Company, Inc. (“Buyer”)(15)
 
 10.30 Environmental Indemnification Agreement dated as of December 26, 2003 between the Phibro Parties (as defined therein) and Buyer(15)
 
 10.31 Amendment to Stockholders Agreement dated as of December 26, 2003 between Registrant, the Investor Stockholders and Jack Bendheim(15)
 
 10.32 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and Registrant(15)††
 
 10.33 Business Purchase Agreement by and between Phibro Animal Health SA and GlaxoSmithKline Biologicals SA, dated December 16, 2004(20)*

55


     
Exhibit No. Description of Exhibit
   
 
 10.34 Redemption Agreement, dated as of February 28, 2005, among the Registrant, PAHC Holdings Corporation, Palladium Capital Management, L.L.C., Palladium Equity Partners II, L.P., Palladium Equity Partners II-A, L.P., Palladium Equity Investors II, L.P., Jack C. Bendheim and Marvin S. Sussman(21)
 
 10.35 Agreement for the Sale and Purchase of the Entire Share Capital in Wychem Limited dated as of April 29, 2005 among Ferro Metal and Chemical Corporation Limited, Koffolk (1949) Limited and MRG Holdings Limited(22)
 
 21  List of Subsidiaries
 
 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 Registrant
(1)   Filed as an Exhibit to the Registrant’s Registration Statement on Form S-4, No. 333-64641.
(2)   Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
(3)   Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2000.
(4)   Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated November 30, 2000.
(5)   Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2001.
(6)   Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 14, 2001.
(7)   Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
(8)   Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
(9)   Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated September 11, 2003, as amended by the Registrant’s Form 8-K/ A dated June 2, 2004.
(10) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003.
(11) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated October 2, 2003.
(12) Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2003.
(13) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated October 31, 2003.
(14) Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2004.
(15) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated January 12, 2004.
(16) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.
(17) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 8, 2004.
(18) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 23, 2004.
(19) Filed as an Exhibit to the Registrant’s Registration Statement on Form S-4, No. 333-122063.
(20) Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
(21) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated February 28, 2005.
(22) Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.

56


*A request for confidential treatment has been made for certain portions of such document. Confidential portions have been omitted and filed separately with the SEC in accordance with Rule 24b-2 under the Securities Exchange Act
A request for confidential treatment has been granted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 406(b).
††      This Exhibit is a management contract or compensatory plan or arrangement.

57


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
F-2
F-3
F-4
F-5
F-6
F-7
Financial Statement Schedules and Reports on Form 8-K (a) Exhibits Exhibit No. DescriptionStatements of Exhibit 3.1 Composite Certificate of Incorporation of Registrant (15) 3.2 By-laws of Registrant (1) 4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of Company (1) 4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant (10) 4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant (10) 4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant (10) 4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, amongCertain Phibro Animal Health Corporation Affiliates
      The following financial statements of Phibro Animal Health SA, a corporation organized under the Guarantors named thereinlaws of Belgium, and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008an indirect, wholly owned subsidiary of Registrant. (11) 4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Phibro Animal Health Corporation, are included pursuant to Regulation S-X Rule 3-16 of the Guarantors named therein and JPMorgan Chase Bank, as trustee, relatingExchange Act, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.” See Notes to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant. (12) 4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Phibro Animal Health Corporation the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant. (16) 4.2 Indenture, dated as of October 21, 2003, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent. (13) 4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent. (16) Certain instruments which define the rights of holders of long-term debt of Registrant and its consolidated subsidiaries have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis, as of June 30, 2004. For a description of such indebtedness, see Note 9 of Notes to Consolidated Financial Statements. Registrant hereby agrees to furnish copies of such instruments to the Securities and Exchange Commission upon its request. 10.1 [Reserved] 10.2 Manufacturing Agreement, dated May 15, 1994, by and between Merck & Co., Inc., Koffolk, Ltd., and Registrant (1)+ 10.3 Lease, dated July 25, 1986, between Registrant and 400 Kelby Associates, as amended December 1, 1986 and December 30, 1994 (1) 10.4 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech, Inc., as amended May 1998 (1) 10.5 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel Land Administration (1) 48 10.6 Master Lease Agreement, dated February 27, 1998, between General Electric Capital Corp., Registrant and Phibro-Tech, Inc. (1) 10.7 Stockholders Agreement, dated December 29, 1987, by and between Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman (1) 10.8 Employment Agreement, dated December 29, 1987, by and between Registrant and Marvin S. Sussman (1)++ 10.9 Stockholders Agreement, dated February 21, 1995, between James O. Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1) 10.10 Form of Severance Agreement, dated as of February 21, 1995, between Registrant and James O. Herlands (1)++ 10.11 Agreement of Limited Partnership of First Dice Road Company, dated June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S. Sussman and James O. Herlands, as amended November 1985 (1) 10.12 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan Trust, dated as of January 1, 1994, by and between Registrant on its own behalf and on behalf of C.P. Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated March 18, 1994 ("Retirement Income and Deferred Compensation Plan") (1)++ 10.12.1 First, Second and Third Amendments to Retirement Income and Deferred Compensation Plan. (2)++ 10.13 Form of Executive Income Deferred Compensation Agreement, each dated March 11, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman (1)++ 10.14 Form of Executive Income Split Dollar Agreement, each dated March 1, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman (1)++ 10.15 [Reserved] 10.16 Administrative Consent Order, dated March 11, 1991, issued by the State of New Jersey Department of Environmental Protection, Division of Hazardous Waste Management, to C.P. Chemicals, Inc. (1) 10.17 Agreement for Transfer of Ownership, dated as of June 8, 2000, between C. P. Chemicals, Inc. ("CP") and the Township of Woodbridge ("Township"), and related Environmental Indemnification Agreement, between CP and Township, and Lease, between Township and CP (2) 10.18 Stockholders' Agreement, dated as of January 5, 2000, among shareholders of Penick Holding Company ("PHC"), and Certificate of Incorporation of PHC and Certificate of Designation, Preferences and Rights of Series A Redeemable Cumulative Preferred Stock of PHC (2) 10.19 [Reserved] 10.20 [Reserved] 10.21 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant, and various exhibits and certain Schedules thereto (3)+ 10.21.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant (10) 10.22 Stock Purchase Agreement, dated as of November 30, 2000, between Registrant and the Purchasers (as defined therein) (4) 10.23 Stockholders' Agreement, dated as of November 30, 2000, among Registrant, the Investor Stockholders (as defined therein) and Jack C. Bendheim (4) 10.24 United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001 (5) 49 10.24.1 Amendment No. 1 to United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001 (6) 10.25 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001 (5) 10.26 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001 (5) 10.27 Management and Advisory Services Agreement dated November 30, 2000 between Registrant and Palladium Equity Partners, L.L.C. (7)++ 10.27.1 Amended and Restated Management Services Agreement dated as of October 21, 2003 between Registrant and Palladium Capital Management, L.L.C. (15)++ 10.28 Employment Agreement, dated May 28, 2002, by and between Registrant and Gerald K. Carlson (8)++ 10.29 Agreement dated as of May 2, 2003, by and between PAH Management Company, Ltd. and David McBeath (10) ++ 10.30 Stock Purchase Agreement, dated August 14, 2003, by and between Registrant and Cemex, Inc. (9) 10.31 Loan and Security Agreement, dated October 21, 2003, by and among, the lenders identified on the signature pages thereto, Wells Fargo Foothill, Inc., and Phibro Animal Health Corporation ("Parent"), and each of Parent's Subsidiaries identified on the signature pages thereto. (12) 10.31.1 Amendment Number One to Loan and Security Agreement dated November 14, 2003. (12) 10.31.2 Amendment Number Two to Loan and Security Agreement dated April 29, 2004. (14) 10.31.3 Amendment Number Three to Loan and Security Agreement dated as of September 24, 2004. (16) 10.32 Intercreditor and Lien Subordination Agreement, dated as of October 21, 2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA, Phibro Animal Health Corporation ("Parent") and those certain subsidiaries of the Parent party thereto. (12) 10.33 Purchase and Sale Agreement dated as of December 26, 2003 by and among Phibro Animal Health Corporation ("PAHC"), Prince MFG, LLC, ("Prince MFG"), The Prince Manufacturing Company ("Prince" and together with PAHC and Prince MFG, the "Phibro Parties"), Palladium Equity Partners II, L.P. ("PEP II"), Palladium Equity Partners II-A, L.P., ("PEP II-A"), Palladium Equity Investors II, L.P., ("PEI II", and together with PEP II and PEP II-A, the "Investor Stockholders"), and Prince Mineral Company, Inc. ("Buyer"). (15) 10.34 Environmental Indemnification Agreement dated as of December 26, 2003 between the Phibro Parties (as defined therein) and Buyer. (15) 10.35 Amendment to Stockholders Agreement dated as of December 26, 2003 between PAHC, the Investor Stockholders and Jack Bendheim (15) 10.36 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and PAHC(15)++ 21 List of Subsidiaries (16) 31.1 Certification of Gerald K. Carlson, Chief Executive Officer required by Rule 15d-14(a) of the Act (16) 31.2 Certification of Jack C. Bendheim, Chairman of the Board required by Rule 15d-14(a) of the Act (16) 31.3 Certification of Richard G. Johnson, Chief Financial Officer required by Rule 15d-14(a) of the Act (16) - ---------- 1 Filed as an Exhibit to the Registrant's Registration Statement on Form S-4, No. 333-64641. 2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. 50 3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. 4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated November 30, 2000. 5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2001. 6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated June 14, 2001. 7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. 8 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. 9 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2, 2004. 10 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. 11 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 2, 2003. 12 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2003. 13 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 31, 2003. 14 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2004. 15 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated January 12, 2004. 16 Filed herewith. + A request for confidential treatment has been granted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 406(b). ++ This Exhibit is a management compensatory plan or arrangement. Since the Company does not have securities registered under Section 12 of the Securities Exchange Act of 1934 and is not required to file periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company is not filing the written certification statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The Company submits periodic reports with the Securities and Exchange Commission because it is required to do so by the terms of the indenture governing its senior subordinated notes. (b) Financial Statement Schedules All supplemental schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the financial statements or notes thereto or in other supplemental schedules. (c) Reports on Form 8-K. The Company filed a Form 8-K/A on June 2, 2004 reporting Item 7 to withdraw its application for confidential treatment of certain portions of a Stock Purchase Agreement. The Company did furnish reports on Form 8-K since then. On July 2, 2004 the Company furnished a report on Form 8-K reporting items 5 to disclose the filing of bankruptcy for La Cornubia. 51 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of June 30, 2004 and 2003 F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2004, 2003 and 2002 F-4 Consolidated Statements of Changes in Stockholders' Deficit for the years ended June 30, 2004, 2003 and 2002 F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002 F-6 Notes to Consolidated Financial Statements F-7 statements.
F-48
F-49
F-50
F-51
F-52
F-53

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Phibro Animal Health Corporation:
      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders'stockholders’ deficit and cash flows present fairly, in all material respects, the financial position of Phibro Animal Health Corporation and its subsidiaries at June 30, 20042005 and 2003,2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004,2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company'sCompany’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 27, 2004 23, 2005

F-2


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS As of June 30, 2004 and 2003 (In Thousands) 2004 2003 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,568 $ 11,179 Trade receivables, less allowance for doubtful accounts of $1,358 and $1,437 at June 30, 2004 and 2003, respectively 57,658 52,714 Other receivables 2,766 3,503 Inventories 79,910 87,849 Prepaid expenses and other current assets 8,688 9,868 Current assets from discontinued operations -- 9,276 --------- --------- TOTAL CURRENT ASSETS 154,590 174,389 PROPERTY, PLANT AND EQUIPMENT, net 58,786 63,905 INTANGIBLES 11,695 8,669 OTHER ASSETS 16,298 14,059 OTHER ASSETS FROM DISCONTINUED OPERATIONS -- 13,325 --------- --------- $ 241,369 $ 274,347 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Cash overdraft $ 891 $ 1,686 Loans payable to banks 10,996 37,878 Current portion of long-term debt 1,351 24,124 Accounts payable 46,972 55,355 Accrued expenses and other current liabilities 40,010 40,699 Current liabilities from discontinued operations -- 5,557 --------- --------- TOTAL CURRENT LIABILITIES 100,220 165,299 LONG-TERM DEBT 158,018 102,263 OTHER LIABILITIES 22,286 21,241 OTHER LIABILITIES FROM DISCONTINUED OPERATIONS -- 1,173 --------- --------- TOTAL LIABILITIES 280,524 289,976 --------- --------- COMMITMENTS AND CONTINGENCIES REDEEMABLE SECURITIES: Series B and C preferred stock 24,678 68,881 --------- --------- STOCKHOLDERS' DEFICIT: Preferred stock - $100 par value, 150,543 shares authorized, none issued 521 521 at June 30, 2004 and 2003; Series A preferred stock - $100 par value, 6% non-cumulative, 5,207 shares authorized, issued and outstanding at June 30, 2004 and 2003 Common stock - $0.10 par value, 30,300 authorized and 24,488 shares issued 2 2 and outstanding at June 30, 2004 and 2003 Paid-in capital 860 860 Accumulated deficit (57,964) (79,489) Accumulated other comprehensive income (loss): Gain on derivative instruments, net of tax 9 81 Cumulative foreign currency translation adjustment (7,261) (6,485) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (63,833) (84,510) --------- --------- $ 241,369 $ 274,347 ========= =========
            
  As of June 30,
   
  2005 2004
     
  (In thousands)
ASSETS
CURRENT ASSETS:        
 Cash and cash equivalents $13,001  $5,568 
 Trade receivables, less allowance for doubtful accounts of $1,372 and $1,358 at June 30, 2005 and 2004, respectively  52,806   57,217 
 Other receivables  3,611   2,766 
 Inventories  96,621   78,562 
 Prepaid expenses and other current assets  12,787   8,591 
 Current assets from discontinued operations     1,886 
       
   TOTAL CURRENT ASSETS  178,826   154,590 
PROPERTY, PLANT AND EQUIPMENT, net  49,960   55,381 
INTANGIBLES, net  10,201   11,695 
OTHER ASSETS  14,070   16,298 
OTHER ASSETS FROM DISCONTINUED OPERATIONS     3,405 
       
  $253,057  $241,369 
       
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:        
 Cash overdraft $190  $891 
 Loans payable to banks  8,038   10,996 
 Current portion of long-term debt  1,625   1,351 
 Accounts payable  36,347   46,764 
 Accrued expenses and other current liabilities  53,815   39,380 
 Current liabilities from discontinued operations     838 
       
   TOTAL CURRENT LIABILITIES  100,015   100,220 
LONG-TERM DEBT  176,501   158,018 
OTHER LIABILITIES  21,465   22,286 
       
   TOTAL LIABILITIES  297,981   280,524 
       
COMMITMENTS AND CONTINGENCIES        
REDEEMABLE SECURITIES:        
 Series C preferred stock     24,678 
       
STOCKHOLDERS’ DEFICIT:        
 Preferred stock — $100 par value, 150,543 shares authorized, none issued at June 30, 2005 and 2004; Series A preferred stock — $100 par value, 6% non-cumulative, 5,207 shares authorized, issued and outstanding at June 30, 2005 and 2004  521   521 
 Common stock — $0.10 par value, 30,300 authorized and 24,488 shares issued and outstanding at June 30, 2005 and 2004  2   2 
 Paid-in capital  27,260   860 
 Accumulated deficit  (74,379)  (57,964)
 Accumulated other comprehensive income (loss):        
  Gain on derivative instruments, net of income taxes  123   9 
  Cumulative foreign currency translation adjustment, net of income taxes  1,549   (7,261)
       
   TOTAL STOCKHOLDERS’ DEFICIT  (44,924)  (63,833)
       
  $253,057  $241,369 
       
The accompanying notes are an integral part of the consolidated financial statements

F-3


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Years Ended June 30, 2004, 2003 and 2002 (In Thousands)
2004 2003 2002 --------- --------- --------- NET SALES $ 358,274 $ 341,746 $ 328,676 COST OF GOODS SOLD 267,871 251,200 247,411 --------- --------- --------- GROSS PROFIT 90,403 90,546 81,265 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (includes litigation income of $3,040 in 2003 and $742 in 2002) 66,128 65,050 70,636 COSTS OF NON-COMPLETED TRANSACTION 5,261 -- -- --------- --------- --------- OPERATING INCOME 19,014 25,496 10,629 OTHER: Interest expense 18,618 16,281 18,070 Interest (income) (130) (85) (346) Other (income) expense, net (781) 1,539 3,349 Net (gain) on extinguishment of debt (23,226) -- -- --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 24,533 7,761 (10,444) PROVISION FOR INCOME TAXES 7,969 10,060 14,767 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS 16,564 (2,299) (25,211) DISCONTINUED OPERATIONS: (Loss) from discontinued operations (net of income taxes) (1,625) (14,577) (26,559) (Loss) on disposal of discontinued operations (net of income taxes) (2,089) (683) -- --------- --------- --------- NET INCOME (LOSS) 12,850 (17,559) (51,770) OTHER COMPREHENSIVE INCOME (LOSS): Change in derivative instruments, net of tax (72) (981) 1,062 Change in currency translation adjustment (776) 7,377 (6,125) --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ 12,002 $ (11,163) $ (56,833) ========= ========= ========= NET INCOME (LOSS) 12,850 (17,559) (51,770) Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions 20,138 -- -- Dividends and equity value accreted on Series B and C redeemable preferred stock (11,463) (12,278) (7,623) --------- --------- --------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 21,525 $ (29,837) $ (59,393) ========= ========= =========
              
  For the Years Ended June 30,
   
  2005 2004 2003
       
  (In thousands)
NET SALES $364,379  $354,384  $337,818 
COST OF GOODS SOLD (includes Belgium Plant Transactions costs of $22,191 for the year ended June 30, 2005)  293,086   265,217   248,577 
          
 GROSS PROFIT  71,293   89,167   89,241 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (includes litigation income of $3,040 for the year ended June 30, 2003)  66,911   63,417   63,346 
COSTS OF NON-COMPLETED TRANSACTION     5,261    
          
 OPERATING INCOME  4,382   20,489   25,895 
OTHER:            
 Interest expense  25,342   20,724   17,455 
 Interest (income)  (120)  (130)  (85)
 Other (income) expense, net  (1,859)  (788)  1,548 
 Net (gain) on extinguishment of debt     (23,226)   
          
 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  (18,981)  23,909   6,977 
PROVISION FOR INCOME TAXES  2,120   7,804   9,830 
          
 INCOME (LOSS) FROM CONTINUING OPERATIONS  (21,101)  16,105   (2,853)
DISCONTINUED OPERATIONS:            
 Income (loss) from discontinued operations, net of income taxes  671   (1,166)  (14,023)
 Income (loss) on disposal of discontinued operations, net of income taxes  765   (2,089)  (683)
          
 NET INCOME (LOSS)  (19,665)  12,850   (17,559)
OTHER COMPREHENSIVE INCOME (LOSS):            
 Change in derivative instruments, net of income taxes  114   (72)  (981)
 Change in currency translation adjustment, net of income taxes  8,810   (776)  7,377 
          
 COMPREHENSIVE INCOME (LOSS) $(10,741) $12,002  $(11,163)
          
 NET INCOME (LOSS)  (19,665)  12,850   (17,559)
Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions  4,973   20,138    
Dividends and equity value accreted on Series B and C redeemable preferred stock  (1,723)  (11,463)  (12,278)
          
 NET INCOME AVAILABLE (LOSS ATTRIBUTABLE) TO COMMON SHAREHOLDERS $(16,415) $21,525  $(29,837)
          
The accompanying notes are an integral part of the consolidated financial statements

F-4


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ DEFICIT
For the Years Ended June 30, 2005, 2004 2003 and 2002 (In Thousands)
Common Retained Preferred Stock Earnings Accumulated Other Stock ----------------- Paid-in (Accumulated Comprehensive Series A Class A Class B Capital Deficit) (Loss) income Total -------- ------- ------- ------- -------- ------------- ----- BALANCE, JUNE 30, 2001 $ 521 $ 1 $ 1 $ 878 $ 9,741 $ (7,737) $ 3,405 Dividends on Series B and C redeemable preferred stock (7,623) (7,623) Change in derivative instruments, net of tax 1,062 1,062 Foreign currency translation adjustment (6,125) (6,125) Receivable from principal shareholder (138) (138) Net (loss) (51,770) (51,770) ----- --- --- ----- --------- --------- --------- BALANCE, JUNE 30, 2002 $ 521 $ 1 $ 1 $ 740 $ (49,652) $ (12,800) $ (61,189) ===== === === ===== ========= ========= ========= Dividends on Series B and C redeemable preferred stock (8,808) (8,808) Equity value accreted on Series B and C redeemable preferred stock (3,470) (3,470) Change in derivative instruments, net of tax (981) (981) Foreign currency translation adjustment 7,377 7,377 Payable to principal shareholder 120 120 Net (loss) (17,559) (17,559) ----- --- --- ----- --------- --------- --------- BALANCE, JUNE 30, 2003 $ 521 $ 1 $ 1 $ 860 $ (79,489) $ (6,404) $ (84,510) ===== === === ===== ========= ========= ========= Excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions 20,138 20,138 Dividends on Series B and C redeemable preferred stock (6,042) (6,042) Equity value accreted on Series B and C redeemable preferred stock (5,421) (5,421) Change in derivative instruments, net of tax (72) (72) Foreign currency translation adjustment (776) (776) Net income 12,850 12,850 ----- --- --- ----- --------- --------- --------- BALANCE, JUNE 30, 2004 $ 521 $ 1 $ 1 $ 860 $ (57,964) $ (7,252) $ (63,833) ===== === === ===== ========= ========= =========
2003
                              
  Preferred Common Stock     Accumulated Other  
  Stock   Paid-in (Accumulated Comprehensive  
  Series A Class A Class B Capital Deficit) (Loss) Income Total
               
  (In thousands)
BALANCE, JUNE 30, 2002 $521  $1  $1  $740  $(49,652) $(12,800) $(61,189)
 Dividends on Series B and C redeemable preferred stock                  (8,808)      (8,808)
 Equity value accreted on Series B and C redeemable preferred stock                  (3,470)      (3,470)
 Change in derivative instruments, net of income taxes                      (981)  (981)
 Foreign currency translation adjustment, net of income taxes                      7,377   7,377 
 Payable to principal shareholder              120           120 
 Net (loss)                  (17,559)      (17,559)
                      
BALANCE, JUNE 30, 2003 $521  $1  $1  $860  $(79,489) $(6,404) $(84,510)
                      
 Excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions                  20,138       20,138 
 Dividends on Series B and C redeemable preferred stock                  (6,042)      (6,042)
 Equity value accreted on Series B and C redeemable preferred stock                  (5,421)      (5,421)
 Change in derivative instruments, net of income taxes                      (72)  (72)
 Foreign currency translation adjustment, net of income taxes                      (776)  (776)
 Net income                  12,850       12,850 
                      
BALANCE, JUNE 30, 2004 $521  $1  $1  $860  $(57,964) $(7,252) $(63,833)
                      
 Capital contribution from PAHC Holdings Corporation              26,400           26,400 
 Excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions                  4,973       4,973 
 Dividends on Series C redeemable preferred stock                  (1,813)      (1,813)
 Equity value accreted on Series C redeemable preferred stock                  90       90 
 Change in derivative instruments, net of income taxes                      114   114 
 Foreign currency translation adjustment, net of income taxes                      8,810   8,810 
 Net (loss)                  (19,665)      (19,665)
                      
BALANCE, JUNE 30, 2005 $521  $1  $1  $27,260  $(74,379) $1,672  $(44,924)
                      
The accompanying notes are an integral part of the consolidated financial statements

F-5


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2004, 2003 and 2002 (In Thousands)
2004 2003 2002 --------- --------- --------- OPERATING ACTIVITIES: Net income (loss) $ 12,850 $ (17,559) $ (51,770) Adjustment for discontinued operations 3,714 15,260 26,559 --------- --------- --------- Income (loss) from continuing operations 16,564 (2,299) (25,211) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization 13,183 12,524 12,355 Deferred income taxes 326 6,460 11,238 Net gain from sales of assets (692) (127) (5) Net gain on extinguishment of debt (23,226) -- -- Change in redemption amount of redeemable common stock -- -- (378) Effects of changes in foreign currency (548) 390 2,120 Other 1,114 387 2,416 Changes in operating assets and liabilities: Accounts receivable (7,222) 3,810 6,046 Inventories 3,660 (1,598) (13,991) Prepaid expenses and other current assets (314) (3,122) (2,819) Other assets (3,079) (2,632) 2,667 Accounts payable (5,650) 20,503 (6,606) Accrued expenses and other liabilities 6,965 (355) 8,511 Accrued costs of non-completed transaction 3,970 -- -- Cash provided (used) by discontinued operations (2,189) 716 (1,088) --------- --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,862 34,657 (4,745) --------- --------- --------- INVESTING ACTIVITIES: Capital expenditures (6,244) (8,636) (8,518) Acquisition of a business, net of cash acquired -- -- (7,182) Proceeds from property damage claim -- -- 411 Proceeds from sale of assets 1,094 2,565 19 Other investing (655) 737 580 Discontinued operations 14,875 1,363 (2,671) --------- --------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 9,070 (3,971) (17,361) --------- --------- --------- FINANCING ACTIVITIES: Net increase (decrease) in cash overdraft (795) (6,081) 3,438 Net increase (decrease) in short-term debt (26,954) (6,660) 14,237 Proceeds from long-term debt 109,661 2,000 2,322 Payments of long-term debt (35,453) (16,014) (4,730) Payment of Pfizer obligations (28,300) -- -- Payments relating to the Prince Transactions and related costs (21,393) -- -- Debt refinancing costs (15,548) -- -- Discontinued operations 1,005 377 (1,590) --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (17,777) (26,378) 13,677 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 234 452 3 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,611) 4,760 (8,426) CASH AND CASH EQUIVALENTS at beginning of period 11,179 6,419 14,845 --------- --------- --------- CASH AND CASH EQUIVALENTS at end of period $ 5,568 $ 11,179 $ 6,419 ========= ========= ========= Supplemental Cash Flow Information: Interest paid $ 17,578 $ 16,104 $ 17,003 Income taxes paid 4,755 3,046 2,629
                
  For the Years Ended June 30,
   
  2005 2004 2003
       
  (In thousands)
OPERATING ACTIVITIES:            
 Net income (loss) $(19,665) $12,850  $(17,559)
 Adjustment for discontinued operations  (1,436)  3,255   14,706 
          
 Income (loss) from continuing operations  (21,101)  16,105   (2,853)
 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 $7,467 for the year ended June 30, 2005)  18,106   10,658   10,986 
  Amortization of deferred financing costs  2,974   2,106   1,174 
  Deferred income taxes  (1,018)  326   6,460 
  Net gain from sales of assets  (1,542)  (692)  (127)
  Net gain on extinguishment of debt     (23,226)   
  Effects of changes in foreign currency  (699)  (548)  390 
  Other  852   1,114   387 
  Changes in operating assets and liabilities:            
   Accounts receivable  4,399   (7,458)  3,907 
   Inventories  (14,251)  3,776   (1,527)
   Prepaid expenses and other current assets  (2,780)  (260)  (3,107)
   Other assets  117   (3,079)  (2,632)
   Accounts payable  (8,854)  (5,730)  20,479 
   Accrued expenses and other liabilities  7,177   7,129   (1,010)
   Accrued costs of non-completed transaction  (3,970)  3,970    
   Accrued costs of the Belgium Plant Transactions  13,309       
 Cash provided (used) by discontinued operations  1,022   (1,329)  2,130 
          
   NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES  (6,259)  2,862   34,657 
          
INVESTING ACTIVITIES:            
 Capital expenditures  (7,489)  (6,129)  (8,507)
 Proceeds from sales of assets  3,817   1,087   2,564 
 Other investing  (1,101)  (655)  737 
 Discontinued operations  4,795   14,767   1,235 
          
   NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES  22   9,070   (3,971)
          
FINANCING ACTIVITIES:            
 Net (decrease) in cash overdraft  (701)  (795)  (6,081)
 Net (decrease) in short-term debt  (2,958)  (26,954)  (6,660)
 Proceeds from long-term debt  24,292   109,661   2,000 
 Payments of long-term debt  (4,667)  (35,453)  (16,014)
 Proceeds from capital contribution by PAHC Holdings Corporation  26,400       
 Redemption of Series C preferred stock  (26,400)      
 Payment of Pfizer obligations     (28,300)   
 Payments relating to the Prince Transactions and related costs     (21,393)   
 Debt financing costs  (2,216)  (15,548)   
 Discontinued operations     1,005   377 
          
   NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES  13,750   (17,777)  (26,378)
          
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (80)  234   452 
          
   NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  7,433   (5,611)  4,760 
CASH AND CASH EQUIVALENTS at beginning of period  5,568   11,179   6,419 
          
CASH AND CASH EQUIVALENTS at end of period $13,001  $5,568  $11,179 
          
Supplemental Cash Flow Information:            
 Interest paid $21,381  $17,578  $16,104 
 Income taxes paid  1,653   4,531   2,674 
The accompanying notes are an integral part of the consolidated financial statements

F-6


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In
(In Thousands) 1.
1.Description of Business
      Phibro Animal Health Corporation (the "Company"“Company” or "PAHC"“PAHC”) is a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives ("MFA"(“MFA”) and nutritional feed additives ("NFA"(“NFA”), which the Company sells throughout the world predominately to the poultry, swine and cattle markets. The Company is also a specialty chemicals manufacturer and marketer, serving numerous markets. 2. Summary
      The Company is a wholly-owned subsidiary of Significant Accounting Policies PAHC Holdings Corporation, which was formed in February 2005, as discussed in these notes to consolidated financial statements.
2.Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation:
      The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
      The Company consolidates the financial statements of Koffolk (1949) Ltd. (Israel) ("Koffolk"(“Koffolk”) and Planalquimica Industrial Ltda. (Brazil) ("Planalquimica"(“Planalquimica”) on the basis of their March 31 fiscal year-ends to facilitate the timely inclusion of such entities in the Company'sCompany’s consolidated financial reporting.
      The Company'sCompany’s Odda Smelteverk (Norway) ("Odda"(“Odda”), Carbide Industries (U.K.) ("Carbide"(“Carbide”), Mineral Resource Technologies, Inc. ("MRT"(“MRT”), and La Cornubia S.A. (France) ("(“La Cornubia"Cornubia”) and Wychem Limited (U.K.) (“Wychem”) businesses have been classified as discontinued operations as discussed in Note 5.operations. The Company'sCompany’s consolidated financial statements have been reclassifiedrevised to report separately the operating results, financial position and cash flows of the discontinued operations. These footnotes present information only for continuing operations, unless otherwise indicated.
      The Company presents its consolidated financial statements on the basis of its fiscal year ending June 30. All references to years 2005, 2004, 2003, and 20022003 in these financial statements refer to the fiscal year ended June 30 of that year.
Risks, Uncertainties and Liquidity:
      The Company'sCompany’s ability to fund its operating plan relies upon the continued availability of borrowing under the domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the amendeddomestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's 2005Company’s 2006 operating plan projects adequate liquidity throughout the year, with periods of reduced availability around the dates of the semi-annual interest payments due NovemberDecember 1 2004 and June 1 2005.related to its senior secured notes and its 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 would be available as needed. The Company has also undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future flexibility and reduce costs. There can be no assurance the Company will be successful in any of the above-noted actions.
      The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company'sCompany’s business. Should regulatory or other developments result in

F-7


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
further restrictions on the sale of such products, it could have a material adverse impact on the Company'sCompany’s financial position, results of operations and cash flows.
      The testing, manufacturing, and marketing of certain products are subject to extensive regulation by numerous government authorities in the United States and other countries. F-7 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
      The Company has significant assets located outside of the United States, and a significant portion of the Company'sCompany’s sales and earnings are attributable to operations conducted abroad.
      The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company.
      The Company'sCompany’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'sCompany’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.
Use of Estimates:
      Preparation of the Company'sCompany’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates include reserves for bad debts, inventory obsolescence, environmental matters, depreciation and amortization periods of long-lived assets, recoverability of long-lived assets, realizability of deferred tax assets and actuarial assumptions related to the Company'sCompany’s pension plans.
Revenue Recognition:
      Revenue is recognized upon transfer of title and when risk of loss passes to the customer. Certain of the Company’s subsidiaries have terms of FOB shipping point where title and risk of loss transfer on shipment. Certain of the Company’s subsidiaries have terms FOB destination where title and risk of loss transfer on delivery. In the case of FOB destination, revenue is not recognized until products are received by the customer. Additional conditions for recognition of revenue are that collection of sales proceeds are reasonably assured and the Company has no further performance obligations. The Company records estimated reductions to revenue for customer generallyprograms and incentive offerings, including pricing arrangements and other volume-based incentives at the time of shipment. Net sales reflect total sales billed, lessthe sale is recorded. There were no material provisions for estimated reductions for goods returned, trade discountsto revenues in 2005, 2004 and customer allowances. 2003.
Cash and Cash Equivalents:
      Cash equivalents include highly liquid investments with maturities of three months or less when purchased.
Accounts Receivable and Allowance for Doubtful Accounts:
      Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company'sCompany’s best estimate of the probable credit losses in its existing accounts

F-8


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
receivable. The allowance is based on historical write-off experience and is reviewed periodically. Past due balances are reviewed individually for collectibility. Account balances are charged against the allowance when the Company feels thatdetermines it is probable that the receivable will not be recovered. Receivables consist of the following: As of ---------------------------------- June 30, 2004 June 30, 2003 ------------- ------------- Trade receivables $57,658 $52,714 Employee receivables 256 267 Other receivables 2,510 3,236 ------- ------- Total receivables $60,424 $56,217 ======= =======are comprised of:
         
  As of June 30,
   
  2005 2004
     
Trade receivables $52,806  $57,217 
Employee receivables  474   256 
Other receivables  3,137   2,510 
       
Total receivables $56,417  $59,983 
       
      The allowance for doubtful accounts was: 2004 2003 2002 ------- ------- ------- Balance at beginning of period $ 1,437 $ 1,461 $ 1,760 Provision for bad debts 565 347 979 Bad debt write-offs (644) (371) (1,278) ------- ------- ------- Balance at end of period $ 1,358 $ 1,437 $ 1,461 ======= ======= ======= F-8 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
             
  For the Years Ended June 30,
   
  2005 2004 2003
       
Balance at beginning of period $1,358  $1,437  $1,461 
Provision for bad debts  258   565   347 
Bad debt write-offs  (244)  (644)  (371)
          
Balance at end of period $1,372  $1,358  $1,437 
          
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; cost for certain inventories is determined under the last-in, first-out (LIFO) method. Inventories valued at LIFO amounted to $0 and $3,805 at June 30, 2004 and 2003, respectively.methods. Obsolete and unsaleable inventories, if any, are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of: As of ------------------------------- June 30, 2004 June 30, 2003 ------------- ------------- Raw materials $ 16,313 $ 21,668 Work-in-process 1,764 1,565 Finished goods 61,833 65,248 Excess of FIFO cost over LIFO cost -- (632) -------- -------- Total inventory $ 79,910 $ 87,849 ======== ========
         
  As of June 30,
   
  2005 2004
     
Raw materials $23,703  $16,038 
Work-in-process  434   1,468 
Finished goods  72,484   61,056 
       
Total inventory $96,621  $78,562 
       
Property, Plant and Equipment:
      Property, plant and equipment are stated at cost. The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. InterestNo interest expense was capitalized was $0, $0in 2005, 2004 and $106 in 2004, 2003 and 2002, respectively.2003.
      Depreciation is charged to results of operations using the straight-line method based upon the assets'assets’ estimated useful lives ranging from 8 to 20 years for buildings and improvements and 3 to 10 years for machinery and equipment.
      The Company capitalizes costs that extend the useful life or productive capacity of an asset. Repair and maintenance costs are expensed as incurred. In the case of disposals, the assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in the statements of operations and comprehensive income (loss).

F-9


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Financing Costs:
      Deferred financing costs related to the senior secured notes and senior subordinated notes are amortized over the respective lives of the notes. Deferred financing costs related to the domestic senior credit facility are amortized over the life of the agreement.
      Amortization of deferred financing costs was $2,974, $2,106 and $1,174 for 2005, 2004 and 2003, respectively, and is included in interest expense in the Company’s consolidated statements of operations and comprehensive income (loss). Amortization of deferred financing costs was previously included in corporate general and administrative expenses. Prior year financial statements have been revised for comparability.
Intangibles:
      Product intangibles cost arising from the MFA acquisition was $10,673 and $10,449 at June 30, 2004 and 2003, respectively, and accumulated amortization of $3,230 and $1,780 at June 30, 2004 and 2003, respectively. Amortization expense was $1,229, $964 and $816 for 2004, 2003 and 2002, respectively. Amortization expense from the MFA business of Pfizer, Inc. and the acquisition for each of the next five years from 2005 to 2009 is expected to be $1,145 per year. In May 2004 the Company acquired the rights to sell amprolium, an anticoccidial MFA, in most international markets. In payment for the acquired rights, the Company relinquished its claims against the seller for certain purchase order commitments,markets, was $14,907 and will make $2,100 of cash payments to the seller over the next five years. The present value of these payments is $1,898 and was recorded as a liability. The $2,354 value of the purchase order commitments was recorded as a reduction in cost of goods sold and inventory, and an intangible asset of $4,252 was recorded representing the fair value of the acquired rights and is included on the Company's balance sheet$14,925 at June 30, 2004. The Company will amortize this intangible over a 10 year period. No2005 and 2004, respectively, and accumulated amortization of $4,706 and $3,230 at June 30, 2005 and 2004, respectively. Amortization expense was recorded in 2004.$1,493, $1,229 and $964 for 2005, 2004 and 2003, respectively. Amortization expense for each of the next five years from 20052006 to 20092010 is expected to be $425approximately $1,491 per year. F-9 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
Foreign Currency Translation:
      Financial position and results of operations of the Company'sCompany’s international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in stockholders'stockholders’ deficit. Income statement accounts are translated at the average rates of exchange prevailing during the year. A business unit of
      Koffolk and all of Planalquimica operate primarily in U.S. dollars. The U.S. dollar is designated as the functional currency for these businesses and translation gains and losses are included in determining net income or loss.
      Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction and translation (gains) losses were $(116)$(284), $(116) and $789 for 2005, 2004 and $3,385 for 2004, 2003, and 2002, respectively, and were included in other expense, net in the consolidated statements of operations and comprehensive income (loss).
Derivative Financial Instruments:
      The Company records all derivative financial instruments on the consolidated balance sheet at fair value. Changes in the fair value of derivatives are recorded in results of operations or accumulated other comprehensive income (loss), depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income (loss) are included in operations in the periods in which operations are affected by the hedged item.
Recoverability of Long-Lived Assets:
      The Company evaluates the recoverability of long-lived assets, including intangible assets, when events or circumstances indicate that a diminution in value may have occurred, using financial indicators such as historical and future ability to generate cash flows from operations. The Company'sCompany’s policy is to record an impairment loss in the period it is determined the carrying amount of the asset may not be recoverable. This

F-10


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business operates, or if the expected future net cash flows (undiscounted and without interest or income taxes) are less than the carrying amount of the assets.
Environmental Liabilities:
      Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. The Company capitalizes expenditures made to improve the condition of property, compared with the condition of that property when constructed or acquired. The Company also capitalizes expenditures that prevent future environmental contamination. Other expenditures are expensed as incurred. The Company records the expense and related liability in the period an environmental assessment indicates remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. All available evidence is considered, including prior experience in remediation of contaminated sites, other companies'companies’ experience, and data released by the U.S. Environmental Protection Agency or other organizations. When such costs will be incurred over a long-term period and can be reliably estimated as to timing, the liabilities are included in the consolidated balance sheet at their discounted amounts.
Income Taxes:
      Income tax expense includes U.S. federal, state, and foreign income taxes. The tax effect of certain temporary differences between amounts recognized for financial reporting purposes and amounts recognized for tax purposes are reported as deferred income taxes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are established as necessary to reduce deferred tax assets to amounts more likely than not to be realized. F-10 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
Research and Development Expenditures:
      Research and development expenditures are expensed as incurred, recorded in selling, general and administrative expenses and were $5,076, $4,634$5,568, $4,808 and $4,251$4,362 for 2005, 2004 and 2003, and 2002, respectively.
New Accounting Pronouncements:
      The Company adoptedwill adopt the following new and revised accounting pronouncements in fiscal 2004:2006:
      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 anticipates that the adoption of SFAS No. 151 will not result in a material impact on the Company’s financial statements.

F-11


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement.
      Statement of Financial Accounting Standards No. 123, “Share-Based Payment (revised 2004)” (“SFAS No. 123”). This Statement is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS No. 123 as originally issued, and it does not address the accounting for employee share ownership plans. This Statement applies to all awards granted after the effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. SFAS No. 123, as revised, is effective as of the beginning of the first annual reporting period that begins after December 31, 2005. The Company anticipates that the adoption of this revision of SFAS No. 123 will not result in a material impact on the Company’s financial statements.
      FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN No. 47”). FIN No. 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations (“ARO”)” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional ARO if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional ARO should be recognized when incurred; generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional ARO should be factored into the measurement of the liability when sufficient information exists. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company anticipates that the adoption of FIN No. 47 will not result in a material impact on the Company’s financial statements.
      Statement of Financial Accounting Standards No. 154, “Accounting for Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change

F-12


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed. SFAS No. 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is currently assessing the impact of this statement.
3.Refinancing
Issuance of Additional 13% Senior Secured Notes:
      On December 21, 2004, PAHC completed a private placement pursuant to which PAHC (the “Parent Issuer”) and Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of Financial Accounting Standards No. 149, "AmendmentPAHC (the “Dutch Issuer” and together with PAHC, the “Issuers”) issued and sold 22,491 additional units consisting of SFAS No. 133$18,207 13% Senior Secured Notes due 2007 of the Parent Issuer (the “U.S. Notes”) and $4,284 13% Senior Secured Notes due 2007 of the Dutch Issuer (the “Dutch Notes” and together with the U.S. Notes, the “Additional Notes”), from which they received gross proceeds of $23,391. The proceeds were used to refinance indebtedness outstanding under the PAHC’s domestic senior credit facility. PAHC incurred financing costs of $2,275 in connection with the issuance of the Additional Notes. The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the “Indenture”) under which the Issuers previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes.
      On March 9, 2005, PAHC completed the exchange of its privately placed 127,491 units of 13% Senior Secured Notes due 2007 with 127,491 new units of 13% Senior Secured Notes due 2007 that have been registered with the Securities and Exchange Commission (the “SEC”).
Amendment to the Domestic Senior Credit Facility:
      On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, PAHC 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 Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts,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 hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not result in a material impactits reduction to $17,500 on such borrowings being refinanced by the Company's financial statements. Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a financial instrument, that is within its scope, as a liability (or an asset in some circumstances). SFAS No. 150 also revises the definition of liabilities to encompass certain obligations that can, or must, be settled by issuing equity shares, depending on the natureproceeds of the relationship established betweenAdditional Notes; (iv) amend the holderPermitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to Phibro Saude International Ltda. (“PAH Brazil”) or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the issuer. The adoptionsale of SFAS No. 150 did not result in a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about PensionsBelgium Plant and Other Postretirement Benefits, an amendment to FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This revision to SFAS No. 132 relates to employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132 now requires additional disclosures to describe the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods of defined pension plans and other defined postretirement plans. The additional disclosures required by this revision to SFAS No. 132 have been provided in the notes to consolidated financial statements. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The adoption of FIN No. 46 did not result in a material impact on the Company's financial statements. 3. Refinancingrelated transactions.
Issuance of 13% Senior Secured Notes, Repurchase of 97/8% Senior Subordinated Notes, Repayment of Domestic Senior Credit Facility, and Payment of Pfizer Obligations
      On October 21, 2003, the CompanyPAHC (the “Parent Issuer”) issued 105,000 units consisting of $85,000 of 13% Senior Secured Notes due 2007 (the "US Senior Notes") and $20,000 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Notes" and, together with the US Senior Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiary of the CompanyPAHC (the "Dutch issuer"“Dutch Issuer”). The CompanyPAHC used the proceeds from the issuance to: (i) repurchase $51,971 of its 9 7/8%7/8% Senior Subordinated Notes due 2008 at a price equal to 60% of the principal amount thereof, plus accrued and unpaid interest; (ii) repay its senior credit facility of $34,888 outstanding at the repayment date; (iii) satisfy, for a payment of approximately $29,315,

F-13


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$29,315, certain of its outstanding obligations to Pfizer Inc., including: (a) $20,075 aggregate principal amount of its promissory note plus accrued and unpaid interest, (b) $9,748 of accounts payable, (c) $9,040 of accrued expenses, and (d) future contingent purchase price obligations under its agreements with Pfizer Inc. by which the Company acquired Pfizer'sPfizer’s medicated feed additive business; and (iv) pay fees and expenses relating to the above transactions. F-11 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
      A net gain on extinguishment of debt is included in the Company's condensedCompany’s consolidated statementstatements of operations and comprehensive income (loss), calculated as follows:
Net Gain on Repurchase of 9 7/8% Senior Subordinated Notes due 2008: Principal amount of repurchased notes $ 51,971 Repurchased at 60% of principal amount (31,183) Transaction costs (4,107) -------- Net gain on repurchase of notes 16,681 -------- Loss on repayment of senior credit facility (1,018) -------- Net Gain on Payment of Pfizer Obligations: Obligations paid: -promissory note 20,075 -accrued interest on promissory note 1,015 -accounts payable and accrued expenses 18,788 -------- Total obligations paid 39,878 Cash payment to Pfizer (29,315) Transaction costs (3,000) -------- Net gain on payment of Pfizer obligations 7,563 -------- Net gain on extinguishment of debt $ 23,226 ======== The US Senior Notes and the Dutch Senior Notes are senior secured obligations of each of the Company (the "US Issuer") and the Dutch issuer, respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a senior secured basis by all the US Issuer's domestic restricted subsidiaries, and the Dutch Senior Notes are guaranteed on a senior secured basis by the US Issuer and by the restricted subsidiaries of the Dutch issuer, presently consisting of 97/8% Senior Subordinated Notes due 2008:
Principal amount of repurchased notes$51,971
Repurchased at 60% of principal amount(31,183)
Transaction costs(4,107)
Net gain on repurchase of notes
16,681
Loss on repayment of senior credit facility
(1,018)
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note20,075
-accrued interest on promissory note1,015
-accounts payable and accrued expenses18,788
Total obligations paid39,878
Cash payment to Pfizer(29,315)
Transaction costs(3,000)
Net gain on payment of Pfizer obligations
7,563
Net gain on extinguishment of debt
$23,226
4.Belgium Plant Transactions
      On December 16, 2004, Phibro Animal Health SA. The US Senior Notes and related guarantees are collateralized bySA, (“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 June 30, 2005 exchange rate): (i) the transfer of substantially all of the US Issuer'sland 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 ($7,501), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 700 ($847) for such cleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1,500 ($1,815) within six months from the closing date, EUR 1,500 ($1,815) within eighteen months from the closing date, EUR 1,500 ($1,815) within thirty months from the closing date, and EUR 500 ($605) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 400 ($484)) 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; 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

F-14


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equipment, together with other assets and rights related to the assetsproduction of its domestic restricted subsidiaries, othervirginiamycin, 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 later than real property and interests therein, including a pledge of all the capital stock of such domestic restricted subsidiaries.June 30, 2006.
      The Dutch Senior Notes and related guarantees are collateralized by a pledge of all the accounts receivable, a security interest or floating chargemortgage on the inventory toBelgium Plant which will be released in connection with the extent permitted by applicable law, and a mortgage on substantially allclosing of the real propertysale of the Dutch issuerBelgium Plant to GSK.
      As a result of the above agreement, the Company will depreciate the Belgium plant to its estimated salvage value of EUR 2,100 ($2,500) as of the projected closing date of November 30, 2005. The Company recorded incremental depreciation expense of EUR 5,828 ($7,467) during 2005 and eachwill record an additional EUR 3,800 ($4,600) of its restricted subsidiaries, a pledgeincremental depreciation expense ratably through November 2005.
      The Company recorded accrued severance expense of 100%EUR 10,200 ($12,808) during 2005, representing the estimated total cost of severance and early-retirement programs for those employees not transferring to GSK. The expense includes $888 for enhanced pension benefits agreed as part of the early-retirement program. The Company estimates $6,500 will be payable at or around the closing date and $6,308 will be payable in subsequent periods.
      The Company also recorded $1,916 of other transaction-related expense during 2005.
      The incremental depreciation expense of $7,467, severance expense of $12,808 and other transaction-related expense of $1,916 recorded in 2005 are included in cost of goods sold on the Company’s consolidated statements of operations and comprehensive income (loss).
      The Company expects to record an estimated $6,200 of additional net expense during fiscal 2006 for employee retention agreements, plant dismantling and decommissioning, plant shutdown and other costs associated with the completion of the sale of the Belgium Plant. The estimated net expense includes an estimated $1,100 of gain from the curtailment of the Belgium pension plan. The Company estimates no material gain or loss during fiscal 2006 resulting from the sale of the Belgium Plant.
      The Company has determined that the carrying amount of the Belgium Plant at June 30, 2005 is recoverable based on the estimated future cash flows arising from the use of the assets.
      In anticipation of transferring production of virginiamycin from the Belgium plant to an alternative production location, the Company has been increasing inventory levels of virginiamycin to ensure adequate supplies during the transfer period. Virginiamycin inventories were approximately $38,800 and $24,100 at June 30, 2005 and 2004, respectively, and are expected to continue to increase through November 2005, based on current production rates.
5.Holding Company and HoldCo Notes
      During February 2005, PAHC Holdings Corporation (“Holdings”) was formed to hold the capital stock of each subsidiarythe Company, except for its Series C Preferred Stock. On February 10, 2005, Holdings issued $29,000 aggregate principal amount of the Dutch issuer, a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries and substantially all of the assets of the U.S. guarantors, other than real property and interests therein. The indenture governing the15% Senior Secured Notes providesdue 2010 (the “HoldCo Notes”) in a private placement. Interest is payable at the option of Holdings in cash or pay-in-kind HoldCo Notes in its sole discretion. PAHC is not obligated for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires the CompanyHoldCo Notes. PAHC’s ability to make certain offerspayments to purchaseHoldings is subject to the terms of PAHC’s Senior Secured Notes, uponits Senior Subordinated Notes, and its domestic senior credit facility, and to applicable law.
      The proceeds from the sale of the HoldCo Notes were used by Holdings to make a changecapital contribution to PAHC to contemporaneously finance the redemption of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are definedPAHC’s Series C Preferred Stock in the indenture). F-12 amount of $26,400 on February 28, 2005.

F-15


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) Also,— (Continued)
      On May 16, 2005, Holdings completed the exchange of its privately placed HoldCo Notes with new HoldCo Notes that have been registered with the SEC.
      Holdings was formed by the holders of all of PAHC’s capital stock, other than the holders of PAHC’s Series C Preferred Stock. In particular, Jack Bendheim, Marvin Sussman and trusts for the benefit of Mr. Bendheim and his family exchanged all of their shares of Series A Preferred Stock and Class B Common Stock and Mr. Bendheim exchanged all of his shares of Class A Common Stock, for the same number and class of shares of Holdings, having the same designations, relative rights, privileges and limitations as PAHC’s shares of such class (except to the extent that Holdings is a Delaware corporation and PAHC is a New York corporation). Holdings owns all the outstanding capital stock of all classes of PAHC.
      The HoldCo Notes are collateralized by all of Holdings’ assets (now consisting substantially of all the outstanding capital stock of PAHC). The HoldCo Notes and such security interest are effectively subordinated to all liabilities, including PAHC’s and its subsidiaries’ trade payables, as well as PAHC’s indenture indebtedness.
6.Series C Preferred Stock
      On February 28, 2005, PAHC, Palladium Equity Partners II, LP and certain of its affiliates (“Palladium”), Holdings and the principal stockholders of Holdings entered into an agreement to redeem PAHC’s Series C Preferred Stock with respect to (i) the redemption price of $26,400 (consisting of $19,600 of liquidation preference and $6,800 of equity value), (ii) amending the terms of the post-redemption redemption price adjustment set forth in the certificate of incorporation of PAHC (a) from an amount payable upon occurrence of certain capital stock transactions determined with respect to the value of PAHC upon the occurrence of such capital stock transaction, to a liquidated amount of $4,000, payable only after the occurrence of certain capital stock transactions and the receipt by the current stockholders of the Company, on October 21,a cumulative basis, of an aggregate of $24,000 of dividends and distributions in respect of such capital stock transactions, and (b) to remove the one year time period for such adjustment of the redemption price, and (iii) eliminating the backstop indemnification obligation of up to $4,000 of PAHC to Palladium incurred in connection with the sale by PAHC to Palladium in December 2003 of The Prince Manufacturing Company (“PMC”). The excess of the redemption price over the carrying value of the Series C Preferred Stock and the elimination of the backstop indemnification obligation have been reflected as adjustments to stockholder’s deficit on the consolidated balance sheet at June 30, 2005. The redemption agreement also eliminated PAHC’s agreement to pay $100 per year to Palladium for certain treasury services. The Company has determined the fair value of the liability for the post-redemption redemption price adjustment to be insignificant to the consolidated financial statements, due to the uncertainty of the ultimate timing of such payment, if any. Future changes in the fair value of the liability for the post-redemption redemption price adjustment will be recorded through earnings in the period in which such change occurs.
      Effective December 26, 2003 (the “Closing Date”), PAHC entered into the Prince Transactions with Palladium. Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements which relate to PAHC’s Redeemable Preferred Stock: the reduction of the value of PAHC’s Preferred Stock owned by Palladium from $72,184 (25,000 Series B shares and 20,000 Series C shares) to $16,517 (accreted through the Closing Date) (10,591 Series C shares) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; the termination of $2,250 in annual management advisory fees payable by PAHC to Palladium; a cash payment of $10,000 to Palladium in respect of the portion of PAHC’s Preferred Stock not exchanged in consideration of the business and assets of PMC; and the agreement of Palladium to pay PAHC for advisory fees for the next three years of $1,000, $500, and $200, respectively (which were pre-paid at closing by Palladium and satisfied for $1,300, the net present value of such payments).

F-16


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Dividends of $1,813, $6,042 and $8,808 for 2005, 2004 and 2003, respectively, were accrued on the preferred shares and charged to accumulated deficit on the Company’s consolidated balance sheet. Equity Value adjustments of $(90), $5,421 and $3,470 for 2005, 2004 and 2003, respectively, were accrued and charged to accumulated deficit on the Company’s consolidated balance sheet.
7.Prince Transactions
      Effective December 26, 2003, the Company entered into completed the divestiture of substantially all of the business and assets of Prince Quincy, Inc. (f/k/a new replacementThe Prince Manufacturing Company (“PMC”)), to a company (“Buyer”) formed by Palladium Equity Partners II, LP and certain of its affiliates (“Palladium”), and the related reduction of the Company’s preferred stock held by Palladium (collectively, the “Prince Transactions”).
      The excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions was recorded as a decrease to accumulated deficit on the Company’s consolidated balance sheet at December 31, 2003, and was calculated as follows:
     
Series B & C Redeemable Preferred Stock:
    
Accreted value pre-transaction $72,184 
Accreted value post-transaction  16,517 
    
Reduction in redeemable preferred stock
  55,667 
    
Assets Divested and Costs Incurred:
    
PMC net assets divested  7,430 
Cash paid to Palladium Investors for:    
-reduction of redeemable preferred stock  10,000 
-settlement of PMC intercompany debt  3,958 
-working capital adjustment  1,331 
-closing fee  500 
Transaction costs  8,310 
Contingent Backstop Indemnification Amount accrued  4,000 
    
Total assets divested and costs and liabilities incurred
  35,529 
    
Excess amount recorded as a decrease to accumulated deficit
 $20,138 
    
      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 consolidated balance sheet at June 30, 2005.
      In connection with the February 2005 redemption of the Series C Preferred Stock, PAHC and the Palladium Investors agreed to eliminate the backstop indemnification obligation of up to $4,000 of PAHC to Palladium incurred in connection with the sale of PMC. The backstop indemnification obligation was previously included in long term liabilities in the Company’s consolidated balance sheet. The net gain of $4,000 from the elimination of the backstop indemnification obligation was recorded as a decrease to accumulated deficit on the Company’s consolidated balance sheet at June 30, 2005.

F-17


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The divestiture of PMC has not been reflected as a discontinued operation due to the existence of continuing supply and service agreements. PMC is included in the Company’s Industrial Chemicals segment. The results of operations of PMC were:
             
  For the Years Ended June 30,
   
  2005 2004 2003
       
Net sales $  $11,118  $22,332 
Operating income     2,278   3,579 
Depreciation and amortization     487   956 
8.Discontinued Operations
Wychem:
      On April 29, 2005, the Company sold the shares of Wychem, an indirect wholly-owned subsidiary, for net cash proceeds of $4,896, to an investor group that included the former head of the Company’s Specialty Chemicals Group, who retired in August 2004, and the Managing Director of Wychem. The Company owned 75% of Wychem through Koffolk and 25% through Ferro Metal and Chemical Corporation Limited (U.K.). The Company recorded a gain on the sale of Wychem of $448. Wychem was included in the Company’s All Other segment.
      Operating results and balance sheet items of Wychem were:
             
  For the Years Ended June 30,
   
  2005 2004 2003
       
OPERATING RESULTS:
            
Net sales $4,431  $3,890  $3,928 
Cost of goods sold  2,921   2,654   2,623 
Selling, general and administrative expenses  570   605   530 
Other (income) expense  6   7   (9)
          
Income before income taxes  934   624   784 
Provision for income taxes  263   165   230 
          
Income from operations $671  $459  $554 
          
Depreciation and amortization $344  $419  $364 
          
GAIN ON SALE:
            
Current assets $(2,328)        
Property, plant & equipment-net and other assets  (3,342)        
Liabilities  924         
Currency translation adjustment  511         
Net proceeds of sale  4,896         
Income tax expense  (213)        
          
Gain on sale $448         
          

F-18


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     
  As of June 30,
  2004
   
BALANCE SHEET:
    
Trade receivables $441 
Inventories  1,348 
Prepaid expenses and other current assets  97 
    
Current assets from discontinued operations $1,886 
    
Property, plant & equipment, net $3,405 
    
Other assets from discontinued operations $3,405 
    
Accounts payable $208 
Accrued expenses and other current liabilities  630 
    
Current liabilities from discontinued operations $838 
    
MRT and La Cornubia:
      The Company sold MRT and shutdown La Cornubia during fiscal 2004. These businesses have been classified as discontinued operations. The Company reassessed the accruals relating to the La Cornubia shutdown and adjusted the accruals accordingly which resulted in a net gain of $137 which was recorded as income on disposal of discontinued operations on the Company’s consolidated statements of operations and comprehensive income (loss).
      Operating results and gain on sale of MRT were:
         
  For the Years Ended
  June 30,
   
  2004 2003
     
OPERATING RESULTS:
        
Net sales $3,327  $18,671 
Cost of goods sold  3,135   19,943 
Selling, general and administrative expenses  316   2,182 
       
(Loss) before income taxes  (124)  (3,454)
Provision for income taxes      
       
(Loss) from operations $(124) $(3,454)
       
Depreciation and amortization $  $1,309 
       
GAIN ON SALE:
        
Current assets $(5,813)    
Property, plant & equipment-net and other assets  (10,703)    
Liabilities  2,911     
Net proceeds of sale  13,836     
       
Gain on sale $231     
       

F-19


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Operating results and loss on disposal of La Cornubia were:
         
  For the Years Ended
  June 30,
   
  2004 2003
     
OPERATING RESULTS:
        
Net sales $13,918  $13,479 
Cost of goods sold  13,723   12,528 
Selling, general and administrative expenses  1,686   1,310 
Other (income)  (102)  (389)
Interest expense  94   60 
       
(Loss) before income taxes  (1,483)  (30)
Provision for income taxes  18   16 
       
(Loss) from operations $(1,501) $(46)
       
Depreciation and amortization $400  $359 
       
LOSS ON DISPOSAL:
        
Current assets $(5,085)    
Property, plant & equipment-net and other assets  (2,557)    
Liabilities  3,614     
Unsecured debt  2,167     
Currency translation adjustment  (459)    
       
(Loss) on disposal $(2,320)    
       
Odda and Carbide
      The Company reassessed the accruals relating to the Odda shutdown and adjusted the accruals accordingly which resulted in a net gain of $180 which was recorded as income on disposal of discontinued operations on the Company’s consolidated statements of operations and comprehensive income (loss).

F-20


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Operating results and loss on disposal of Odda and Carbide were:
     
  For the Year
  Ended June 30,
  2003
   
OPERATING RESULTS:
    
Net sales $11,217 
Cost of goods sold  13,723 
Selling, general and administrative expenses  3,175 
Asset writedowns  7,781 
Other income  2,327 
    
(Loss) before income taxes  (11,135)
(Benefit) for income taxes  (58)
    
(Loss) from operations $(11,077)
    
Depreciation and amortization $894 
    
LOSS ON DISPOSAL:
    
Assets $(3,359)
Liabilities  6,432 
Unsecured debt  2,488 
Currency translation adjustment  (6,244)
    
(Loss) on disposal $(683)
    
9.Property, Plant and Equipment
      Property, plant and equipment is comprised of:
         
  As of June 30,
   
  2005 2004
     
Land $6,250  $5,633 
Buildings and improvements  25,967   25,743 
Machinery and equipment  108,762   100,771 
       
   140,979   132,147 
Less: accumulated depreciation  91,019   76,766 
       
  $49,960  $55,381 
       
      Certain of the buildings of Koffolk are on land leased for a nominal amount from the Israel Land Authority. The lease expires on July 9, 2027.
      Depreciation expense was $16,095, $8,703 and $8,838 for 2005, 2004 and 2003, respectively. Depreciation expense for 2005 includes accelerated depreciation of $7,467 relating to the Belgium Plant Transactions.
10.Related Party Transactions
      On January 5, 2000, the United States Bankruptcy Court for the Eastern District of New York confirmed a plan of reorganization for Penick Corporation and Penick Pharmaceutical, Inc. (collectively “Penick”) which prior to such confirmation were debtors in proceedings in such Court for reorganization under

F-21


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Chapter 11 of the Bankruptcy Code, and awarded Penick to Penick Holding Company (“PHC”). PHC is a corporation formed to effect such acquisition by the Company, PBCI LLC, a limited liability company controlled by Mr. Bendheim, and several other investors, including Peter A. Joseph, a former director of the Company. In May 2005, in connection with the sale of PHC, the Company received the return of its $2,418 investment in preferred interest in PHC Holdings LLC, the company formed by the investors to hold, receive and sell their interests in PHC (net carrying value of $1,711). The principal common stockholder of Holdings owns approximately 15% voting common stock interest in PHC Holdings LLC. The Company recorded a gain on the sale of the investment of $707, which was included in other (income) expense, net on the Company’s consolidated statements of operations and comprehensive income (loss).
      A subsidiary of the Company leases the property underlying its Santa Fe Springs, California plant from a limited partnership controlled by common shareholders of the Company. The lease requires annual base rent of $250 and terminates on December 31, 2008. The Company is responsible under the lease agreement to pay all real property taxes.
      In accordance with the terms of the Prince Transactions the Company recorded advisory fee income of $750 and $500 for 2005 and 2004, respectively. The Buyer also supplied manganous oxide and red iron oxide products, and provided certain mineral blending services to the Company’s Prince Agriproducts subsidiary (“Prince Agri”) in the amounts of $4,607 and $2,149 during 2005 and 2004, respectively. Prince Agri provided the Buyer with certain laboratory, MIS and telephone services, and leased to Buyer office space in Quincy, Illinois in the amounts of $586 and $421 during 2005 and 2004, respectively. The Company also had an agreement to receive certain treasury services from the Palladium Investors for $100 per year which terminated on February 28, 2005 concurrent with the redemption of the Series C Preferred Stock. Prior to the Prince Transactions an annual management advisory fee of $2,250 was payable to the Palladium Investors. Payments were due quarterly in advance and were charged to selling, general and administrative expenses. The management fee was $1,125 and $2,250 for 2004 and 2003, respectively.
11.Accrued Expenses and Other Current Liabilities
      Accrued expenses and other current liabilities were:
         
  As of June 30,
   
  2005 2004
     
Belgium Plant Transactions $13,309  $ 
Employee related expenses  14,774   11,409 
Interest and income tax accruals  5,858   4,311 
Other accrued liabilities  19,874   23,660 
       
  $53,815  $39,380 
       
12.Debt
Loans Payable to Banks
      At June 30, 2005, loans payable to banks included $8,000 under PAHC’s domestic senior credit facility ("senior credit facility") with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter The weighted average interest rate at June 30, 2005 was 6.00%. At June 30, 2005, PAHC had $9,500 of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities initially could not exceed $25,000, including aggregate borrowings under the working capital facility up to $15,000. On April 29, 2004, the Company amended the senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25,000 to $27,500 and to increase the amount of aggregate borrowings available under the working capital facility from $15,000that is provided under the domestic senior credit facility. Koffolk had $38 included in loans payable to $17,500.banks at June 30, 2005.
      As of September 24, 2004, the CompanyPAHC amended theits 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

F-22


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5,300 for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336; and (v) establish covenant EBITDA levels for the periods 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 all other items. Borrowings under the senior credit facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. Under the senior credit facility, the Company may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit facility is secured by a first priority lien on substantially all of the Company's assets and assets of substantially all of the Company's domestic subsidiaries. The Company is required to pay an unused line fee of 0.375% on the unused portion of the senior credit facility, a monthly servicing fee and standard letter of credit fees to issuing banks. Borrowings under the senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior Secured Notes has not been extended, as required by the senior credit facility, by that date. Pursuant to the terms of an intercreditor agreement, the security interest securing the Senior Secured Notes and the guarantees made by the Company's domestic restricted subsidiaries are subordinated to a lien securing the senior credit facility. 4. Prince Transactions Effective December 26, 2003 (the "Closing Date"), the Company completed the divestiture of substantially all of the business and assets of 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"). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements: (i) the transfer of substantially all of the business and assets of PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72,184 to $16,517 (accreted through the Closing Date) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii) the termination of $2,250 in annual management advisory fees payable by the Company to Palladium; (iv) a cash payment of $10,000 to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; (v) the agreement of the Buyer to pay the Company for advisory fees for the next three years of $1,000, $500, and $200, respectively (which were pre-paid at closing by the Buyer and satisfied for $1,300, the net present value of such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron oxide products and to provide certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer with certain laboratory, MIS and telephone services, all on terms substantially consistent with the historic relationship between Prince Agri and PMC, and to lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an agreement to receive certain treasury services from Palladium for $100 per year. Pursuant to definitive agreements, the Company made customary representations, warranties and environmental and other F-13 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) indemnities, agreed to a post-closing working capital adjustment, paid $3,958 in full satisfaction of all intercompany debt owed to PMC, paid a closing fee to Palladium of $500, made certain capital expenditure adjustments included as part of the intercompany settlement amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC retained $414 of its accounts receivable. The Company established a $1,000 letter of credit escrow for two years to secure its working capital adjustment and certain indemnification obligations. 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 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 Buyer by January 1, 2009. The definition of "Equity Value" in the Company's Certificate of Incorporation was amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5 The excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions was recorded as a decrease to accumulated deficit on the Company's consolidated balance sheet at December 31, 2003, and was calculated as follows: Series B & C Redeemable Preferred Stock: Accreted value pre-transaction $72,184 Accreted value post-transaction 16,517 ------- Reduction in redeemable preferred stock 55,667 ------- Assets Divested and Costs Incurred: PMC net assets divested 7,430 Cash paid to Palladium Investors for: -reduction of redeemable preferred stock 10,000 -settlement of PMC intercompany debt 3,958 -working capital adjustment 1,331 -closing fee 500 Transaction costs 8,310 Contingent Backstop Indemnification Amount accrued 4,000 ------- Total assets divested and costs and liabilities incurred 35,529 ------- Excess amount recorded as a decrease to accumulated deficit $20,138 ======= PMC is included in the Company's Industrial Chemicals segment. The results of operations of PMC were: For the Years Ended June 30, ---------------------------------- 2004 2003 2002 ---- ---- ---- Net sales $11,118 $22,332 $21,451 Operating income 2,278 3,579 3,640 Depreciation and amortization 487 956 966 The divestiture of PMC has not been reflected as a discontinued operation due to the existence of the Backstop Indemnification and continuing supply and service agreements. F-14 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) 5. Discontinued Operations The Company shutdown Odda and divested Carbide during 2003, and sold MRT and shutdown La Cornubia during 2004. These businesses have been classified as discontinued operations. Odda and Carbide Operating results and loss on disposal of Odda and Carbide were: For the Years Ended June 30, ---------------------------- 2003 2002 -------- -------- OPERATING RESULTS: Net sales $ 11,217 $ 31,219 Cost of goods sold 13,723 46,116 Selling, general and administrative expenses 3,175 12,812 Asset writedowns 7,781 -- Other income 2,327 3,699 -------- -------- (Loss) before income taxes (11,135) (24,010) (Benefit) for income taxes (58) (1,170) -------- -------- (Loss) from operations $(11,077) $(22,840) ======== ======== Depreciation and amortization $ 894 $ 17,676 ======== ======== LOSS ON DISPOSAL: Assets $ (3,359) Liabilities 6,432 Unsecured debt 2,488 Currency translation adjustment (6,244) -------- (Loss) on disposal $ (683) ======== F-15 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) Mineral Resource Technologies, Inc. The Company sold MRT on August 28, 2003. Net proceeds, after transaction costs, were approximately $13,836. Operating results, gain on sale and balance sheet items of MRT were: For the Years Ended June 30, ------------------------------------ 2004 2003 2002 -------- -------- -------- OPERATING RESULTS: Net sales $ 3,327 $ 18,671 $ 17,045 Cost of goods sold 3,135 19,943 17,676 Selling, general and administrative expenses 316 2,182 2,299 -------- -------- -------- (Loss) before income taxes (124) (3,454) (2,930) Provision for income taxes -- -- -- -------- -------- -------- (Loss) from operations $ (124) $ (3,454) $ (2,930) ======== ======== ======== Depreciation and amortization $ -- $ 1,309 $ 1,192 ======== ======== ======== GAIN ON SALE: Current Assets $ (5,813) Property, plant & equipment-net and other assets (10,703) Liabilities 2,911 Net proceeds of sale 13,836 -------- Gain on disposal $ 231 ======== As of June 30, 2003 ------------- BALANCE SHEET: Trade receivables $ 2,633 Other receivables 304 Inventories 1,643 Prepaid expenses and other current assets 362 ------- Current assets from discontinued operations $ 4,942 ======= Property, plant and equipment, net $ 9,999 Intangibles 196 Other assets 455 ------- Other assets from discontinued operations $10,650 ======= Accounts payable $ 1,466 Accrued expenses and other current liabilities 585 ------- Current liabilities from discontinued operations $ 2,051 ======= Other liabilities $ 198 ------- Other liabilities from discontinued operations $ 198 ======= F-16 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) La Cornubia, S.A. During June 2004 the Company determined that it would no longer fund the operations of La Cornubia. On June 30, 2004, La Cornubia filed for bankruptcy in France. The bankruptcy is proceeding in accordance with French law. The Company has been advised that, as a result of the bankruptcy, the creditors of La Cornubia have recourse only to the assets of La Cornubia. The Company removed all assets, liabilities, and cumulative translation adjustments related to La Cornubia from the Company's consolidated balance sheet as of June 30, 2004, and recorded a loss on disposal of discontinued operations. The Company obtained the consent of a majority of the holders of its senior secured notes due 2007 and its senior subordinated notes due 2008 to amend the indentures governing these notes in such a manner that the bankruptcy of La Cornubia would not create an event of default thereunder. The Company also obtained a waiver under its senior credit facility so that the bankruptcy of La Cornubia would not constitute an event of default under the senior credit facility. Operating results, loss on disposal and balance sheet items of La Cornubia were: For the Years Ended June 30, ------------------------------------- 2004 2003 2002 -------- -------- -------- OPERATING RESULTS: Net sales $ 13,918 $ 13,479 $ 11,873 Cost of goods sold 13,723 12,528 11,144 Selling, general and administrative expenses 1,686 1,310 1,641 Other income 102 389 263 Interest (expense) - net (94) (60) (78) -------- -------- -------- (Loss) before income taxes (1,483) (30) (727) Provision for income taxes 18 16 62 -------- -------- -------- (Loss) from operations $ (1,501) $ (46) $ (789) ======== ======== ======== Depreciation and amortization $ 400 $ 359 $ 325 ======== ======== ======== LOSS ON DISPOSAL: Current Assets $ (5,085) Property, plant & equipment-net and other assets (2,557) Liabilities 3,614 Unsecured debt 2,167 Currency translation adjustment (459) -------- (Loss) on disposal $ (2,320) ======== F-17 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) As of June 30, 2003 ------- BALANCE SHEET: Trade receivables $2,957 Other receivables 139 Inventories 918 Prepaid expenses and other current assets 348 ------ Current assets from discontinued operations $4,362 ====== Property, plant and equipment, net $2,535 Other assets 140 ------ Other assets from discontinued operations $2,675 ====== Accounts payable $1,560 Accrued expenses and other current liabilities 910 Unsecured debt 1,036 ------ Current liabilities from discontinued operations $3,506 ====== Other liabilities $ 975 ------ Other liabilities from discontinued operations $ 975 ====== 6. Property, Plant and Equipment Property, plant and equipment was: As of June 30, -------------------------- 2004 2003 -------- -------- Land $ 5,657 $ 5,816 Buildings and improvements 27,925 29,841 Machinery and equipment 105,308 106,026 -------- -------- 138,890 141,683 Less: accumulated depreciation 80,104 77,778 -------- -------- $ 58,786 $ 63,905 ======== ======== Certain of the buildings of Koffolk are on land leased for a nominal amount from the Israel Land Authority. The lease expires on July 9, 2027. Depreciation expense was $9,122, $9,202 and $10,235 for 2004, 2003 and 2002, respectively. 7. Related Party Transactions The Company owns approximately $2,300 par value of preferred stock of a pharmaceutical company. The principal common stockholder of the Company owns approximately 15% voting common stock interest in the pharmaceutical company, acquired for approximately $500. The preferred stock investment, included in other assets, has a net carrying value of $1,610 at June 30, 2004. F-18 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) A subsidiary of the Company leases the property underlying its Santa Fe Springs, California plant from a limited partnership controlled by common shareholders of the Company. The lease requires annual base rent of $250 and terminates on December 31, 2008. The Company is responsible under the lease agreement to pay all real property taxes. In accordance with the terms of the Prince Transactions (Note 4) the Buyer paid the Company advisory fees of $500 for the year ended June 30, 2004. The Buyer also supplied manganous oxide and red iron oxide products, and provided certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri") for which Prince Agri paid $2,149 during the year ended June 30, 2004. Prince Agri provided the Buyer with certain laboratory, MIS and telephone services, and leased to Buyer office space in Quincy, Illinois for which the buyer paid Prince Agri $421 during the year ended June 30, 2004. The Company also has an agreement to receive certain treasury services from the Palladium Investors for $100 per year. Prior to the Prince Transactions an annual management advisory fee of $2,250 was payable to the Palladium Investors. Payments were due quarterly in advance and were charged to general and administrative expense. The management fee was $1,125, $2,250 and $2,250 for 2004, 2003 and 2002, respectively. 8. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were: As of June 30, ------------------------- 2004 2003 ------- ------- Employee related expenses $11,444 $10,003 Payments due to Pfizer -- 9,040 Interest and tax accruals 4,836 9,249 Other accrued liabilities 23,730 12,407 ------- ------- $40,010 $40,699 ======= ======= 9. Debt Loans Payable to Banks At June 30, 2004, loans payable to banks included $10,996 under the senior credit facility with Wells Fargo Foothill, Inc. The weighted average interest rate under the senior credit facility from its inception at October 21, 2003 through June 30, 2004 was 8.0%. At June 30, 2004, the Company had $6,504 of borrowings available under the borrowing base formula in effect for the working capital facility that is provided under the senior credit facility. On October 21, 2003, the Company entered into a new senior credit facility with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities may not exceed $25,000, including aggregate borrowings under the working capital facility of up to $15,000. On April 29, 2004, the Company amended the senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25,000 to $27,500 and to increase the amount of aggregate borrowings available under the working capital facility from $15,000 to $17,500. As of September 24, 2004, the Company amended the senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27,500 to $32,500; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5,300 for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336; and (v) establish covenant EBITDA levels for the periods after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for all other items. F-19 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) Borrowings underitem (v).
      On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, PAHC amended its domestic senior credit facility are subjectto: (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 base formula based on percentages of eligible domestic receivables and domestic inventory. Under the senior credit facility, the Company may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtednessavailable under the senior creditworking capital facility is securedto permit a temporary increase to $22,500 and for its reduction to $17,500 on such borrowings being refinanced by a first priority lien on substantially allthe proceeds of the Company'sAdditional 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 assetsrights related to the production of substantially allvirginiamycin, to Phibro Saude Animal International Ltda, (“PAH Brazil”) or in connection with alternative production arrangements; and (v) provide for the issuance of the Company's domestic subsidiaries. The Company is required to pay an unused line fee of 0.375% onAdditional Notes and the unused portionsale of the senior credit facility, a monthly servicing feeBelgium Plant and standard letter of credit fees to issuing banks. Borrowings under the senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior Secured Notes has not been extended, as required by the senior credit facility, by that date.related transactions.
      As of June 30, 2004, the Company2005, PAHC was in compliance with the financial covenants of the amendedits 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'sPAHC’s assets, guarantees, dividend payments, redemption or purchase of the Company'sPAHC’s stock, sale of subsidiaries'subsidiaries’ stock, disposition of assets, investments, and mergers and acquisitions. The
      PAHC’s 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 ----------------------------- June 30, 2004 June 30, 2003 ------------- ------------- Senior secured notes due December 1, 2007 $105,000 $ -- Senior subordinated notes due June 1, 2008 48,029 100,000 Foreign bank loans 6,237 3,906 Pfizer promissory note -- 20,075 Bank capital expenditure facility -- 1,496 Capitalized lease obligations and other 103 910 -------- -------- 159,369 126,387 Less: current maturities 1,351 24,124 -------- -------- $158,018 $102,263 ======== ========
Long-Term Debt
         
  As of June 30,
   
  2005 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  2,606   6,237 
Capitalized lease obligations and other     103 
       
   178,126   159,369 
Less: current maturities  1,625   1,351 
       
  $176,501  $158,018 
       

F-23


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Senior Secured Notes due 2007
      In October 2003 PAHC (the “Parent Issuer”) and Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of PAHC (the “Dutch Issuer” and together with PAHC, the Company“Issuers”) issued and sold 105,000 units, consisting of $85,000 of 13% Senior Secured Notes due 2007 of the Parent Issuer (the "US Senior Notes"“U.S. Notes”) and $20,000 of 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V.the Dutch Issuer (the "Dutch Senior Notes"“Dutch Notes” and, together with the US SeniorU.S. Notes, the "Senior“Senior Secured Notes"Notes”), an indirect wholly-owned subsidiary.
      On December 21, 2004, PAHC completed a private placement pursuant to which the Parent Issuer and the Dutch Issuer issued and sold 22,491 additional units consisting of $18,207 of additional U.S. Notes and $4,284 of additional Dutch Notes from which they received gross proceeds of $23,391. The proceeds were used to refinance indebtedness outstanding under PAHC’s domestic senior credit facility. PAHC incurred financing costs of $2,275 in connection with the Companyissuance of these additional Senior Secured Notes. These additional Senior Secured Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the "Dutch issuer"“Indenture”). F-20 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) under which the Issuers previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes.
      On March 9, 2005, PAHC completed the exchange of its privately placed 127,491 units of 13% Senior Secured Notes due 2007 with 127,491 new units of 13% Senior Secured Notes due 2007 that have been registered with the SEC.
      The US SeniorU.S. Notes and the Dutch Senior Notes are senior secured obligations of each of the Company (the "US issuer")Parent Issuer and the Dutch issuer,Issuer, respectively. The US SeniorU.S. Notes and the Dutch Senior Notes are guaranteed on a senior secured basis by all the US Issuer'sParent Issuer’s domestic restricted subsidiaries (the “U.S. Guarantor Subsidiaries”), and the Dutch Senior Notes are guaranteed on a senior secured basis by the USParent Issuer and by the restricted subsidiaries of the Dutch issuer,Issuer, presently consisting of Phibro Animal Health SA.SA (the “Belgium Guarantor”). The US SeniorU.S. Notes and related guarantees are collateralized by substantially all of the US Issuer'sParent Issuer’s assets and the assets of its domestic restricted subsidiaries,the U.S. Guarantor Subsidiaries, other than real property and interests therein, including a pledge of all the capital stock of such domestic restricted subsidiaries.the U.S. Guarantor Subsidiaries. The Dutch Senior Notes and related guarantees are collateralized by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuerIssuer and each of its restricted subsidiaries,the Belgium Guarantor, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer,Belgium Guarantor, a pledge of the intercompany loans made by the Dutch issuerIssuer to its restricted subsidiariesthe Belgium Guarantor and substantially all of the assets of the U.S. guarantors,Guarantor Subsidiaries, other than real property and interests therein. The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires the CompanyPAHC to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture).
      The indenture contains certain covenants with respect to the CompanyPAHC and the guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company'sPAHC’s ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person. Senior Subordinated Notes due 2008 The Company
Senior Subordinated Notes due 2008
      PAHC issued $100,000 aggregate principal amount of 9-7/8%97/8% Senior Subordinated Notes due 2008 ("(“Senior Subordinated Notes"Notes”) of which $51,971 principal amount was repurchased with proceeds of the Senior Secured Notes. The Senior Subordinated Notes are general unsecured obligations of the CompanyPAHC and are subordinated in right of payment to all existing and future senior debt (as defined in the indenture agreement of the Company)PAHC) and rank pari passu in right of payment with all other existing and future senior subordinated indebtedness of the Company.PAHC. The Senior Subordinated Notes are unconditionally guaranteed on a senior

F-24


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
subordinated basis by the domestic restricted subsidiaries of the Company.PAHC. Additional future domestic subsidiaries may become guarantors under certain circumstances.
      The indenture contains certain covenants with respect to the CompanyPAHC and the Guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company'sPAHC’s ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person.
Foreign Bank Loans
      The bank loans of the Company's Koffolk Ltd. (Israel) subsidiary are collateralized by its receivables and inventory, accrue interest at LIBOR plus 1.25%, and are repayable in equal quarterly payments through 2005.2008. The LIBOR rate was 1.15%3.125% at June 30, 2004. The Company's foreign subsidiaries have2005.
      Koffolk has aggregate credit lines of $11,044. At$10,500, and at June 30, 2004, the Company2005, had $4,807$7,135 of borrowings available under these credit lines. F-21 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
Aggregate Maturities of Long-Term Debt
      The aggregate maturities of long-term debt as of June 30, 20042005 were: Year Ended June 30, - ------------------- 2005 $ 1,351 2006 4,127 2007 -- 2008 153,891 2009 -- -------- Total $159,369 ======== 10.
      
Year Ended June 30,  
   
2006 $1,625 
2007   
2008  176,501 
2009   
2010   
    
 Total $178,126 
    
13.Redeemable Common Stock of Subsidiary
      A key executive of the Company has a 2.1% ownership interest in the common stock of a subsidiary. The subsidiary'ssubsidiary’s shares are redeemable at fair market value, based on independent appraisal, upon the death, disability or termination of the key executive. The Company and its subsidiary have entered into a severance agreement with the executive for payments based on a multiple of pre-tax earnings (as defined). The payments are subject to certain restrictions pursuant to terms of the domestic senior credit facility. At June 30, 20042005 no severance payments would have been due upon termination. 11. Redeemable Preferred Stock Effective December 26, 2003 (the "Closing Date"), the Company entered into the Prince Transactions with the Palladium Investors (Note 4). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements which relate to the Company's Redeemable Preferred Stock: the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72,184 (25,000 Series B shares and 20,000 Series C shares) to $16,517 (accreted through the Closing Date) (10,591 Series C shares) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; the termination of $2,250 in annual management advisory fees payable by the Company to Palladium; a cash payment of $10,000 to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; and the agreement of the Palladium Investors to pay the Company for advisory fees for the next three years of $1,000, $500, and $200, respectively (which were pre-paid
14.Common Stock and Preferred Stock
Common Stock:
      Common stock at closing by the Palladium Investors and satisfied for $1,300, the net present value of such payments). The Company has an agreement to receive certain treasury services from the Palladium Investors for $100 per year. The redeemable preferred stock is entitled to cumulative cash dividends, payable semi-annually, at 15% per annum of the liquidation value. The redeemable Preferred C stock is entitled to the Liquidation Value plus a percentage of the equity value of the Company, as defined in the amended Certificate of Incorporation. The equity value is calculated as a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA") of the Company's business ("Equity Value"). On the third closing anniversary and on each closing anniversary thereafter, the Company may redeem, for cash only, in whole the Preferred C, at the Liquidation Value plus the Equity Value payment. At any time after the redemption of the Company's Senior Subordinated Notes (due June 2008), Palladium Investors shall have the right to require the Company to redeem, for cash, the Preferred C at the Liquidation Value plus the Equity Value payment. Dividends of $6,042, $8,808 and $7,623 for the years ended June 30, 2005 and 2004 2003 and 2002, respectively, were accrued on the preferred shares and charged to retained earnings. Equity Value of $5,421, $3,470 and $0 for the years ended June 30, 2004, 2003 and 2002, respectively, was accrued and charged to retained earnings. F-22 was:
             
  Authorized    
  Shares Issued Shares Amount at Par
       
Class A common stock  16,200   12,600  $.10 
Class B common stock  14,100   11,888  $.10 
          
   30,300   24,488     

F-25


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) As of -------------------------------- June 30, 2004 June 30, 2003 ------------- ------------- Series B Value at issuance $ -- $25,000 Accrued dividends -- 11,339 Series C Value at issuance 10,591 20,000 Accrued dividends 7,200 9,072 Accreted equity value 6,887 3,470 ------- ------- Total redeemable preferred stock $24,678 $68,881 ======= ======= The agreement with the Palladium Investors contains covenants which restrict, without the consent of at least one director designated by the Palladium Investors (or if no such director is then serving on the Board, at least one of the Palladium Investors), certain (a) issuances of equity securities, (b) sales of assets in excess of $10,000, (c) purchases of business and other investments in excess of $10,000, (d) incurrence of indebtedness for borrowed money in excess of $12,500, (e) redemptions, acquisitions or other purchases of equity securities, (f) transactions with officers, directors, stockholders or employees or any family member or affiliate thereof in excess of $500, (g) compensation and benefits of certain officers, and (h) transactions involving a change of control. 12. Common Stock and Paid-in Capital Common Stock: Common stock at June 30, 2004 and 2003 was: Authorized Shares Issued Shares Amount at Par ---------- ------------ ------------- Class A common stock................. 16,200 12,600 $.10 Class B common stock................. 14,100 11,888 $.10 ------ ------ 30,300 24,488— (Continued)
      The entire voting power is vested in the holders of Class A common stock, except the holders of Class A common stock are entitled to elect all but threetwo of the directors. The holders of Class B common stock are entitled to elect one director, and the purchasersholders of the Preferred B and Preferred C are entitled by contractunits of senior secured notes have the right to elect two directors.designate one director. No dividends may be paid to common stockholders until all dividends have been paid to preferred stockholders. Thereafter, holders of Class A common stock shall receive dividends, when and as declared by the directors, at the rate of 5.5% of the par value of such stock (non-cumulative). After all declared dividends have been paid to Class A common stockholders, dividends may be declared and paid to the holders of Class B common stock. In the event of any complete liquidation, dissolution, winding-up of the business, or sale of all the assets of the Company, and after the redemption of the preferred stock, the Class A common stockholders are entitled to a distribution equal to the par value of the stock plus declared and unpaid dividends. Thereafter, the remaining assets of the Company shall be distributed to the holders of Class B common stock. Redeemable Common Stock: Pursuant to terms
      Non-cumulative dividends are payable on the outstanding Series A preferred stock, when and as declared by the directors, at the rate of an agreement with a minority shareholder, who is also an officer of the Company, the Company is required to purchase at book value, the Class B$1.00 per year for each share. The shares of such shareholder upon his retirement, death, disability,Series A preferred stock are redeemable at our option, in whole or in part, at any time or from time to time, for a redemption price equal to the termination of his employment. Should such shareholder elect to sell his shares, the Company has a right of first offer and an option to purchase the shares. The Company records a liability for the redemption amount as calculated at each balance sheet date. No liability was recorded as of June 30, 2004 and 2003. Income of $378 was recorded during 2002 to adjust the shares to redeemable value. F-23 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) 13. par value thereof plus any declared but unpaid dividends.
15.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'sCompany’s Belgium subsidiary maintains a defined contribution and defined benefit plan for eligible employees. The benefits provided by the plans are based upon years of service and the employees'employees’ average compensation, as defined. The measurement datedates for the domestic and international pension plans waswere June 30, 2005 and 2004, and 2003, respectively.
      Reconciliations of changes in benefit obligations, plan assets, and funded status of the plans were: Domestic International -------------------- -------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Change in Benefit Obligation Benefit obligation at beginning of year $ 15,846 $ 11,821 $ 6,595 $ 4,251 Service cost 1,260 1,056 467 310 Employee contributions -- -- 27 100 Interest cost 891 784 374 259 Benefits paid (595) (243) (3) (29) Actuarial (gain) or loss (251) (663) (475) 879 Curtailment (922) -- -- -- Change in Discount Rate (786) 3,092 -- -- Exchange rate impact -- -- 338 825 -------- -------- -------- -------- Benefit obligation at end of year $ 15,443 $ 15,846 $ 7,323 $ 6,595 ======== ======== ======== ========
                 
  Domestic International
     
  2005 2004 2005 2004
         
Change in benefit obligation
                
Benefit obligation at beginning of year $15,443  $15,846  $7,323  $6,595 
Service cost  1,220   1,260   477   467 
Interest cost  943   891   423   374 
Benefits paid  (295)  (595)  (14)  (3)
Employee contributions        39   27 
Actuarial (gain) or loss  197   (251)  670   (475)
Curtailment     (922)      
Special termination benefits        888    
Change in discount rate  3,732   (786)  1,690    
Exchange rate impact        (232)  338 
             
Benefit obligation at end of year $21,240  $15,443  $11,264  $7,323 
             
      At June 30, 20042005 and 2003,2004, the accumulated benefit obligation was $13,075$17,844 and $12,458,$13,075, respectively, for domestic pension plans and $4,383$7,325 and $4,248,$4,383, respectively, for international pension plans. Change in Plan Assets Fair value of
      The International plan assets at beginning of year $ 10,387 $ 9,717 $ 4,566 $ 2,882 Actual return on plan assets 1,069 537 435 204 Employer contributions 935 376 558 841 Employee contributions -- -- 27 100 Benefits paid (595) (243) (3) (29) Exchange rate impact -- -- 245 568 -------- -------- -------- -------- Fair value of plan assets at end of year $ 11,795 $ 10,387 $ 5,828 $ 4,566 ======== ======== ======== ======== Funded Status Funded status2005 benefit obligation and pension cost include $888 for enhanced pension benefits with certain employees who have agreed to an early-retirement program effective as of the closing of the Belgium Plant Transactions.

F-26


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company expects the International plan $ (3,648) $ (5,459) $ (1,495) $ (2,029) Unrecognized net actuarial (gain) or loss 152 2,358 368 961 Unrecognized prior service cost (337) (554) -- -- Unrecognized transition obligation/(asset) (8) (12) -- -- -------- -------- -------- -------- (Accrued) pension cost $ (3,842) $ (3,666) $ (1,127) $ (1,068) ======== ======== ======== ========will record during fiscal 2006 a curtailment gain of approximately $1,100 related to the reduction in number of international participants due to the Belgium Plant Transactions.
                 
Change in Plan Assets
                
Fair value of plan assets at beginning of year $11,795  $10,387  $5,828  $4,566 
Actual return on plan assets  365   1,068   623   435 
Employer contributions  720   935   658   558 
Employee contributions        38   27 
Other        353    
Benefits paid  (295)  (595)  (14)  (3)
Exchange rate impact        (78)  245 
             
Fair value of plan assets at end of year $12,585  $11,795  $7,408  $5,828 
             
Funded status
                
Funded status of the plan $(8,655) $(3,648) $(3,856) $(1,495)
Unrecognized net actuarial (gain) or loss  4,618   152   2,002   368 
Unrecognized prior service cost  (195)  (338)      
Unrecognized transition obligation/(asset)  (5)  (8)      
             
(Accrued) pension cost $(4,237) $(3,842) $(1,854) $(1,127)
             
      The Company expects to contribute $990 and $602approximately $1,411 to its Domestic and International plans, respectively,domestic plan during fiscal 2005.2006. The Company'sCompany’s policy is to fund the pension plans in amounts which comply with contribution limits imposed by law. F-24 law or by contractual obligation.
      The Company expects it will not contribute to the international plan during fiscal 2006 due to the anticipated reduction in plan participants resulting from employees who will transfer to GSK and from an early-retirement program.
      The Company expects international plan assets during 2006 will be reduced by approximately $6,800 in connection with the expected transfer of employees to GSK and the early-retirement program.

F-27


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)— (Continued)
      Components of net periodic pension expense were: 2004 2003 2002 ------- ------- ------- Domestic Pension Expense Service cost - benefits earned during the year $ 1,260 $ 1,056 $ 879 Interest cost on benefit obligation 891 784 714 Expected return on plan assets (846) (756) (709) Amortization of initial unrecognized net transition (asset) (3) (3) (3) Amortization of prior service costs (153) (162) (165) Amortization of net actuarial loss (gain) 25 (57) (31) Curtailment benefit (64) -- -- ------- ------- ------- Net periodic pension cost - domestic $ 1,110 $ 862 $ 685 ======= ======= ======= International Pension Expense Service cost - benefits earned during the year $ 467 $ 310 $ 217 Interest cost on benefit obligation 374 259 164 Expected return on plan assets (300) (203) (123) Amortization of net actuarial loss 22 -- -- ------- ------- ------- Net periodic pension cost - international $ 563 $ 366 $ 258 ======= ======= =======
             
  2005 2004 2003
       
Domestic Pension Expense
            
Service cost — benefits earned during the year $1,220  $1,260  $1,056 
Interest cost on benefit obligation  943   891   784 
Expected return on plan assets  (902)  (846)  (756)
Amortization of initial unrecognized net transition (asset)  (3)  (3)  (3)
Amortization of prior service costs  (143)  (153)  (162)
Amortization of net actuarial loss (gain)     25   (57)
Curtailment benefit     (64)   
          
Net periodic pension expense — domestic $1,115  $1,110  $862 
          
International Pension Expense
            
Service cost — benefits earned during the year $477  $467  $310 
Interest cost on benefit obligation  424   374   259 
Expected return on plan assets  (362)  (300)  (203)
Special Termination Benefits  888       
Amortization of net actuarial loss     22    
          
Net periodic pension expense — international $1,427  $563  $366 
          
      Significant actuarial assumptions for the plans were: 2004 2003 2002 ---- ---- ---- Domestic Actuarial Assumptions Discount
             
  2005 2004 2003
       
Domestic Actuarial Assumptions
            
Discount rate for service and interest  6.1%   5.8%   7.1% 
Expected rate of return on plan assets  7.5%   7.5%   7.5% 
Rate of compensation increase  3.0%-4.5%   3.0%-4.5%   3.0%-4.5% 
Discount rate for year-end benefit obligation  5.0%   6.1%   5.8% 
International Actuarial Assumptions
            
Discount rate for service and interest  5.5%   5.5%   5.8% 
Expected rate of return on plan assets  6.0%   6.0%   6.0% 
Rate of compensation increase  3.0%   3.0%   3.0% 
Discount rate for year-end benefit obligation  4.5%   5.5%   5.5% 
      The Company uses Moody’s Aa Corporate Bond Rate as a benchmark for its assumed discount rate for service and interest 5.8% 7.1% 7.5% Expectedthe domestic pension plan. The international pension plan utilizes Euro-zone A+ rated bonds in the determination of the discount rate based on the average liability duration of return onthe plan assets 7.5% 7.5% 7.5% Rate of compensation increase 3.0%-4.5% 3.0%-4.5% 3.0%-4.5% Discount rate for year-end benefit obligation 6.1% 5.8% 7.1% International Actuarial Assumptions Discount rate for service and interest 5.5% 5.8% 5.8% Expected rate of return on plan assets 6.0% 6.0% 6.0% Rate of compensation increase 3.0% 3.0% 3.0% Discount rate for year-end benefit obligation 5.5% 5.5% 5.8%beneficiaries.

F-28


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Estimated future benefit payments, including benefits attributable to future service, are as follows: Domestic International -------- ------------- 2005 $ 295 $ 37 2006 301 38 2007 311 40 2008 451 41 2009 508 42 2010-2014 4,500 1,817 F-25 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
         
  Domestic International
     
2006 $333  $48 
2007  334   10 
2008  447   6 
2009  512   5 
2010  616   4 
2011-2015  5,267   13 
      Estimated future benefit payments for the international plan reflect participants remaining after completion of the Belgium Plant Transactions.
      The Company'sCompany’s domestic plan target asset allocations for fiscal 20052006 and the weighted asset allocation of plan assets as of June 30, 20042005 and 20032004 are as follows: 2005 2004 2003 ---- ---- ---- Domestic Plan Asset Allocations Debt Securities 45% - 55% 50% 59% Equity Securities 15% - 25% 19% 9% Other 25% - 35% 31% 32%
             
  2006 2005 2004
       
Domestic Plan Asset Allocations
            
Debt Securities  35% - 45%   39%   50% 
Equity Securities  25% - 35%   30%   19% 
Other  25% - 35%   31%   31% 
      The expected long-term rate of return for the plan'splan’s total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation of each class. Equity securities are expected to return 8% to 10% annually over the long-term, while debt securities are expected to return 4% to 6%. Based on historical experience, the Committee expects that the Plan'sPlan’s asset managers will provide a modest (1/2%1/2% to 1% per annum)annual premium to their respective market benchmark indices.
      The investment policy and strategy is to earn a long-termlong term investment return sufficient to meet the obligations of the Plan,plan, while assuming a moderate amount of risk in order to maximize investment return. In order to achieve this goal, assets are invested in a diversified portfolio consisting of equity securities, debt securities, limited partnerships and other investments in a manner consistent with ERISA'sERISA’s fiduciary requirements.
      The Company'sCompany’s international plan target asset allocations for fiscal 20052006 and the weighted asset allocation of plan assets as of June 30, 20042005 and 20032004 are as follows: 2005 2004 2003 ---- ---- ---- International Plan Asset Allocations Debt Securities 59% 62% 79% Equity Securities 25% 21% 20% Other 16% 17% 1%
             
  2006 2005 2004
       
International Plan Asset Allocations
            
Debt Securities  57%   57%   62% 
Equity Securities  24%   23%   21% 
Other  19%   20%   17% 
      The expected long-term rate of return for the plan'splan’s total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class. Equity securities are expected to return 7.5% over the long-term, while debt securities are expected to return 5.5%. The Company assumed the liability for the International pension plan during 2002 as part of the MFA acquisition.
      In addition to Belgium, most of the Company'sCompany’s foreign subsidiaries have retirement plans covering substantially all employees. Contributions to these plans are generally deposited under fiduciary-type arrangements. Benefits under these plans primarily are based on compensation levels. Funding policies are based on legal requirements and local practices. Expense under these plans was $585, $522$547, $498 and $534$437 for 2005, 2004 and 2003, and 2002, respectively.

F-29


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company and its domestic subsidiaries provide a 401(k) savings plan, under which an employee may make a pre-tax contribution of up to 60% of base compensation. The Company makes a non-matching contribution equal to 1% of the employee'semployee’s base compensation and a matching contribution equal to 50% of the employee'semployee’s contribution up to the first 3% of base compensation and 25% of the employee'semployee’s contribution from 3% to 6% of base compensation. All employee contributions are subject to the maximum amounts permitted for federal income tax purposes. Employees vest in the Company'sCompany’s matching contributions over 5 years. The Company'sCompany’s contribution was $425, $502 and $528 in 2005, 2004 and $539 in 2004, 2003, and 2002, respectively. F-26 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
      The Company has a deferred compensation and supplemental retirement plan for certain senior executives. The benefits provided by the plan are based upon years of service and the executives'executives’ average compensation, subject to certain limits. The plan also provides for death benefits before retirement. Expense under this plan was $268, $259, and $249 in 2005, 2004 and $204 in 2004, 2003, and 2002, respectively. The aggregate liability under this plan amounted to $2,018$2,297 and $1,678$2,018 at June 30, 20042005 and 2003,2004, respectively. To assist in funding the benefits of the plan, the Company invested in corporate-owned life insurance policies, through a trust, which at June 30, 20042005 and 20032004 had cash surrender values of $1,481$1,566 and $1,299,$1,481, respectively, and are included in other assets.
      The Company has an executive income program to provide a pre-retirement death benefit and a supplemental retirement benefit for certain senior executives. The aggregate liability under this plan amounted to $416$441 and $385$416 at June 30, 20042005 and 2003,2004, respectively. To assist in funding the benefits of the plan, the Company invested in split-dollar life insurance policies, which at June 30, 20042005 and 20032004 had cash surrender values to the Company of $1,529$2,246 and $1,392,$1,529, respectively, and are included in other assets. 14.
16.Income Taxes
      Income (loss) from continuing operations before income taxes was: 2004 2003 2002 -------- -------- -------- Domestic .................................... $ 27,587 $ 3,855 $ (5,507) Foreign ..................................... (3,054) 3,906 (4,937) -------- -------- -------- Income (loss) from continuing operations before income taxes ....................... $ 24,533 $ 7,761 $(10,444) ======== ======== ========
             
  2005 2004 2003
       
Domestic $2,786  $27,587  $3,855 
Foreign  (21,767)  (3,678)  3,122 
          
Income (loss) from continuing operations before income taxes $(18,981) $23,909  $6,977 
          

F-30


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      Components of the provision for income taxes were: 2004 2003 2002 -------- -------- -------- Current tax provision (benefit): Federal .................................. $ 563 $ -- $ -- State and local .......................... 1,333 516 (256) Foreign .................................. 5,747 3,084 3,785 -------- -------- -------- Total current tax provision .............. 7,643 3,600 3,529 -------- -------- -------- Deferred tax provision (benefit): Federal .................................. 10,150 1,705 (1,225) State and local .......................... (1,396) (345) (590) Foreign .................................. (1,671) 850 (1,673) Change in valuation allowance -domestic .. (8,754) (1,360) 14,726 -foreign ... 1,997 5,610 -- -------- -------- -------- Total deferred tax provision ............. 326 6,460 11,238 -------- -------- -------- Provision for income taxes .................. $ 7,969 $ 10,060 $ 14,767 ======== ======== ======== F-27 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
              
  2005 2004 2003
       
Current tax provision (benefit):            
 Federal $175  $563  $ 
 State and local  518   1,333   516 
 Foreign  2,445   5,582   2,854 
          
 Total current tax provision  3,138   7,478   3,370 
          
Deferred tax provision (benefit):            
 Federal  1,200   10,150   1,705 
 State and local  (170)  (1,396)  (345)
 Foreign  (5,527)  (1,671)  850 
 Change in valuation allowance — domestic  (1,030)  (8,754)  (1,360)
                                  — foreign  4,509   1,997   5,610 
          
 Total deferred tax provision  (1,018)  326   6,460 
          
Provision for income taxes $2,120  $7,804  $9,830 
          
      Reconciliations of the Federal statutory rate to the Company'sCompany’s effective tax rate are: 2004 2003 2002 ---- ---- ---- Federal income tax rate ...................... 35.0% 35.0% (35.0)% State and local taxes, net of federal income tax effect .......................... 3.5 1.4 (4.9) Foreign tax rate differences and taxes in certain profitable foreign jurisdictions 22.9 33.2 50.8 Change in valuation allowance ................ (41.4) 55.0 131.8 Gain not taxable for book purposes ........... 10.4 -- -- Expenses with no tax benefit ................. 1.7 4.4 1.0 Other ........................................ 0.3 0.6 (2.3) ---- ----- ----- Effective tax rate ........................... 32.4% 129.6% 141.4% ==== ===== =====
             
  2005 2004 2003
       
Federal income tax rate  (35.0)%  35.0%  35.0%
State and local taxes, net of federal income tax effect  1.8   3.6   1.6 
Foreign tax rate differences and taxes in certain profitable foreign jurisdictions  41.0   23.9   38.8 
Change in valuation allowance  (6.3)  (42.5)  60.9 
Taxable income not recorded on books  9.0   10.6    
Nondeductible expenses  2.1   1.7   4.9 
Other  (1.4)  0.3   (0.3)
          
Effective tax rate  11.2%  32.6%  140.9%
          
      Most of the investments in fixed assets of the Company'sCompany’s Israeli subsidiary have been granted "approved enterprise"“approved enterprise” status under Israeli law. The subsidiary is also a "foreign investors' company"“foreign investors’ company” as defined by Israeli law. This status entitles the subsidiary to reduced tax rates. The entitlement of the reduced tax rates is conditional upon the subsidiary fulfilling the conditions stipulated by Israeli law, regulations published there-under and the instruments of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be canceledcancelled and the subsidiary may be required to refund the amount of the benefits, in whole or in part, with the addition of interest. The periods of benefits associated with “approved enterprise” status expire in various yearsincrements through 2010.
      Provision has not been made for United States or additional foreign taxes on undistributed earnings of foreign subsidiaries of approximately $39,200,$46,100, whose earnings have been or are intended to be reinvested. It is not practicable at this time to determine the amount of income tax liability that would result should such earnings be repatriated.

F-31


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The tax effects of significant temporary differences that comprise deferred tax assets and liabilities at June 30, 2005 and 2004 and 2003 were: As of June 30, ----------------------- 2004 2003 -------- -------- Deferred tax assets: Employee benefits ............................. $ 3,274 $ 3,194 Property, plant and equipment ................. 475 686 Insurance ..................................... 350 341 Receivables allowances ........................ 724 770 Inventory ..................................... 3,441 4,588 Environmental remediation ..................... 1,322 1,232 Alternative minimum tax ....................... 701 163 Net operating loss carry forwards -domestic ... 11,645 20,186 -foreign .... 10,432 1,290 Other ......................................... 1,333 2,059 -------- -------- 33,697 34,509 Valuation allowance ........................... (30,045) (32,954) -------- -------- 3,652 1,555 Deferred tax liabilities Property, plant and equipment ................. (2,727) (2,354) Other ......................................... (2,649) -- -------- -------- (5,376) (2,354) -------- -------- Net deferred tax liability ....................... $ (1,724) $ (799) ======== ======== F-28 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
          
  As of June 30,
   
  2005 2004
     
Deferred tax assets:        
 Employee benefits $3,149  $3,274 
 Property, plant and equipment  406   475 
 Insurance  334   350 
 Receivables allowances  729   724 
 Inventory  1,434   3,441 
 Environmental remediation  1,156   1,322 
 Alternative minimum tax  563   701 
 Net operating loss carry forwards — domestic  9,944   11,645 
                                     — foreign  18,982   10,432 
 Other  1,822   1,333 
       
   38,519   33,697 
 Valuation allowance  (33,437)  (30,045)
       
   5,082   3,652 
       
Deferred tax liabilities        
 Property, plant and equipment  (3,141)  (2,727)
 Other  (2,647)  (2,649)
       
   (5,788)  (5,376)
       
Net deferred tax liability $(706) $(1,724)
       
      Deferred taxes are included in the following line items in the consolidated balance sheets: 2004 2003 ------- ------- Prepaid expenses and other current assets .......... $ 502 $ 543 Accrued expenses and other current liabilities ..... (138) (111) Other assets ....................................... 669 624 Other liabilities .................................. (2,757) (1,855) ------- ------- $(1,724) $ (799) ======= =======
         
  2005 2004
     
Prepaid expenses and other current assets $541  $502 
Accrued expenses and other current liabilities  (141)  (138)
Other assets  255   669 
Other liabilities  (1,361)  (2,757)
       
  $(706) $(1,724)
       
      The Company has incurred domestic and foreign losses in recent years and has reassessed the likelihood of recovering net deferred tax assets, resulting in the recording of valuation allowances due to the uncertainty of future profitability. The Company recorded income tax expense and increased the foreign valuation allowances by $5,610$4,509, $1,997 and $11,594$5,610 during the fourth quarters of 20032005, 2004 and 2002,2003, respectively. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance.

F-32


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The valuation allowance for deferred tax assets was: 2004 2003 2002 -------- -------- -------- Balance at beginning
             
  2005 2004 2003
       
Balance at beginning of period $30,045  $32,954  $18,495 
Change in valuation allowance  3,479   (6,757)  4,250 
Other adjustments  (87)  3,848   10,209 
          
Balance at end of period $33,437  $30,045  $32,954 
          
      $3,202 and $4,811 of period $ 32,954 $ 18,495 $ 1,434 Change inthe valuation allowance (6,757) 4,250 14,726 Other adjustments 3,848 10,209 2,335 -------- -------- -------- Balancerelates to the current portion of deferred tax assets at end of period $ 30,045 $ 32,954 $ 18,495 ======== ======== ========June 30, 2005 and 2004, respectively.
      The other adjustments into the valuation allowance consist primarily of changes in the valuation allowance attributable to discontinued operations.
      The Company has domestic federal net operating loss carry forwards of approximately $25,000$20,000 that expire infrom 2019 through 2024, state net operating loss carry forwards of approximately $55,000$56,000 that expire over various periods beginning in 2005 and foreign net operating loss carry forwards of approximately $30,000$55,000 that expire over various periods beginning in 2010. 15. Commitments and Contingencies
17.Commitments and Contingencies
Leases:
      The Company leases office, warehouse and manufacturing equipment and facilities for minimum annual rentals (plus certain cost escalations) as follows: Non-Cancelable Capital Operating Year Ended June 30 Leases Leases - ----------------- ------- --------- 2005 ........................................... $ 103 $1,524 2006 ........................................... 2 778 2007 ........................................... -- 568 2008 ........................................... -- 456 2009 ........................................... -- 167 Thereafter ..................................... -- 72 ------ ------ Total minimum lease payments ................... $ 105 $3,565 ====== Amounts representing interest .................. 2 ------ Present value of minimum lease payments ........ $ 103 ====== F-29 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) Equipment under capitalized leases included in the consolidated balance sheet at June 30, 2004 was $1,027, net of accumulated depreciation of $440.
     
  Non-Cancelable
  Operating
Year Ended June 30 Leases
   
2006 $1,474 
2007  1,388 
2008  1,244 
2009  972 
2010  853 
Thereafter  1,695 
    
Total minimum lease payments $7,626 
    
      Operating lease commitments include $1,125$875 with a related party controlled by shareholders of the Company, as described in Related Party Transactions.
      Rent expense under operating leases was $1,873, $2,441 and $2,221 for 2005, 2004 and 2003, and 2002 was $2,441, $2,221 and $2,015, respectively.
Litigation:
      On or about April 17, 1997, CP Chemicals, Inc. (a, a subsidiary "CP"(“CP”), and the Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron"(“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 providesprovided for a period of due diligence investigation of the property owned by Chevron. The investigation has been conductedChevron and the results are under review. The investigation costs are being split with one other defendant, Vulcan Materials Company. Uponupon completion of the review of the results of the investigation, a decision willwas to 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 negotiationsNegotiations with Chevron regarding its allocation of responsibility and associated costs

F-33


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
under the Consent Order.Order reached an impasse and it became necessary for the Company and another defendant, Vulcan Materials Company (“Vulcan”), to opt out of the settlement on April 21, 2005. Since then, settlement negotiations have continued and the parties are in the process of memorializing the terms of a revised settlement. The Court will reopen the case if a revised settlement is not finalized.
      As proposed, CP, the Company and Vulcan, through an acquisition entity known as NFE, LLC (“NFE”), would acquire a portion of the property. NFE will then proceed with the remediation of the acquired property. Vulcan will pay a share of the remediation costs. Vulcan’s share has not yet been determined. Another defendant will also make a contribution toward the remediation costs to be incurred by NFE in an amount that has not yet been determined but which is estimated to be approximately $175. Chevron will retain title to a portion of the property and will also retain responsibility for further investigation and remediation of certain identified environmental conditions on the property. In addition, Chevron will also be required to complete any necessary remediation in a certain area of the property. While the costs and liabilities cannot be estimated with any degree of certainty at this time, the Company believes that insurance recoveries will be available to offset somemost of those costs.
      The Company'sCompany’s subsidiary, Phibro-Tech, subsidiaryInc. (“Phibro-Tech”), was named in 1993 as a potentially responsible party ("PRP"(“PRP”) in connection with an action commenced under the Federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"(“CERCLA”) by the United States Environmental Protection Agency ("the EPA"(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$675 has been paid as of June 30, 2004.2005. Some recovery from insurance and other sources is expected but has not been recorded. The Company also has accrued its best estimate of any future costs.
      Phibro-Tech 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 endingmake annual payments through October 2008. In February 2000,The remaining payments under this agreement were $315 as of June 30, 2005.
      Phibro-Tech and the EPA notified numerous partiesDTSC are currently negotiating the settlement of potential liability for waste disposal at a licensed Casmalia, California disposal site, including a business, assetscertain alleged technical permit violations from 2003. A preliminary assessment of which were originally acquired by a subsidiarypenalties in 1984. A settlementthe amount of $49 has been reached inmade. Phibro-Tech, Inc. believes this matter and the Company has paid $171 in full settlement.amount will be reduced.
      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 is investigatinghas investigated the matter, which relates to events in the 1950's1950’s and 1960's, but1960’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 RCRAthe Resource Conservation and Recovery Act relating to possible discharges into Turkey Creek in Sumter, South Carolina. The Company is preparinghas submitted its response to the Request for Information and believes that, because its Sumter, South Carolina facility is distant from Turkey Creek and does not discharge into Turkey Creek, there is a low probabilitythe likelihood of liability associated with this matter. F-30 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)matter is remote.
      By letter dated February 22, 2005, Phibro-Tech has been advised by the adjoining property owner of Phibro-Tech’s Powder Springs, Georgia property, of a potential claim for property damage as a result of certain alleged environmental conditions on Phibro-Tech’s Powder Springs property. No specific claim was made nor was any specific amount alleged. The Company has investigated this matter but does not, at this time, believe there will be any material liability resulting therefrom.
      The Company and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. The Company believes that

F-34


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on its financial position. position or results of operations.
Environmental Remediation:
      The Company'sCompany’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'sCompany’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'sCompany’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.
      Israel’s Ministry of the Environment has imposed revised business license terms on Koffolk’s Ramat Hovav manufacturing facilities. The Company has taken steps to contest the revised terms and can not currently estimate the costs or the timing of the final resolution of the issue.
      The nature of the Company'sCompany’s and its subsidiaries'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'sCompany’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 $2,933,$2,743, which is included in current and long-term liabilities in the June 30, 20042005 consolidated balance sheet (approximately $2,652$2,933 at June 30, 2003)2004). Environmental provisions were $661, $1,511 and $1,610 for 2005, 2004 and $2,148 for 2004, 2003, and 2002, respectively, and were included in selling, general and administrative expenses inon the Company’s consolidated statements of operations. 16. operations and comprehensive income (loss).
18.Guarantees
      As part of the Prince Transactions, (Note 4), 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'sCompany’s maximum liability under such indemnifications is limited to $15,000. The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of 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 Buyer by January 1, 2009. The maximum potential Backstop Indemnification Amount is included in other liabilities on the Company's condensed consolidated balance sheet at June 30, 2004. F-31 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands)
      The Company established a $1,000 letter of credit escrow for two yearsthrough December 2005 to collateralize its working capital adjustment and certain other indemnification obligations relating to the Prince Transactions. 17.

F-35


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19.Financial Instruments
      Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions in various countries. The Company sells to customers in a variety of industries, markets and countries. Concentrations of credit risk with respect to receivables arising from these sales are limited due to the large number of customers comprising the Company'sCompany’s customer base. Ongoing credit evaluations of customers'customers’ financial conditions are performed and, generally, no collateral is required. The Company maintains appropriate reserves for uncollectible receivables.
      The carrying amounts of cash and cash equivalents, trade receivables, trade payables and short-term debt is considered to be representative of their fair value because of their short maturities. The fair values of the Company'sCompany’s Senior Secured Notes and Senior Subordinated Notes are estimated based on quoted market prices. At June 30, 2005 the fair values of the Company’s Senior Secured Notes and Senior Subordinated Notes were $136,415 and $45,628, respectively, and the related carrying amounts were $127,491 and $48,029, respectively. At June 30, 2004 the fair values of the Company'sCompany’s Senior Secured Notes and Senior Subordinated Notes were $114,450 and $43,706, respectively, and the related carrying amounts were $105,000 and $48,029,48,029, respectively. At June 30, 2003 the fair value of the Company's Senior Subordinated Notes was $40,000 and the related carrying amount was $100,000. The fair value of the Company'sCompany’s other long-term debt does not differ materially from its carrying amount based on the variable interest rate structure of these obligations.
      The Company obtains third-party letters of credit in connection with certain regulatory and insurance obligations, inventory purchases and insuranceother contractual obligations. The contract values of the letters of credit at June 30, 2005 and 2004 were $11,686 and 2003 were $9,263, and $2,593, respectively. The difference between the carrying values and fair values of these letters of credit was not material.
      The Company operates internationally, with manufacturing and sales facilities in various locations around the world and utilizes certain financial instruments to manage its foreign currency and commodity exposures, primarily related to forecasted transactions. To qualify a derivative as a hedge at inception and throughout the hedge period, the Company formally documents the nature and relationships between hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in operations currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company hedges forecasted transactions for periods not exceeding the next twelve months. The Company does not engage in trading or other speculative uses of financial instruments.
      From time to time, the Company uses forward contracts and options to mitigate its exposure to changes in foreign currency exchange rates and as a means of hedging forecasted operating costs. When using options as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. Pursuant to SFAS No. 133, for contracts that qualify as a hedge at inception and throughout the hedge period, all cumulative changes in a foreign currency option'soption’s fair value are deferred as a component of accumulated other comprehensive income until the underlying hedged transactions are reported on the Company'sCompany’s consolidated statement of operations and comprehensive income. The Company also utilizes, on a limited basis, certain commodity derivatives, primarily on copper used in its manufacturing process, to hedge the cost of its anticipated production requirements. The Company's foreign currency options and forward contracts andCompany’s commodity futures contracts were designated as cash flow hedges and qualified for hedge accounting treatment. The notional amount of the Company’s copper contracts at June 30, 2005 was $1,858. The Company deferred $9$123 and $81$9 of cumulative gains (net of losses) on various copper futures contracts designated as cash flow hedges as of June 30, 2005 and 2004, and 2003, respectively.

F-36


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The fair value of commodity contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that the Company would expect to receive or pay to terminate the agreements as of the reporting date. F-32 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) 18.
20.Business Segments
      The Company'sCompany’s reportable segments are Animal Health and Nutrition, Industrial Chemicals Distribution and All Other.Distribution. 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'sCompany’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.industries; and copper-based fungicides. 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.
      Certain of the Company’s operations (MRT, La Cornubia and Wychem) were previously included in the All Other segment. Contract manufacturing, also previously included in the All Other segment, has been aggregated with the Industrial Chemicals segment due to the similar nature, management and economic characteristics of the businesses as well as common copper-based raw materials and production facilities. In addition, certain product lines previously included in the Animal Health and Nutrition segment have been included in the Distribution segment due to a change in management and marketing responsibilities. Prior years segment data has been revised for comparability.
      The following segment data includes information only for continuing operations.
Animal Corporate Health & Industrial All Expenses & 2004 Segment Detail Nutrition Chemicals Distribution Other Adjustments Total - ------------------- --------- --------- ------------ ----- ----------- ----- Net Sales $265,421 $ 42,253 $ 30,861 $ 19,739 $ -- $358,274 Operating income/(loss) 33,307 2,899 2,900 2,301 (17,132) 24,275 Depreciation and amortization 8,263 2,123 11 419 2,367 13,183 Identifiable assets 185,601 26,146 7,715 5,696 16,211 241,369 Capital expenditures 3,850 2,216 6 115 57 6,244
Animal Corporate Health & Industrial All Expenses & 2003 Segment Detail Nutrition Chemicals Distribution Other Adjustments Total - ------------------- --------- --------- ------------ ----- ----------- ----- Net Sales $250,706 $ 48,797 $ 30,072 $ 12,171 $ -- $341,746 Operating income/(loss) 38,472 (1,855) 3,207 620 (14,948) 25,496 Depreciation and amortization 7,690 2,904 12 364 1,554 12,524 Identifiable assets 190,864 33,191 9,154 5,726 12,811 251,746 Capital expenditures 5,669 2,836 -- 129 2 8,636
Animal Corporate Health & Industrial All Expenses & 2002 Segment Detail Nutrition Chemicals Distribution Other Adjustments Total - ------------------- --------- --------- ------------ ----- ----------- ----- Net Sales $239,602 $ 50,854 $ 27,852 $ 10,368 $ -- $328,676 Operating income/(loss) 28,298 (7,324) 2,345 1,164 (13,854) 10,629 Depreciation and amortization 7,438 3,535 12 321 1,049 12,355 Identifiable assets 186,118 38,985 8,059 8,097 10,393 251,652 Capital expenditures 5,915 2,328 12 144 119 8,518
F-33
                     
  Animal        
  Health & Industrial      
  Nutrition Chemicals Distribution Corporate Total
           
2005 Segment Detail
                    
Net Sales $278,837  $52,305  $33,237  $  $364,379 
Operating income/(loss)  10,073   4,835   4,671   (15,197)  4,382 
Depreciation and amortization  16,243   1,597   20   246   18,106 
Identifiable assets  204,799   21,473   8,092   18,693   253,057 
Capital expenditures  4,823   1,384   50   1,232   7,489 
      The Animal Health and Nutrition Segment includes Belgium Plant Transactions Costs for severance of $12,808, depreciation expense of $7,467 and other costs of $1,916.
                     
  Animal        
  Health & Industrial      
  Nutrition Chemicals Distribution Corporate Total
           
2004 Segment Detail
                    
Net Sales $263,417  $58,102  $32,865  $  $354,384 
Operating income/(loss)  32,605   4,569   3,602   (20,287)  20,489 
Depreciation and amortization  8,263   2,123   11   261   10,658 
Identifiable assets  185,601   26,146   7,715   16,616   236,078 
Capital expenditures  3,850   2,216   6   57   6,129 

F-37


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) 19. — (Continued)
                     
  Animal        
  Health & Industrial      
  Nutrition Chemicals Distribution Corporate Total
           
2003 Segment Detail
                    
Net Sales $248,262  $57,040  $32,516  $  $337,818 
Operating income/(loss)  37,325   (2,010)  4,354   (13,774)  25,895 
Depreciation and amortization  7,690   2,904   12   380   10,986 
Identifiable assets  190,864   33,191   9,154   13,353   246,562 
Capital expenditures  5,669   2,836      2   8,507 
21.Geographic Information
      The following is information about the Company'sCompany’s geographic operations. Information is attributed to the geographic areas based on the location of the Company'sCompany’s subsidiaries. 2004 2003 2002 -------- -------- -------- Net Sales: United States $248,577 $233,942 $219,981 Europe 18,605 16,643 12,004 Israel 43,170 44,383 45,266 Latin America 26,800 25,235 28,970 Asia/Pacific 21,122 21,543 22,455 -------- -------- -------- Total $358,274 $341,746 $328,676 ======== ======== ======== Property, Plant and Equipment, net: United States $ 13,836 $ 16,719 $ 19,370 Europe 20,732 20,463 17,451 Israel 9,157 10,990 12,647 Latin America 14,783 15,396 13,772 Asia/Pacific 278 337 258 -------- -------- -------- Total $ 58,786 $ 63,905 $ 63,498 ======== ======== ======== 20.
              
  For the Years Ended June 30,
   
  2005 2004 2003
       
Net Sales:
            
 United States $251,520  $248,577  $233,942 
 Europe  17,091   14,715   12,715 
 Israel  40,150   43,170   44,383 
 Latin America  31,397   26,800   25,235 
 Asia/ Pacific  24,221   21,122   21,543 
          
 Total $364,379  $354,384  $337,818 
          
              
  For the Years Ended June 30,
   
  2005 2004 2003
       
Property, Plant and Equipment, net:
            
 United States $14,742  $13,836  $16,719 
 Europe  8,167   17,327   17,062 
 Israel  7,816   9,157   10,990 
 Latin America  18,997   14,783   15,396 
 Asia/ Pacific  238   278   337 
          
 Total $49,960  $55,381  $60,504 
          
22.Consolidating Financial Statements
      The units of Senior Secured Notes due 2007, consisting of US SeniorU.S. Notes issued by the Company (the "Parent Issuer")Parent Issuer and Dutch Senior Notes issued by Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"),the Dutch Issuer, are guaranteed by certain subsidiaries. The CompanyParent Issuer and its U.S. subsidiaries ("(“U.S. Guarantor Subsidiaries"Subsidiaries”), excluding The Prince Manufacturing Company,PMC, Prince MFG, LLC and Mineral Resource Technologies, Inc. (until divested)MRT (the "Unrestricted Subsidiaries"“Unrestricted Subsidiaries”, as defined in the indenture)Indenture), fully and unconditionally guarantee all of the Senior Secured Notes on a joint and several basis. In addition, the Dutch Issuer'sIssuer’s subsidiaries, presently consisting of Phibro Animal Health SA (the "Belgium Guarantor"“Belgium Guarantor”), fully and unconditionally guarantee the Dutch Senior Notes. The Dutch issuerIssuer and the Belgium Guarantor do not guarantee the US SeniorU.S. Notes. Other foreign subsidiaries ("(“Non-Guarantor Subsidiaries"Subsidiaries”) do not presently guarantee the Senior Secured Notes. The U.S. Guarantor Subsidiaries include all domestic subsidiaries of the CompanyParent Issuer other than the Unrestricted Subsidiaries and include: CP Chemicals, Inc.,; Phibro-Tech, Inc.,; Prince Agriproducts, Inc,Inc.; Phibrochem, Inc., ;

F-38


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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'sParent Issuer’s U.S. subsidiaries, including the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and unconditionally guarantee the Senior Subordinated Notes on a joint and several basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not presently guarantee the Senior Subordinated Notes. The U.S. Guarantor Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of the CompanyParent Issuer including: CP F-34 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) Chemicals, Inc.,; Phibro-Tech, Inc.,; Prince Agriproducts, Inc., The Prince Manufacturing Company,; PMC; Prince MFG, LLC, Mineral Resource Technologies, Inc.LLC; MRT (until divested),; Phibrochem, Inc.,; Phibro Chemicals, Inc.,; Western Magnesium Corp.,; Phibro Animal Health Holdings, Inc.,; and Phibro Animal Health U.S., Inc.
      The following consolidating financial data summarizes the assets, liabilities and results of operations and cash flows of the Parent Issuer, Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries are directly or indirectly wholly owned as to voting stock by the Company.
      Investments in subsidiaries are accounted for by the Parent Issuer using the equity method. Income tax expense (benefit) is allocated among the consolidating entities based upon taxable income (loss) by jurisdiction within each group. The principal consolidation adjustments are to eliminate investments in subsidiaries and intercompany balances and transactions. F-35

F-39


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING BALANCE SHEET
As of June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 $ -- $ 5,568 Trade receivables 2,670 -- 26,996 -- 2,592 25,400 -- 57,658 Other receivables 317 414 1,195 -- 72 768 -- 2,766 Inventory 1,994 -- 37,890 -- 23,159 16,867 -- 79,910 Prepaid expenses and other 3,195 110 565 -- 1,018 3,800 -- 8,688 --------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 8,312 524 67,447 17 27,053 51,237 -- 154,590 --------------------------------------------------------------------------------------------------- Property, plant & equipment, net 105 -- 13,730 -- 17,321 27,630 -- 58,786 Intangibles -- -- 4,252 -- 1,569 5,874 -- 11,695 Investment in subsidiaries 125,355 -- 3,619 1,604 -- -- (130,578) -- Intercompany (14,995) 20,995 60,030 20,181 1,630 (12,497) (75,344) -- Other assets 14,506 -- 1,056 -- -- 736 -- 16,298 --------------------------------------------------------------------------------------------------- $ 133,283 $ 21,519 $ 150,134 $ 21,802 $ 47,573 $ 72,980 $(205,922) $ 241,369 =================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Cash overdraft $ -- $ 10 $ 881 $ -- $ -- $ -- $ -- $ 891 Loan payable to banks 10,996 -- -- -- -- -- -- 10,996 Current portion of long-term debt -- -- 101 -- -- 1,250 -- 1,351 Accounts payable 4,734 9 28,434 -- 2,258 11,537 -- 46,972 Accrued expenses and other 11,857 159 8,306 216 12,022 7,450 -- 40,010 --------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 27,587 178 37,722 216 14,280 20,237 -- 100,220 --------------------------------------------------------------------------------------------------- Long-term debt 133,029 -- 2 20,000 -- 4,987 -- 158,018 Intercompany debt -- -- -- -- 30,553 44,791 (75,344) -- Other liabilities 11,822 -- 4,897 -- 1,136 4,431 -- 22,286 --------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 172,438 178 42,621 20,216 45,969 74,446 (75,344) 280,524 --------------------------------------------------------------------------------------------------- REDEEMABLE SECURITIES: Series C preferred stock 24,678 -- -- -- -- -- -- 24,678 --------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT): Series A preferred stock 521 -- -- -- -- -- -- 521 Common stock 2 1 31 -- -- -- (32) 2 Paid-in capital 860 -- 112,004 21 52 1,537 (113,614) 860 Retained earnings (accumulated deficit) (57,964) 21,340 (4,339) (2,744) (2,757) 8,374 (19,874) (57,964) Accumulated other comprehensive -- income (loss): Gain on derivative instruments 9 -- 9 -- -- -- (9) 9 Cumulative currency translation adjustment (7,261) -- (192) 4,309 4,309 (11,377) 2,951 (7,261) --------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (63,833) 21,341 107,513 1,586 1,604 (1,466) (130,578) (63,833) --------------------------------------------------------------------------------------------------- $ 133,283 $ 21,519 $ 150,134 $ 21,802 $ 47,573 $ 72,980 $(205,922) $ 241,369 ===================================================================================================
F-36 2005
                                    
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
ASSETS
CURRENT ASSETS:                                
 Cash and cash equivalents $2,490  $  $1,787  $17  $255  $8,452  $  $13,001 
 Trade receivables  2,828      24,791      3,980   21,207      52,806 
 Other receivables  549      971      804   1,287      3,611 
 Inventory  2,669      36,289      29,691   27,972      96,621 
 Prepaid expenses and other  4,118      921      1,203   6,545      12,787 
                         
   TOTAL CURRENT ASSETS  12,654      64,759   17   35,933   65,463      178,826 
                         
Property, plant & equipment, net  1,178      13,564      8,122   27,096      49,960 
Intangibles, net        3,827      1,339   5,035      10,201 
Other assets  12,303      796         971      14,070 
Investment in subsidiaries  101,464         (17,469)        (83,995)   
Intercompany  9,384      93,463   31,103   (1,427)  (14,325)  (118,198)   
                         
  $136,983  $  $176,409  $13,651  $43,967  $84,240  $(202,193) $253,057 
                         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:                                
 Cash overdraft $  $  $190  $  $  $  $  $190 
 Loan payable to banks  8,000               38      8,038 
 Current portion of long-term debt                 1,625      1,625 
 Accounts payable  1,683      20,137      3,320   11,207      36,347 
 Accrued expenses and other  10,910      9,222   248   21,195   12,240       53,815 
                         
   TOTAL CURRENT LIABILITIES  20,593      29,549   248   24,515   25,110      100,015 
                         
Long-term debt  151,236         24,284      981      176,501 
Other liabilities  10,078      5,364      1,856   4,167      21,465 
Intercompany debt        28,047   6,591   35,065   48,495   (118,198)   
                         
   TOTAL LIABILITIES  181,907      62,960   31,123   61,436   78,753   (118,198)  297,981 
                         
STOCKHOLDERS’ EQUITY (DEFICIT):                                
 Series A preferred stock  521                     521 
 Common stock  2      33            (33)  2 
 Paid-in capital  27,260      108,383   21   52   1,537   (109,993)  27,260 
 Retained earnings (accumulated deficit)  (74,379)     5,188   (21,445)  (21,473)  6,074   31,656   (74,379)
 Accumulated other comprehensive                               
  income (loss):                                
  Gain on derivative instruments, net of income taxes  123      123            (123)  123 
  Cumulative currency translation adjustment, net of income taxes  1,549      (278)  3,952   3,952   (2,124)  (5,502)  1,549 
                         
   TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)  (44,924)     113,449   (17,472)  (17,469)  5,487   (83,995)  (44,924)
                         
  $136,983  $  $176,409  $13,651  $43,967  $84,240  $(202,193) $253,057 
                         

F-40


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Twelve Monthsthe Year Ended June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- NET SALES $ 21,868 $ 11,118 $ 215,591 $ -- $ 5,742 $ 103,955 $ -- $ 358,274 NET SALES - INTERCOMPANY 150 2,598 468 -- 28,970 4,375 (36,561) -- COST OF GOODS SOLD 17,318 10,139 160,136 -- 25,293 91,546 (36,561) 267,871 --------------------------------------------------------------------------------------------------- GROSS PROFIT 4,700 3,577 55,923 -- 9,419 16,784 -- 90,403 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,238 1,299 25,317 4 2,676 16,594 -- 66,128 COSTS OF NON-COMPLETED TRANSACTION 5,261 -- -- -- -- -- -- 5,261 --------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (20,799) 2,278 30,606 (4) 6,743 190 -- 19,014 OTHER: Interest expense 16,208 18 -- 1,806 95 491 -- 18,618 Interest (income) (4) -- -- -- -- (126) -- (130) Other (income) expense, net 578 -- (605) -- (265) (489) -- (781) Net (gain) on extinguishment of debt (23,226) -- -- -- -- -- -- (23,226) Intercompany interest and other (26,755) 1,892 16,392 (1,823) 3,335 6,959 -- -- (Profit) loss relating to subsidiaries (5,349) -- -- (2,124) -- -- 7,473 -- --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 17,749 368 14,819 2,137 3,578 (6,645) (7,473) 24,533 PROVISION FOR INCOME TAXES 1,185 221 1,294 -- 1,454 3,815 -- 7,969 --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 16,564 147 13,525 2,137 2,124 (10,460) (7,473) 16,564 DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations (517) -- -- -- -- -- 517 -- (Loss) from discontinued operations (net of income taxes) -- (124) -- -- -- (1,501) -- (1,625) Gain (loss) from disposal of discontinued operations (net of income taxes) (3,197) -- (2,735) -- -- 3,843 -- (2,089) --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 12,850 $ 23 $ 10,790 $ 2,137 $ 2,124 $ (8,118) $ (6,956) $ 12,850 ===================================================================================================
F-37 2005
                                   
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
NET SALES $23,877  $  $227,643  $  $10,276  $102,583  $  $364,379 
NET SALES — INTERCOMPANY  173      265      30,298   7,417   (38,153)   
COST OF GOODS SOLD (includes Belgium Plant Transactions costs of $22,191)  18,503      167,734      55,688   89,314   (38,153)  293,086 
                         
 GROSS PROFIT  5,547      60,174      (15,114)  20,686      71,293 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  18,694      29,424   17   2,345   16,431      66,911 
                         
 OPERATING INCOME (LOSS)  (13,147)     30,750   (17)  (17,459)  4,255      4,382 
OTHER:                                
 Interest expense  21,662         2,877   61   742      25,342 
 Interest (income)  (12)     (8)        (100)     (120)
 Other (income) expense, net  (707)     (10)     62   (1,204)     (1,859)
 Intercompany interest and other  (26,862)     20,754   (2,909)  4,073   4,944       
 Loss relating to subsidiaries  12,657         18,716         (31,373)   
                         
 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  (19,885)     10,014   (18,701)  (21,655)  (127)  31,373   (18,981)
PROVISION (BENEFIT) FOR INCOME TAXES  1,216      487      (2,939)  3,356      2,120 
                         
 INCOME (LOSS) FROM CONTINUING OPERATIONS  (21,101)     9,527   (18,701)  (18,716)  (3,483)  31,373   (21,101)
DISCONTINUED OPERATIONS:                                
 Income from discontinued operations, net of income taxes                 671      671 
 Gain from disposal of discontinued operations, net of income taxes  253               512      765 
 Income relating to discontinued operations  1,183                  (1,183)   
                         
  NET INCOME (LOSS) $(19,665) $  $9,527  $(18,701) $(18,716) $(2,300) $30,190  $(19,665)
                         

F-41


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve MonthsYear Ended June 30, 2004
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ 12,850 $ 23 $ 10,790 $ 2,137 $ 2,124 $ (8,118) $ (6,956) $ 12,850 Adjustment for discontinued operation 3,714 124 2,735 -- -- (2,342) (517) 3,714 --------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 16,564 147 13,525 2,137 2,124 (10,460) (7,473) 16,564 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization 2,367 487 2,542 -- 2,669 5,118 -- 13,183 Deferred income taxes 733 -- -- -- -- (407) -- 326 Net gain from sales of assets -- -- (689) -- -- (3) -- (692) Net gain on extinguishment of debt (23,226) -- -- -- -- -- -- (23,226) Effects of changes in foreign currency -- -- 84 -- (264) (368) -- (548) Other 525 -- 395 -- -- 194 -- 1,114 Changes in operating assets and liabilities: -- Accounts receivable 79 336 (4,826) -- (945) (1,866) -- (7,222) Inventory 618 (543) 4,143 -- (8,762) 8,204 -- 3,660 Prepaid expenses and other (268) 188 (479) -- 1,369 (1,124) -- (314) Other assets 1,997 -- (4,548) -- -- (528) -- (3,079) Intercompany (981) 17,331 (8,706) (22,336) 13,316 (6,097) 7,473 -- Accounts payable (370) (328) (2,368) -- (2,395) (189) -- (5,650) Accrued expenses and other 2,803 (89) 5,089 216 2,742 (3,796) -- 6,965 Accrued costs of non-completed transaction 3,970 -- -- -- -- -- -- 3,970 Cash provided (used) by discontinued operations (3,197) (652) (2,735) -- -- 4,395 -- (2,189) --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,614 16,877 1,427 (19,983) 9,854 (6,927) -- 2,862 --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (57) (62) (2,506) -- (1,613) (2,006) -- (6,244) Proceeds from sale of assets -- -- 1,057 -- -- 37 -- 1,094 Other investing (654) -- -- -- -- (1) -- (655) Discontinued operations 14,343 -- -- -- -- 532 -- 14,875 --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,632 (62) (1,449) -- (1,613) (1,438) -- 9,070 --------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net (decrease) in cash overdraft (350) (276) (160) -- -- (9) -- (795) Net (decrease) in short-term debt (26,882) -- -- -- -- (72) -- (26,954) Proceeds from long-term debt 85,000 -- -- 20,000 -- 4,661 -- 109,661 Payments of long-term debt (32,679) (13) (1,055) -- -- (1,706) -- (35,453) Payment of Pfizer obligations (20,075) -- -- -- (8,225) -- -- (28,300) Payments relating to the Prince Transactions and transaction costs (4,619) (16,645) (129) -- -- -- -- (21,393) Debt refinancing costs (15,548) -- -- -- -- -- -- (15,548) Discontinued operations -- -- -- -- -- 1,005 -- 1,005 --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (15,153) (16,934) (1,344) 20,000 (8,225) 3,879 -- (17,777) --------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- -- -- 11 223 234 --------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 93 (119) (1,366) 17 27 (4,263) -- (5,611) 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 $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 $ -- $ 5,568 ===================================================================================================
F-38 2005
                                    
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
OPERATING ACTIVITIES:                                
 Net income (loss) $(19,665) $  $9,527  $(18,701) $(18,716) $(2,300) $30,190  $(19,665)
 Adjustment for discontinued operations  (1,436)              (1,183)  1,183   (1,436)
                         
 Income (loss) from continuing operations  (21,101)     9,527   (18,701)  (18,716)  (3,483)  31,373   (21,101)
 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 $7,467)  246      2,829      10,489   4,542      18,106 
  Amortization of deferred financing costs  2,974                     2,974 
  Deferred income taxes              (2,124)  1,106      (1,018)
  Net gain from sales of assets  (643)     (823)        (76)     (1,542)
  Effects of changes in foreign currency        (731)     62   (30)     (699)
  Other  291      294         267      852 
  Changes in operating assets and liabilities:                                
   Accounts receivable  (168)     2,460      (1,482)  3,589      4,399 
   Inventory  (675)     2,906      (7,084)  (9,398)     (14,251)
   Prepaid expenses and other  (1,102)     338      (786)  (1,230)     (2,780)
   Other assets  804      (23)        (664)     117 
   Intercompany  7,809   5   (7,023)  14,386   7,871   8,325   (31,373)   
   Accounts payable  (1,251)  6   (8,325)     1,137   (421)     (8,854)
   Accrued expenses and other  3,455   (1)  1,512   31   (1,628)  3,808      7,177 
   Accrued costs of non-completed transaction  (3,970)                    (3,970)
   Accrued costs of the Belgium Plant Transactions              13,309         13,309 
 Cash provided by discontinued operations  765               257      1,022 
                         
  NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES  (12,566)  10   2,941   (4,284)  1,048   6,592      (6,259)
                         
INVESTING ACTIVITIES:                                
 Capital expenditures  (1,232)     (2,527)     (1,001)  (2,729)     (7,489)
 Proceeds from sale of assets  2,418      1,366         33      3,817 
 Other investing  (1,101)                    (1,101)
 Discontinued operations  940               3,855      4,795 
                         
  NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES  1,025      (1,161)     (1,001)  1,159      22 
                         
FINANCING ACTIVITIES:                                
 Net (decrease) in cash overdraft     (10)  (691)              (701)
 Net increase (decrease) in short-term debt  (2,996)              38      (2,958)
 Proceeds from long-term debt  19,107         4,284      901      24,292 
 Payments of long-term debt        (103)        (4,564)     (4,667)
 Proceeds from capital contribution from PAHC Holdings Corporation  26,400                     26,400 
 Redemption of Series C preferred stock  (26,400)                    (26,400)
 Debt financing costs  (2,216)                    (2,216)
                         
  NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES  13,895   (10)  (794)  4,284      (3,625)     13,750 
                         
EFFECT OF EXCHANGE RATE CHANGES ON CASH              (4)  (76)      (80)
                         
NET INCREASE IN CASH AND CASH EQUIVALENTS  2,354      986      43   4,050      7,433 
CASH AND CASH EQUIVALENTS at beginning of period  136      801   17   212   4,402       5,568 
                         
CASH AND CASH EQUIVALENTS at end of period $2,490  $  $1,787  $17  $255  $8,452  $  $13,001 
                         

F-42


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING BALANCE SHEET
As of June 30, 2003
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 $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ 11,179 Trade receivables 2,759 2,452 22,071 -- 1,542 23,890 52,714 Other receivables 957 3 733 -- 518 1,292 3,503 Inventory 2,612 4,278 41,266 -- 13,460 26,233 87,849 Prepaid expenses and other 3,267 458 981 -- 1,866 3,296 9,868 Current assets from discontinued operations -- 4,942 -- -- -- 4,334 9,276 --------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 9,638 12,252 67,218 -- 17,571 67,710 -- 174,389 --------------------------------------------------------------------------------------------------- Property, plant & equipment, net 153 3,269 13,297 -- 17,049 30,137 63,905 Intangibles -- -- -- -- 1,818 6,851 8,669 Investment in subsidiaries 103,574 -- 3,619 -- -- -- (107,193) -- Intercompany 35,034 (19,431) 59,765 -- 6,731 (9,116) (72,983) -- Other assets 11,516 710 1,122 -- -- 711 14,059 Other assets from discontinued operations -- 10,650 -- -- -- 2,675 13,325 --------------------------------------------------------------------------------------------------- $159,915 $ 7,450 $ 145,021 $ -- $ 43,169 $ 98,968 $(180,176) $ 274,347 =================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Cash overdraft $ 350 $ 286 $ 1,041 $ -- $ -- $ 9 1,686 Loan payable to banks 37,878 -- -- -- -- -- 37,878 Current portion of long-term debt 21,599 66 381 -- -- 2,078 24,124 Accounts payable 3,304 2,350 25,926 -- 12,115 11,660 55,355 Accrued expenses and other 7,943 1,151 9,931 -- 8,583 13,091 40,699 Current liabilities from discontinued operations -- 2,051 -- -- -- 3,506 5,557 --------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 71,074 5,904 37,279 -- 20,698 30,344 -- 165,299 --------------------------------------------------------------------------------------------------- Long-term debt 100,073 213 149 -- -- 1,828 102,263 Intercompany debt -- -- -- -- 22,319 50,664 (72,983) -- Other liabilities 4,397 114 13,289 -- 1,256 2,185 21,241 Other liabilities from discontinued operations -- 198 -- -- -- 975 1,173 --------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 175,544 6,429 50,717 -- 44,273 85,996 (72,983) 289,976 --------------------------------------------------------------------------------------------------- REDEEMABLE SECURITIES: Series B and C preferred stock 68,881 -- -- -- -- -- 68,881 --------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT): Series A preferred stock 521 -- -- -- -- -- 521 Common stock 2 1 31 -- -- -- (32) 2 Paid-in capital 860 -- 110,883 -- -- 5,179 (116,062) 860 Retained earnings (accumulated deficit) (79,489) 1,020 (16,499) -- (4,881) 17,862 2,498 (79,489) Accumulated other comprehensive -- income (loss): Gain on derivative instruments 81 -- 81 -- -- -- (81) 81 Cumulative currency translation adjustment (6,485) -- (192) -- 3,777 (10,069) 6,484 (6,485) --------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (84,510) 1,021 94,304 -- (1,104) 12,972 (107,193) (84,510) --------------------------------------------------------------------------------------------------- $159,915 $ 7,450 $ 145,021 $ -- $ 43,169 $ 98,968 $(180,176) $ 274,347 ===================================================================================================
F-39 2004
                                    
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
ASSETS
CURRENT ASSETS:                                
 Cash and cash equivalents $136  $  $801  $17  $212  $4,402  $  $5,568 
 Trade receivables  2,670      26,996      2,592   24,959      57,217 
 Other receivables  317   414   1,195      72   768      2,766 
 Inventory  1,994      37,890      23,159   15,519       78,562 
 Prepaid expenses and other  3,195   110   565      1,018   3,703      8,591 
 Current assets from discontinued operations                 1,886      1,886 
                         
   TOTAL CURRENT ASSETS  8,312   524   67,447   17   27,053   51,237      154,590 
                         
Property, plant & equipment, net  105      13,730      17,321   24,225      55,381 
Intangibles, net        4,252      1,569   5,874      11,695 
Other assets  14,506      1,056         736      16,298 
Other assets from discontinued operations                 3,405      3,405 
Investment in subsidiaries  125,355         1,604         (126,959)   
Intercompany  (14,995)  20,995   60,030   20,181   1,630   (12,497)  (75,344)   
                         
  $133,283  $21,519  $146,515  $21,802  $47,573  $72,980  $(202,303) $241,369 
                         
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:                                
 Cash overdraft $  $10  $881  $  $  $  $  $891 
 Loan payable to banks  10,996                     10,996 
 Current portion of long-term debt        101         1,250      1,351 
 Accounts payable  4,734   9   28,434      2,258   11,329      46,764 
 Accrued expenses and other  11,857   159   8,306   216   12,022   6,820       39,380 
 Current liabilities from discontinued operations                 838      838 
                         
   TOTAL CURRENT LIABILITIES  27,587   178   37,722   216   14,280   20,237      100,220 
                         
Long-term debt  133,029      2   20,000      4,987      158,018 
Other liabilities  11,822      4,897      1,136   4,431      22,286 
Intercompany debt              30,553   44,791   (75,344)   
                         
   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, net of income taxes  9      9            (9)  9 
  Cumulative currency translation adjustment, net of income taxes  (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 
                         

F-43


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Twelve Monthsthe Year Ended June 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- NET SALES $ 23,982 $ 22,332 $ 187,628 $ -- $ 6,625 $ 101,179 $ -- $ 341,746 NET SALES - INTERCOMPANY 1,338 4,244 775 -- 26,994 6,812 (40,163) -- COST OF GOODS SOLD 20,083 20,422 144,543 -- 31,435 74,880 (40,163) 251,200 --------------------------------------------------------------------------------------------------- GROSS PROFIT 5,237 6,154 43,860 -- 2,184 33,111 -- 90,546 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 18,064 2,575 26,632 -- 1,868 15,911 65,050 --------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (12,827) 3,579 17,228 -- 316 17,200 -- 25,496 OTHER: Interest expense 15,050 86 1 -- 62 1,082 16,281 Interest (income) (2) -- -- -- -- (83) (85) Other (income) expense, net 3,283 -- (3,481) -- 1,283 454 1,539 Intercompany interest and other (33,819) 4,952 18,997 -- 2,849 7,021 -- (Profit) loss relating to subsidiaries 4,036 -- -- -- -- -- (4,036) -- --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,375) (1,459) 1,711 -- (3,878) 8,726 4,036 7,761 PROVISION FOR INCOME TAXES 924 52 570 -- 572 7,942 10,060 --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (2,299) (1,511) 1,141 -- (4,450) 784 4,036 (2,299) DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations 14,759 -- -- -- -- -- (14,759) -- (Loss) from discontinued operations (net of income taxes) -- (3,454) -- -- -- (11,123) (14,577) Gain (loss) from disposal of discontinued operations (net of income taxes) (30,019) -- -- -- -- 29,336 (683) --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(17,559) $ (4,965) $ 1,141 $ -- $ (4,450) $ 18,997 $(10,723) $ (17,559) ===================================================================================================
F-40 2004
                                   
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantors Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
NET SALES $21,868  $11,118  $215,591  $  $5,742  $100,065  $  $354,384 
NET SALES — INTERCOMPANY  150   2,598   468      28,970   4,375   (36,561)   
COST OF GOODS SOLD  17,318   10,139   160,136      25,293   88,892   (36,561)  265,217 
                         
 GROSS PROFIT  4,700   3,577   55,923      9,419   15,548      89,167 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  23,393   1,299   25,317   4   2,676   15,989       68,678 
                         
 OPERATING INCOME (LOSS)  (18,693)  2,278   30,606   (4)  6,743   (441)     20,489 
OTHER:                                
 Interest expense  18,314   18      1,806   95   491       20,724 
 Interest (income)  (4)              (126)      (130)
 Other (income) expense, net  578      (605)     (265)  (496)      (788)
 Net (gain) on extinguishment of debt  (23,226)                     (23,226)
 Intercompany interest and other  (26,755)  1,892   16,392   (1,823)  3,335   6,959        
 Loss relating to subsidiaries  (4,890)        (2,124)        7,014    
                         
 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  17,290   368   14,819   2,137   3,578   (7,269)  (7,014)  23,909 
PROVISION FOR INCOME TAXES  1,185   221   1,294      1,454   3,650       7,804 
                         
 INCOME (LOSS) FROM CONTINUING OPERATIONS  16,105   147   13,525   2,137   2,124   (10,919)  (7,014)  16,105 
DISCONTINUED OPERATIONS:                                
 (Loss) from discontinued operations, net of income taxes     (124)           (1,042)      (1,166)
 Gain (loss) on disposal of discontinued operations, net of income taxes  (3,197)     (2,735)        3,843       (2,089)
 (Loss) relating to discontinued operations  (58)                 58    
                         
  NET INCOME (LOSS) $12,850  $23  $10,790  $2,137  $2,124  $(8,118) $(6,956) $12,850 
                         

F-44


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve MonthsYear Ended June 30, 2003
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $(17,559) $ (4,965) $ 1,141 $ -- $ (4,450) $ 18,997 $(10,723) $ (17,559) Adjustment for discontinued operation 15,260 3,454 -- -- -- (18,213) 14,759 15,260 --------------------------------------------------------------------------------------------------- Income (loss) from continuing operations (2,299) (1,511) 1,141 -- (4,450) 784 4,036 (2,299) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization 1,554 956 2,900 -- 2,019 5,095 12,524 Deferred income taxes -- -- -- -- -- 6,460 6,460 Net gain from sales of assets -- -- (118) -- -- (9) (127) Effects of changes in foreign currency -- -- (399) -- 1,268 (479) 390 Other 218 13 540 -- -- (384) 387 Changes in operating assets and liabilities: Accounts receivable 301 245 1,489 -- (322) 2,097 3,810 Inventory 95 (61) (3,658) -- 2,270 (244) (1,598) Prepaid expenses and other (702) (195) 558 -- (1,191) (1,592) (3,122) Other assets (3,171) -- 1,131 -- -- (592) (2,632) Intercompany 12,780 2,717 (12,285) -- 4,989 (4,165) (4,036) -- Accounts payable 2,280 714 12,542 -- 3,523 1,444 20,503 Accrued expenses and other 1,415 95 2,326 -- (6,444) 2,253 (355) Cash provided (used) by discontinued operations -- (1,928) -- -- -- 2,644 716 --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 12,471 1,045 6,167 -- 1,662 13,312 -- 34,657 --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (2) (350) (2,573) -- (2,149) (3,562) (8,636) Proceeds from sale of assets -- -- 2,530 -- -- 35 2,565 Other investing -- -- -- -- -- 737 737 Discontinued operations -- (493) -- -- -- 1,856 1,363 --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2) (843) (43) -- (2,149) (934) -- (3,971) --------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net (decrease) in cash overdraft (226) (24) (4,151) -- -- (1,680) (6,081) Net (decrease) in short-term debt (5,844) -- -- -- -- (816) (6,660) Proceeds from long-term debt -- -- -- -- -- 2,000 2,000 Payments of long-term debt (6,813) (111) (415) -- -- (8,675) (16,014) Discontinued operations -- -- -- -- -- 377 377 --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (12,883) (135) (4,566) -- -- (8,794) -- (26,378) --------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- 9 -- 54 389 452 --------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (414) 67 1,567 -- (433) 3,973 -- 4,760 CASH AND CASH EQUIVALENTS at beginning of period 457 52 600 -- 618 4,692 6,419 --------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS at end of period $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ -- $ 11,179 ===================================================================================================
F-41 2004
                                    
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
OPERATING ACTIVITIES:                                
 Net income (loss) $12,850  $23  $10,790  $2,137  $2,124  $(8,118) $(6,956) $12,850 
 Adjustment for discontinued operations  3,255   124   2,735         (2,801)  (58)  3,255 
                         
 Income (loss) from continuing operations  16,105   147   13,525   2,137   2,124   (10,919)  (7,014)  16,105 
 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities:                                
  Depreciation and amortization  261   487   2,542      2,669   4,699       10,658 
  Amortization of deferred financing costs  2,106                      2,106 
  Deferred income taxes  733               (407)      326 
  Net gain from sales of assets        (689)        (3)      (692)
  Net gain on extinguishment of debt  (23,226)                     (23,226)
  Effects of changes in foreign currency        84      (264)  (368)      (548)
  Other  525      395         194       1,114 
  Changes in operating assets and liabilities:                                
   Accounts receivable  79   336   (4,826)     (945)  (2,102)      (7,458)
   Inventory  618   (543)  4,143      (8,762)  8,320       3,776 
   Prepaid expenses and other  (268)  188   (479)     1,369   (1,070)      (260)
   Other assets  1,997      (4,548)        (528)      (3,079)
   Intercompany  (522)  17,331   (8,706)  (22,336)  13,316   (6,097)  7,014    
   Accounts payable  (370)  (328)  (2,368)     (2,395)  (269)      (5,730)
   Accrued expenses and other  2,803   (89)  5,089   216   2,742   (3,632)      7,129 
   Accrued costs of non-completed transaction  3,970                      3,970 
 Cash provided (used) by discontinued operations  (3,197)  (652)  (2,735)        5,255       (1,329)
                         
  NET CASH PROVIDED (USED) BY                                
  OPERATING ACTIVITIES  1,614   16,877   1,427   (19,983)  9,854   (6,927)     2,862 
                         
INVESTING ACTIVITIES:                                
 Capital expenditures  (57)  (62)  (2,506)     (1,613)  (1,891)      (6,129)
 Proceeds from sale of assets        1,057         30       1,087 
 Other investing  (654)              (1)      (655)
 Discontinued operations  14,343               424       14,767 
                         
  NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES  13,632   (62)  (1,449)     (1,613)  (1,438)     9,070 
                         
FINANCING ACTIVITIES:                                
 Net (decrease) in cash overdraft  (350)  (276)  (160)        (9)      (795)
 Net (decrease) in short-term debt  (26,882)              (72)      (26,954)
 Proceeds from long-term debt  85,000         20,000      4,661       109,661 
 Payments of long-term debt  (32,679)  (13)  (1,055)        (1,706)      (35,453)
 Payment of Pfizer obligations  (20,075)           (8,225)         (28,300)
 Payments relating to the Prince Transactions and transaction costs  (4,619)  (16,645)  (129)               (21,393)
 Debt financing costs  (15,548)                     (15,548)
 Discontinued operations                 1,005       1,005 
                         
  NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES  (15,153)  (16,934)  (1,344)  20,000   (8,225)  3,879      (17,777)
                         
EFFECT OF EXCHANGE RATE CHANGES ON CASH              11   223       234 
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  93   (119)  (1,366)  17   27   (4,263)     (5,611)
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 $136  $  $801  $17  $212  $4,402  $  $5,568 
                         

F-45


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For The Twelve Monthsthe Year Ended June 30, 2002
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- NET SALES $ 24,578 $ 21,451 $ 173,952 $ -- $ 4,196 $ 104,499 $ -- $ 328,676 NET SALES - INTERCOMPANY 1,114 4,212 924 -- 21,509 9,607 (37,366) -- COST OF GOODS SOLD 20,837 19,400 135,378 -- 21,631 87,531 (37,366) 247,411 --------------------------------------------------------------------------------------------------- GROSS PROFIT 4,855 6,263 39,498 -- 4,074 26,575 -- 81,265 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 16,786 2,623 32,959 -- 1,559 16,709 70,636 --------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (11,931) 3,640 6,539 -- 2,515 9,866 -- 10,629 OTHER: Interest expense 15,858 (29) (172) -- 365 2,048 18,070 Interest (income) (15) -- -- -- -- (331) (346) Other (income) expense, net (2,001) -- (839) -- 2,294 3,895 3,349 Intercompany interest and other (28,534) 5,210 12,467 -- 2,486 8,371 -- (Profit) loss relating to subsidiaries 17,913 -- -- -- -- -- (17,913) -- --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (15,152) (1,541) (4,917) -- (2,630) (4,117) 17,913 (10,444) PROVISION (BENEFIT) FOR INCOME TAXES 10,059 (407) 4,636 -- (626) 1,105 14,767 --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (25,211) (1,134) (9,553) -- (2,004) (5,222) 17,913 (25,211) DISCONTINUED OPERATIONS: Profit (loss) relating to discontinued operations (26,559) -- -- -- -- -- 26,559 -- (Loss) from discontinued operations (net of income taxes) -- (2,930) -- -- -- (23,629) (26,559) --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(51,770) $ (4,064) $ (9,553) $ -- $ (2,004) $ (28,851) $ 44,472 $ (51,770) ===================================================================================================
F-42 2003
                                   
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
NET SALES $23,982  $22,332  $187,628  $  $6,625  $97,251  $  $337,818 
NET SALES — INTERCOMPANY  1,338   4,244   775      26,994   6,812   (40,163)   
COST OF GOODS SOLD  20,083   20,422   144,543      31,435   72,257   (40,163)  248,577 
                         
 GROSS PROFIT  5,237   6,154   43,860      2,184   31,806      89,241 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  16,890   2,575   26,632      1,868   15,381      63,346 
                         
 OPERATING INCOME (LOSS)  (11,653)  3,579   17,228      316   16,425      25,895 
OTHER:                                
 Interest expense  16,224   86   1      62   1,082      17,455 
 Interest (income)  (2)              (83)     (85)
 Other (income) expense, net  3,283      (3,481)     1,283   463      1,548 
 Intercompany interest and other  (33,819)  4,952   18,997      2,849   7,021       
 Loss relating to subsidiaries  4,590                  (4,590)   
                         
 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  (1,929)  (1,459)  1,711      (3,878)  7,942   4,590   6,977 
PROVISION FOR INCOME TAXES  924   52   570      572   7,712      9,830 
                         
 INCOME (LOSS) FROM CONTINUING OPERATIONS  (2,853)  (1,511)  1,141      (4,450)  230   4,590   (2,853)
DISCONTINUED OPERATIONS:                                
 (Loss) from discontinued operations, net of income taxes     (3,454)           (10,569)     (14,023)
 Gain (loss) from disposal of discontinued operations, net of income taxes  (30,019)              29,336      (683)
 Income relating to discontinued operations  15,313                  (15,313)   
                         
  NET INCOME (LOSS) $(17,559) $(4,965) $1,141  $  $(4,450) $18,997  $(10,723) $(17,559)
                         

F-46


PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands) — (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twelve MonthsYear Ended June 30, 2002 2003
                                    
      U.S.     Non-    
  Parent Unrestricted Guarantor Dutch Belgium Guarantor Consolidation Consolidated
  Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
                 
OPERATING ACTIVITIES:                                
 Net income (loss) $(17,559) $(4,965) $1,141  $  $(4,450) $18,997  $(10,723) $(17,559)
 Adjustment for discontinued operations  14,706   3,454       —      (18,767)  15,313   14,706 
                         
 Income (loss) from continuing operations  (2,853)  (1,511)  1,141      (4,450)  230   4,590   (2,853)
 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:                                
  Depreciation and amortization  380   956   2,900      2,019   4,731      10,986 
  Amortization of deferred financing costs  1,174                     1,174 
  Deferred income taxes                 6,460      6,460 
  Net gain from sales of assets        (118)        (9)     (127)
  Effects of changes in foreign currency        (399)     1,268   (479)     390 
  Other  218   13   540         (384)     387 
                                
  Changes in operating assets and liabilities:                                
   Accounts receivable  301   245   1,489      (322)  2,194      3,907 
   Inventory  95   (61)  (3,658)     2,270   (173)     (1,527)
   Prepaid expenses and other  (702)  (195)  558      (1,191)  (1,577)     (3,107)
   Other assets  (3,171)     1,131         (592)     (2,632)
   Intercompany  13,334   2,717   (12,285)     4,989   (4,165)  (4,590)   
   Accounts payable  2,280   714   12,542      3,523   1,420      20,479 
   Accrued expenses and other  1,415   95   2,326      (6,444)  1,598      (1,010)
 Cash provided (used) by discontinued operations     (1,928)           4,058      2,130 
                         
  NET CASH PROVIDED BY OPERATING ACTIVITIES  12,471   1,045   6,167      1,662   13,312      34,657 
                         
INVESTING ACTIVITIES:                                
 Capital expenditures  (2)  (350)  (2,573)     (2,149)  (3,433)     (8,507)
 Proceeds from sale of assets        2,530         34      2,564 
 Other investing                 737      737 
 Discontinued operations     (493)           1,728      1,235 
                         
  NET CASH (USED) BY INVESTING ACTIVITIES  (2)  (843)  (43)     (2,149)  (934)     (3,971)
                         
FINANCING ACTIVITIES:                                
 Net (decrease) in cash overdraft  (226)  (24)  (4,151)        (1,680)     (6,081)
 Net (decrease) in short-term debt  (5,844)              (816)     (6,660)
 Proceeds from long-term debt                 2,000      2,000 
 Payments of long-term debt  (6,813)  (111)  (415)        (8,675)     (16,014)
 Discontinued operations                 377      377 
                         
  NET CASH (USED) BY FINANCING ACTIVITIES  (12,883)  (135)  (4,566)        (8,794)     (26,378)
                         
EFFECT OF EXCHANGE RATE CHANGES ON CASH        9      54   389       452 
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (414)  67   1,567      (433)  3,973      4,760 
CASH AND CASH EQUIVALENTS at beginning of period  457   52   600      618   4,692       6,419 
                         
CASH AND CASH EQUIVALENTS at end of period $43  $119  $2,167  $  $185  $8,665  $  $11,179 
                         

F-47


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Phibro Animal Health SA (Belgium):
      In our opinion, the accompanying balance sheets and the related statements of operations and comprehensive income (loss), changes in stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Phibro Animal Health SA (Belgium) at June 30, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      As discussed in Note 6 to the financial statements, a significant portion of the Company’s business is conducted with Phibro Animal Health Corporation and certain of its subsidiaries, which are related parties.
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance --------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $(51,770) $ (4,064) $ (9,553) $ -- $ (2,004) $ (28,851) $ 44,472 $ (51,770) Adjustment
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 23, 2005

F-48


PHIBRO ANIMAL HEALTH SA (Belgium)
BALANCE SHEETS
           
  As of June 30,
   
  2005 2004
     
  (In thousands)
ASSETS
CURRENT ASSETS:        
 Cash, including restricted balance of $175 at June 30, 2004 $255  $212 
 Trade receivables, less allowance for doubtful accounts of $0 and $13 at June 30, 2005 and 2004, respectively  3,980   2,592 
 Other receivables  804   72 
 Inventories  29,691   23,159 
 Prepaid expenses and other current assets  1,203   1,018 
 Trade receivables — related parties  5,560   4,527 
       
  TOTAL CURRENT ASSETS  41,493   31,580 
PROPERTY, PLANT AND EQUIPMENT, net  8,122   17,321 
INTANGIBLES, net  1,339   1,569 
       
  $50,954  $50,470 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:        
 Accounts payable $3,320  $2,258 
 Accrued expenses and other current liabilities  19,909   8,291 
 Trade payables — related parties  6,390   2,879 
       
  TOTAL CURRENT LIABILITIES  29,619   13,428 
OTHER LIABILITIES  1,855   2,897 
NOTES PAYABLE — RELATED PARTIES  35,662   30,571 
       
  TOTAL LIABILITIES  67,136   46,896 
       
STOCKHOLDERS’ EQUITY (DEFICIT):        
 Paid-in capital  3,114   1,896 
 Accumulated deficit  (23,243)  (2,631)
 Cumulative foreign currency translation adjustment, net of income taxes  3,947   4,309 
       
  TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)  (16,182)  3,574 
       
  $50,954  $50,470 
       
The accompanying notes are an integral part of the financial statements

F-49


PHIBRO ANIMAL HEALTH SA (Belgium)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
              
  For the Years Ended June 30,
   
  2005 2004 2003
       
  (In thousands)
NET SALES $10,276  $5,742  $6,625 
NET SALES — RELATED PARTIES  30,298   28,970   26,994 
          
 TOTAL SALES  40,574   34,712   33,619 
COST OF GOODS SOLD (includes Belgium Plant Transaction costs of $22,191 for the year ended June 30, 2005)  55,688   25,293   31,435 
          
 GROSS PROFIT  (15,114)  9,419   2,184 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  3,563   3,334   2,595 
          
 OPERATING INCOME (LOSS)  (18,677)  6,085   (411)
OTHER:            
 Interest expense  61   95   62 
 Interest expense — related parties  4,073   3,335   2,849 
 Other (income) expense, net  62   (265)  1,283 
          
 INCOME (LOSS) BEFORE INCOME TAXES  (22,873)  2,920   (4,605)
PROVISION (BENEFIT) FOR INCOME TAXES  (2,261)  1,614   (1,086)
          
 NET INCOME (LOSS)  (20,612)  1,306   (3,519)
OTHER COMPREHENSIVE INCOME:            
 Change in currency translation adjustment, net of income taxes  (362)  532   2,401 
          
 COMPREHENSIVE INCOME (LOSS) $(20,974) $1,838  $(1,118)
          
The accompanying notes are an integral part of the financial statements

F-50


PHIBRO ANIMAL HEALTH SA (Belgium)
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
                  
  For the Years Ended June 30, 2005 and 2004 and 2003
   
    Foreign  
    Currency  
  Paid-in (Accumulated Translation  
  Capital Deficit) Adjustment Total
         
  (In thousands)
BALANCE, JUNE 30, 2002 $459  $(418) $1,376  $1,417 
 Contribution from parent  727           727 
 Net (loss)      (3,519)      (3,519)
 Foreign currency translation adjustment, net of income taxes          2,401   2,401 
             
BALANCE, JUNE 30, 2003 $1,186  $(3,937) $3,777  $1,026 
             
 Contribution from parent  710           710 
 Net income      1,306       1,306 
 Foreign currency translation adjustment, net of income taxes          532   532 
             
BALANCE, JUNE 30, 2004 $1,896  $(2,631) $4,309  $3,574 
             
 Contribution from parent  1,218           1,218 
 Net (loss)      (20,612)      (20,612)
 Foreign currency translation adjustment, net of income taxes          (362)  (362)
             
BALANCE, JUNE 30, 2005 $3,114  $(23,243) $3,947  $(16,182)
             
The accompanying notes are an integral part of the financial statements

F-51


PHIBRO ANIMAL HEALTH SA (Belgium)
STATEMENTS OF CASH FLOWS
                
  For the Years Ended June 30,
   
  2005 2004 2003
       
  (In thousands)
OPERATING ACTIVITIES:            
 Net income (loss) $(20,612) $1,306  $(3,519)
 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:            
  Depreciation and amortization (includes accelerated depreciation from the Belgium Plant Transactions of $7,467 for the year ended June 30, 2005)  10,484   2,669   2,019 
  Deferred taxes  (1,446)  112   142 
  Allocated selling, general and administrative expenses from parent  1,218   658   727 
  Effects of changes in foreign currency and other  62   (264)  1,268 
  Changes in operating assets and liabilities:            
   Accounts receivable  (1,482)  (945)  (322)
   Inventories  (7,084)  (8,762)  2,270 
   Prepaid expenses and other current assets  (786)  1,369   (1,191)
   Related party receivables and payables  3,010   5,135   1,557 
   Accounts payable  1,137   (2,395)  3,523 
   Accrued expenses and other liabilities  (1,826)  2,790   (8,244)
   Accrued costs of the Belgium Plant Transactions  13,069       
          
   NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES  (4,256)  1,673   (1,770)
          
INVESTING ACTIVITIES:            
 Capital expenditures  (1,001)  (1,613)  (2,149)
 Other investing  296       
          
   NET CASH (USED) BY INVESTING ACTIVITIES  (705)  (1,613)  (2,149)
          
FINANCING ACTIVITIES:            
 Net increase in intercompany debt  5,008   8,181   3,432 
 Payment of Pfizer obligations     (8,225)   
          
   NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES  5,008   (44)  3,432 
          
EFFECT OF EXCHANGE RATE CHANGES ON CASH  (4)  11   54 
          
   NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  43   27   (433)
CASH AND CASH EQUIVALENTS at beginning of period  212   185   618 
          
CASH AND CASH EQUIVALENTS at end of period $255  $212  $185 
          
Supplemental Cash Flow Information:            
 Interest paid $  $55  $88 
 Income taxes paid        366 
The accompanying notes are an integral part of the financial statements

F-52


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS
(In Thousands)
1.Description of Business
      Phibro Animal Health SA, a company organized under the laws of Belgium, (the “Company”) is a manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives (“MFA”), which the Company sells in various markets predominately to the poultry, swine and cattle markets.
      The Company is a direct wholly-owned subsidiary of Philipp Brothers Netherlands III B.V. (“BV III”) and an indirect wholly-owned subsidiary of both Philipp Brothers Netherlands I B.V. (“BV I”) and Phibro Animal Health Corporation (“PAHC”).
      On November 30, 2000, PAHC purchased the MFA business of Pfizer, Inc. The Company, BV III and BV I were part of that acquisition.
2.Summary of Significant Accounting Policies
Basis of Presentation:
      The Company presents its financial statements on the basis of its fiscal year ending June 30. All references to years 2005, 2004, and 2003 in these financial statements refer to the fiscal year ended June 30 of that year.
Risks and Uncertainties:
      The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company’s business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company’s financial position, results of operations and cash flows.
      The testing, manufacturing, and marketing of certain products are subject to extensive regulation by numerous government authorities in the United States and other countries.
      A significant portion of the Company’s sales and earnings are attributable to transactions with related parties.
      The Company’s ability to fund its operating plan relies upon the continuance of this business and the continued support of BV III, BV I and PAHC, including their agreement to not require repayment of the Company’s notes payable to them for the foreseeable future.
Use of Estimates:
      Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates include reserves for bad debts, inventory obsolescence, environmental matters, depreciation and amortization periods of long-lived assets, recoverability of long-lived assets and realizability of deferred tax assets and actuarial assumptions related to the Company’s pension plan.

F-53


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Revenue Recognition:
      Revenue is recognized upon transfer of title and when risk of loss passes to the customer. Certain of the Company’s customers have terms of FOB shipping point where title and risk of loss transfer on shipment. Certain of the Company’s customers have terms FOB destination where title and risk of loss transfer on delivery. In the case of FOB destination, revenue is not recognized until products are received by the customer. Additional conditions for recognition of revenue are that collection of sales proceeds are reasonably assured and the Company has no further performance obligations. The Company records estimated reductions to revenue for customer programs and incentive offerings, including pricing arrangements and other volume-based incentives at the time the sale is recorded. There were no material provisions for estimated reductions to revenues in 2005, 2004 and 2003.
Cash:
      Cash includes cash in banks. Cash also includes cash on deposit in a restricted bank account under a contractual obligation with a customer, in the amount of $175 at June 30, 2004. This cash was subsequently released during 2005.
Accounts Receivable and Allowance for discontinued operation 26,559 2,930 -- -- -- 23,629 (26,559) 26,559 --------------------------------------------------------------------------------------------------- Doubtful Accounts:
      Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the probable credit losses in its existing accounts receivable. The allowance is based on historical write-off experience and is reviewed periodically. Past due balances are reviewed individually for collectibility. Account balances are charged against the allowance when the Company determines that it is probable that the receivable will not be recovered. The allowance for doubtful accounts was:
             
  For the Years Ended
  June 30,
   
  2005 2004 2003
       
Balance at beginning of period $13  $22  $ 
Provision for bad debts        22 
Bad debt write-offs  (13)  (9)   
          
Balance at end of period $  $13  $22 
          
Inventories:
      Inventories are valued at the lower of cost or market. Cost is determined principally under the first-in, first-out (FIFO) method. Obsolete and unsaleable inventories, if any, are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of:
         
  As of June 30,
   
  2005 2004
     
Raw materials $907  $910 
Work-in-process     166 
Finished goods  28,784   22,083 
       
Total inventory $29,691  $23,159 
       

F-54


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Property, Plant and Equipment:
      Property, plant and equipment are stated at cost.
      Depreciation is charged to results of operations using the straight-line method based upon the assets’ estimated useful lives ranging from 8 to 20 years for buildings and improvements and 3 to 10 years for machinery and equipment.
      The Company capitalizes costs that extend the useful life or productive capacity of an asset. Repair and maintenance costs are expensed as incurred. In the case of disposals, the assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in the statements of operations and comprehensive income (loss).
Intangibles:
      Product intangibles cost arising from the acquisition of the MFA business from Pfizer, Inc. was $2,173 and $2,191 at June 30, 2005 and 2004, respectively, and accumulated amortization of $834 and $622 at June 30, 2005 and 2004, respectively. Amortization expense was $229, $252 and $156 for 2005, 2004 and 2003, respectively. Amortization expense for each of the next five years from 2006 to 2010 is expected to be approximately $243 per year. These product intangible costs are being amortized on a straight-line basis over ten years with 51/2 years remaining at June 30, 2005.
Foreign Currency Translation:
      Financial position and results of operations of the Company are measured using the Euro as the functional currency. Assets and liabilities are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in cumulative foreign currency translation adjustment on the Company’s balance sheet. Income statement accounts are translated at the average rates of exchange prevailing during the year.
      Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction (gains) losses were $62, $(264) and $1,268 for 2005, 2004 and 2003, respectively, and were included in other (income) expense, net in the Company’s statements of operations and comprehensive income (loss).
      PAHC considers long-term notes payable with related parties to be balances for which settlement is not planned or anticipated in the foreseeable future. PAHC considers these balances to be part of the net investment and, accordingly, foreign currency transaction (gains) losses from such items are recorded in cumulative foreign currency translation adjustment on the Company’s balance sheet.
Recoverability of Long-Lived Assets:
      The Company evaluates the recoverability of long-lived assets, including intangible assets, when events or circumstances indicate that a diminution in value may have occurred, using financial indicators such as historical and future ability to generate cash flows from operations. The Company’s policy is to record an impairment loss in the period it is determined the carrying amount of the asset may not be recoverable. This determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business operates, or if the expected future net cash flows (undiscounted and without interest or income taxes) are less than the carrying amount of the assets.

F-55


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Income (loss) from continuing operations (25,211) (1,134) (9,553) -- (2,004) (5,222) 17,913 (25,211) AdjustmentsTaxes:
      Income tax expense includes Belgium income taxes. The tax effect of certain temporary differences between amounts recognized for financial reporting purposes and amounts recognized for tax purposes are reported as deferred income taxes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are established as necessary to reduce deferred tax assets to amounts more likely than not to be realized.
Research and Development Expenditures:
      Research and development expenditures are expensed as incurred, recorded in selling, general and administrative expenses and were $122 for 2004. There were no research and development expenditures in 2005 and 2003.
New Accounting Pronouncements:
      The Company will adopt the following new and revised accounting pronouncements in fiscal 2006:
      Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment to reconcile income (loss) from continuing operationsAccounting Research Bulletin No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing” to net cash provided (used) by operating activities: Depreciationclarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and amortization 1,049 966 3,434 -- 2,252 4,654 12,355 Deferred income taxes 9,297 (466) 5,356 -- -- (2,949) 11,238 Net gain from saleswasted material (spoilage). Paragraph 5 of assets -- -- -- -- -- (5) (5) ChangeARB 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 anticipates that the adoption of SFAS No. 151 will not result in redemption amounta material impact on the Company’s financial statements.
      Statement of redeemable common stock (378) -- -- -- -- -- (378) EffectsFinancial Accounting Standards No. 153, “Exchanges of changes in foreign currency -- -- (100) -- 1,912 308 2,120 Other (43) 12 985 -- -- 1,462 2,416 Changes in operatingNonmonetary 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 liabilities: Accounts receivable 1,299 278 1,932 -- 886 1,651 6,046 Inventory 606 1,165 (2,915) -- (10,325) (2,522) (13,991) Prepaid expensesreplaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement.
      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

F-56


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
other 210 (157) (1,550) -- 273 (1,595) (2,819) Other assets (1,335) 1 2,519 -- 66 1,416 2,667 Intercompany 473 4,753 2,164 -- 7,562 2,961 (17,913) -- Accounts payable (719) (844) 1,460 1,472 (7,975) (6,606) Accrued expensesthan employees provided in SFAS No. 123 as originally issued, and other (119) (225) (3,248) -- 3,487 8,616 8,511 Cash provided (used) by discontinued operations -- (2,437) -- -- -- 1,349 (1,088) --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (14,871) 1,912 484 -- 5,581 2,149 -- (4,745) --------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (119) (192) (3,022) -- (1,939) (3,246) (8,518) Acquisitionit does not address the accounting for employee share ownership plans. This Statement applies to all awards granted after the effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date. SFAS No. 123, as revised, is effective as of the beginning of the first annual reporting period that begins after December 31, 2005. The Company anticipates that the adoption of this revision of SFAS No. 123 will not result in a material impact on the Company’s financial statements.
      FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN No. 47”). FIN No. 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations (“ARO”)” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a business -- -- -- -- (4,421) (2,761) (7,182) Proceeds from property damage claim -- -- 411 -- -- -- 411 Proceeds from saleconditional ARO if the fair value of assets -- -- -- -- -- 19 19 Other investing 613 -- -- -- -- (33) 580 Discontinued operations -- (1,832) -- -- -- (839) (2,671) --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 494 (2,024) (2,611) -- (6,360) (6,860) -- (17,361) --------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in cash overdraft 563 (116) 1,447 -- -- 1,544 3,438 Net increase in short-term debt 13,520 -- -- -- -- 717 14,237 Proceeds from long-term debt 2,000 322 -- -- -- -- 2,322 Paymentsthe liability can be reasonably estimated. The fair value of long-term debt (2,541) (98) (396) -- -- (1,695) (4,730) Discontinued operations -- -- -- -- -- (1,590) (1,590) --------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,542 108 1,051 -- -- (1,024) -- 13,677 --------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- -- -- 128 (125) 3 --------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (835) (4) (1,076) -- (651) (5,860) -- (8,426) CASH AND CASH EQUIVALENTS at beginninga liability for the conditional ARO should be recognized when incurred; generally upon acquisition, construction, or development and/or through the normal operation of period 1,292 56 1,676 -- 1,269 10,552 14,845 --------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS atthe asset. Uncertainty about the timing and/or method of settlement of a conditional ARO should be factored into the measurement of the liability when sufficient information exists. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. FIN No. 47 is effective no later than the end of period $ 457 $ 52 $ 600 $ -- $ 618 $ 4,692 $ -- $ 6,419 =================================================================================================== fiscal years ending after December 15, 2005. The Company anticipates that the adoption of FIN No. 47 will not result in a material impact on the Company’s financial statements.
      Statement of Financial Accounting Standards No. 154, “Accounting for Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed. SFAS No. 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is currently assessing the impact of this statement.
F-43
3.Refinancing
Issuance of 13% Senior Secured Notes and Payment of Pfizer Obligations
      On October 21, 2003, PAHC issued 105,000 units consisting of $85,000 of 13% Senior Secured Notes due 2007 (the “U.S. Notes”) and $20,000 13% Senior Secured Notes due 2007 of BVIII (the “Dutch Notes”), the direct parent of the Company. Certain proceeds from the issuance were used to satisfy outstanding obligations to Pfizer Inc., including $8,225 of accounts payable.

F-57


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Issuance of Additional 13% Senior Secured Notes:
      On December 21, 2004, PAHC completed a private placement pursuant to which PAHC and BVIII issued and sold 22,491 additional units consisting of $18,207 of U.S. Notes of PAHC and $4,284 of Dutch Notes of BV III. The proceeds were used to refinance indebtedness outstanding under the PAHC’s domestic senior credit facility. These additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the “Indenture”) under which PAHC and BV III previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes.
      On March 9, 2005, PAHC completed the exchange of its privately placed 127,491 units of 13% Senior Secured Notes due 2007 with 127,491 new units of 13% Senior Secured Notes due 2007 that have been registered with the Securities and Exchange Commission (the “SEC”).
4.Belgium Plant Transactions
      On December 16, 2004, the Company entered into an agreement with GlaxoSmithKline Biologicals (“GSK”) to sell to GSK substantially all of the Company’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 June 30, 2005 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of the Company at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of the Company for a purchase price of EUR 6,200 ($7,501), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for the Company to reimburse GSK up to a maximum of EUR 700 ($847) for such cleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, the Company agreeing to pay to GSK EUR 1,500 ($1,815) within six months from the closing date, EUR 1,500 ($1,815) within eighteen months from the closing date, EUR 1,500 ($1,815) within thirty months from the closing date, and EUR 500 ($605) within forty-two months from the closing date; (v) the Company retaining certain excess land (valued at approximately EUR 400 ($484)) and being able to sell such land for its own account; (vi) the Company being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions; and (vii) the Company retaining any or all equipment at the Belgium Plant, and being able to sell such equipment for its own account 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 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 2,100 ($2,500) as of the projected closing date of November 30, 2005. The Company recorded incremental depreciation expense of EUR 5,828 ($7,467) during 2005 and will record an additional EUR 3,800 ($4,600) of incremental depreciation expense ratably through November 2005.
      The Company recorded accrued severance expense of EUR 10,200 ($12,808) during 2005, representing the estimated total cost of severance and early-retirement programs for those employees not transferring to GSK. The expense includes $888 for enhanced pension benefits agreed as part of the early-retirement program. The Company estimates $6,500 will be payable at or around the closing date and $6,308 will be payable in subsequent periods.

F-58


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
      The Company also recorded $1,916 of other transaction-related expense during 2005.
      The incremental depreciation expense of $7,467, severance expense of $12,808 and other transaction-related expense of $1,916 recorded in 2005 are included in cost of goods sold on the Company’s consolidated statements of operations and comprehensive income (loss).
      The Company expects to record an estimated $6,200 of additional net expense during fiscal 2006 for employee retention agreements, plant dismantling and decommissioning, plant shutdown and other costs associated with the completion of the sale of the Belgium Plant. The estimated net expense includes an estimated $1,100 of gain from the curtailment of the Belgium pension plan. The Company estimates no material gain or loss during fiscal 2006 resulting from the sale of the Belgium Plant.
      The Company has determined that the carrying amount of the Belgium Plant at June 30, 2005 is recoverable based on the estimated future cash flows arising from the use of the assets.
      In anticipation of transferring production of virginiamycin from the Belgium plant to an alternative production location, the Company has been increasing inventory levels of virginiamycin to ensure adequate supplies during the transfer period.
5.Property, Plant and Equipment
      Property, plant and equipment is comprised of:
         
  As of June 30,
   
  2005 2004
     
Land $1,896  $1,912 
Buildings and improvements  5,926   6,153 
Machinery and equipment  17,482   16,425 
       
   25,304   24,490 
Less: accumulated depreciation  17,182   7,169 
       
  $8,122  $17,321 
       
      Depreciation expense was $10,255, $2,417 and $1,863 for 2005, 2004 and 2003, respectively. Depreciation expense for 2005 includes accelerated depreciation of $7,467 relating to the Belgium Plant Transactions.
6.Related Party Transactions
      The Company transacts business with PAHC and certain of its subsidiaries. The amounts of these transactions, and the related receivables and payables, reflected in the Company’s financial statements are as follows:
             
  For the Years Ended June 30,
   
  2005 2004 2003
       
Product sales $30,298  $28,970  $26,994 
Product purchases  8,183   3,553   5,344 
Receivables at June 30  5,560   4,527   8,553 
Payables at June 30  6,390   2,879   1,835 
      The Company has notes payable to related parties. These notes bear interest at 13.125% per annum and interest is payable annually on December 31. The Company’s related interest obligations to related parties will be payable only to the extent that the Company’s cash flows are sufficient to service such obligations. These

F-59


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
notes mature on December 7, 2007 and July 2, 2011. These notes payable are included in notes payable — related parties on the Company’s balance sheet.
      Cost allocations from PAHC and certain other related parties are included in selling, general and administrative expenses on the Company’s statements of operations and comprehensive income (loss). These allocations are based upon the ratio of the Company’s third party sales to the third party sales of PAHC and certain other related parties, and represent administrative costs incurred by these entities in support of the operations of the Company. These cost allocations amounted to $1,218, $658 and $727 for 2004, 2003 and 2002, respectively. PAHC and the certain other related parties have elected not to seek repayment for these amounts from the Company and have contributed these amounts as additional capital to the Company.
7.Accrued Expenses and Other Current Liabilities
      Accrued expenses and other current liabilities are comprised of:
         
  As of June 30,
   
  2005 2004
     
Belgium Plant Transactions $13,069    
Employee related expenses  2,511   2,507 
Tax accruals  4,442   4,059 
Other accrued liabilities  707   1,725 
       
  $20,729  $8,291 
       
8.Debt Guaranteed
      In October 2003 PAHC issued 105,000 units, consisting of $85,000 of 13% Senior Secured Notes due 2007 of PAHC (the “U.S. Notes”) and $20,000 of 13% Senior Secured Notes due 2007 of BV III (the “Dutch Notes”), the direct parent of the Company.
      In December 2004 PAHC completed a private placement pursuant to which PAHC and BVIII issued and sold 22,491 additional units consisting of $18,207 of U.S. Notes of PAHC and $4,284 of Dutch Notes of BV III.
      The Dutch Notes are senior secured obligations of the BV III and are guaranteed on a senior secured basis by PAHC and by the restricted subsidiaries of BV III, presently consisting of the Company. The Dutch Notes and related guarantees are secured by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of BV III and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of BV III, and a pledge of the intercompany loans made by BV III to its restricted subsidiaries.
      The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires PAHC to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture).
      The indenture contains certain covenants with respect to PAHC, the Company and the guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company’s ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person.

F-60


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
9.Employee Benefit Plans
      The Company maintains a defined benefit plan for eligible employees. The benefits provided by the plans are based upon years of service and the employees’ average compensation, as defined. The measurement dates for the domestic and international pension plans were June 30, 2005 and 2004, respectively.
      Reconciliations of changes in benefit obligations, plan assets, and funded status of the plans were:
         
  2005 2004
     
Change in benefit obligation
        
Benefit obligation at beginning of year $7,323  $6,595 
Service cost  477   467 
Interest cost  423   374 
Benefits paid  (14)  (3)
Employee contributions  39   27 
Actuarial (gain) or loss  670   (475)
Curtailment      
Special termination benefits  888    
Change in discount rate  1,690    
Exchange rate impact  (232)  338 
       
Benefit obligation at end of year $11,264  $7,323 
       
      At June 30, 2005 and 2004, the accumulated benefit obligation was $7,325 and $4,383, respectively.
      The International plan 2005 benefit obligation and pension cost include $888 for enhanced pension benefits with certain employees who have agreed to an early-retirement program effective as of the closing of the Belgium Plant Transactions.
      The Company expects the International plan will record during fiscal 2006 a curtailment gain of approximately $1,100 related to the reduction in number of international participants due to the Belgium Plant Transactions.
         
  2005 2004
     
Change in Plan Assets
        
Fair value of plan assets at beginning of year $5,828  $4,566 
Actual return on plan assets  623   435 
Employer contributions  658   558 
Employee contributions  38   27 
Other  353    
Benefits paid  (14)  (3)
Exchange rate impact  (78)  245 
       
Fair value of plan assets at end of year $7,408  $5,828 
       
Funded status
        
Funded status of the plan $(3,856) $(1,495)
Unrecognized net actuarial (gain) or loss  2,002   368 
Unrecognized prior service cost      
Unrecognized transition obligation/(asset)      
       
(Accrued) pension cost $(1,854) $(1,127)
       

F-61


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
      The Company expects it will not contribute to the plan during fiscal 2006 due to the anticipated reduction in plan participants resulting from employees who will transfer to GSK and from an early-retirement program.
      The Company expects plan assets during 2006 will be reduced by approximately $6,800 in connection with the expected transfer of employees to GSK and the early-retirement program.
      Components of net periodic pension expense were:
             
  2005 2004 2003
       
Service cost — benefits earned during the year $477  $467  $310 
Interest cost on benefit obligation  424   374   259 
Expected return on plan assets  (362)  (300)  (203)
Special Termination Benefits  888       
Amortization of net actuarial loss     22    
          
Net periodic pension expense — international $1,427  $563  $366 
          
      Significant actuarial assumptions for the plans were:
             
  2005 2004 2003
       
Discount rate for service and interest  5.5%   5.5%   5.8% 
Expected rate of return on plan assets  6.0%   6.0%   6.0% 
Rate of compensation increase  3.0%   3.0%   3.0% 
Discount rate for year-end benefit obligation  4.5%   5.5%   5.5% 
      The international pension plan utilizes Euro-zone A+ rated bonds in the determination of the discount rate based on the average liability duration of the plan beneficiaries.
      Estimated future benefit payments, including benefits attributable to future service, are as follows:
     
2006 $48 
2007  10 
2008  6 
2009  5 
2010  4 
2011-2015  13 
      Estimated future benefit payments for the plan reflect participants remaining after completion of the Belgium Plant Transactions.
      The Company’s plan target asset allocations for fiscal 2006 and the weighted asset allocation of plan assets as of June 30, 2005 and 2004 are as follows:
             
  2006 2005 2004
       
Debt Securities  57%   57%   62% 
Equity Securities  24%   23%   21% 
Other  19%   20%   17% 
      The Company assumed the liability for the plan during 2002 as part of the acquisition of the MFA business from Pfizer, Inc.

F-62


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
10.Income Taxes
             
  For the Years Ended
  June 30,
   
  2005 2004 2003
       
Income (loss) before income taxes $(22,873) $2,920  $(4,605)
          
Current tax provision (benefit) $(815) $1,502  $(1,228)
Deferred tax provision (benefit)  (1,446)  112   142 
          
Provision (benefit) for income taxes $(2,261) $1,614  $(1,086)
          
      Reconciliations of the statutory income tax rate to the Company’s effective tax rate are:
             
  For the Years Ended
  June 30,
   
  2005 2004 2003
       
  % % %
Statutory income tax rate  (34.0)  34.0   (34.0)
Expenses with no tax benefit  1.8   16.9   5.4 
Changes in valuation allowance  21.3   (6.5)  4.1 
Other  1.0   10.9   0.9 
          
Effective income tax rate  (9.9)  55.3   (23.6)
          
      The tax effects of significant temporary differences that comprise deferred tax assets and deferred tax liabilities at June 30, 2004 and 2003 were:
          
  As of June 30,
   
  2005 2004
     
Deferred tax assets:        
 Depreciation $7  $7 
 Inventory  615   615 
 Net operating loss carry forwards  7,363    
 Other  575   97 
       
   8,560   719 
 Valuation allowance  (4,867)   
       
   3,693   719 
       
Deferred tax liabilities:        
 Depreciation  (2,058)  (1,022)
 Other  (1,635)  (1,143)
       
   (3,693)  (2,165)
       
Net deferred tax liability $  $(1,446)
       

F-63


PHIBRO ANIMAL HEALTH SA (Belgium)
NOTES TO FINANCIAL STATEMENTS — (Continued)
      Deferred taxes are included in the following line items on the Company’s balance sheets:
         
  As of June 30,
   
  2005 2004
     
Prepaid expenses and other current assets $315  $315 
Other liabilities  (315)  (1,761)
       
Net deferred tax liability $  $(1,446)
       
      The Company incurred losses in 2003 and prior years and assessed the likelihood of recovering net deferred tax assets, which resulted in the recording of valuation allowances. In 2004 the Company had taxable income and utilized the net operating loss carry forwards from 2003 and prior years. The Company will continue to evaluate the likelihood of recoverability of the remaining deferred tax assets based upon actual and expected operating performance.
11.Financial Instruments
      Financial instruments that potentially subject the Company to credit risk consist principally of cash and trade receivables. The Company places its cash with high quality financial institutions. The Company sells to customers in a variety of industries, markets and countries. Concentrations of credit risk with respect to receivables arising from these sales are limited due to the large number of customers comprising the Company’s customer base. Ongoing credit evaluations of customers’ financial conditions are performed and, generally, no collateral is required. The Company maintains appropriate reserves for uncollectible receivables.
      The carrying amounts of cash, trade receivables and trade payables is considered to be representative of their fair value because of their short term maturities.

F-64


SIGNATURES
      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PHIBRO ANIMAL HEALTH CORPORATION By: /s/ Jack C. Bendheim By: /s/ Gerald K. Carlson - --------------------------------- ---------------------------- Jack C. Bendheim Gerald K. Carlson Chairman of the Board Chief Executive Officer Date: September 28, 2004 Date: September 28, 2004
By: /s/ Jack C. BendheimBy: /s/ Gerald K. Carlson
Jack C. BendheimGerald K. Carlson
Chairman of the BoardChief Executive Officer
Date: September 28, 2005Date: September 28, 2005
      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature and Title Date - ------------------- ---- /s/ Gerald K. Carlson September 28, 2004 -------------------------------- Gerald K. Carlson Chief Executive Officer (Principal Executive Officer) /s/ Jack C. Bendheim September 28, 2004 -------------------------------- Jack C. Bendheim Director, Chairman of the Board /s/ Richard G. Johnson September 28, 2004 - -------------------------------- Richard G. Johnson Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Marvin S. Sussman September 28, 2004 -------------------------------- Marvin S. Sussman Director /s/ James O. Herlands September 28, 2004 - -------------------------------- James O. Herlands Director /s/ Sam Gejdenson September 28, 2004 - -------------------------------- Sam Gejdenson Director II-1
Signature and TitleDate
/s/ Gerald K. Carlson
Gerald K. Carlson
Chief Executive Officer
(Principal Executive Officer)
September 28, 2005
/s/ Jack C. Bendheim
Jack C. Bendheim
Director, Chairman of the Board
September 28, 2005
/s/ Richard G. Johnson
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
September 28, 2005
/s/ Marvin S. Sussman
Marvin S. Sussman
Director
September 28, 2005
/s/ James O. Herlands
James O. Herlands
Director
September 28, 2005
/s/ Sam Gejdenson
Sam Gejdenson
Director
September 28, 2005
/s/ Mary Lou Malanoski
Mary Lou Malanoski
Director
September 28, 2005

S-1


EXHIBIT INDEX TO EXHIBITS Exhibit No. Description of Exhibit - ----------- ---------------------- 3.1 Composite Certificate of Incorporation of Registrant (15) 3.2 By-laws of Registrant (1) 4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of Company (1) 4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant (10) 4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant (10) 4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant (10) 4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among Phibro Animal Health Corporation, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant. (11) 4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Phibro Animal Health Corporation, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant. (12) 4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Phibro Animal Health Corporation, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant. (16) 4.2 Indenture, dated as of October 21, 2003, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent. (13) 4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent. (16) Certain instruments which define the rights of holders of long-term debt of Registrant and its consolidated subsidiaries have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis, as of June 30, 2004. For a description of such indebtedness, see Note 9 of Notes to Consolidated Financial Statements. Registrant hereby agrees to furnish copies of such instruments to the Securities and Exchange Commission upon its request. 10.1 [Reserved] 10.2 Manufacturing Agreement, dated May 15, 1994, by and between Merck & Co., Inc., Koffolk, Ltd., and Registrant (1)+ 10.3 Lease, dated July 25, 1986, between Registrant and 400 Kelby Associates, as amended December 1, 1986 and December 30, 1994 (1) 10.4 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech, Inc., as amended May 1998 (1) 10.5 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel Land Administration (1) 10.6 Master Lease Agreement, dated February 27, 1998, between General Electric Capital Corp., Registrant and Phibro-Tech, Inc. (1) 10.7 Stockholders Agreement, dated December 29, 1987, by and between Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman (1) 10.8 Employment Agreement, dated December 29, 1987, by and between Registrant and Marvin S. Sussman (1)++ 10.9 Stockholders Agreement, dated February 21, 1995, between James O. Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1) 10.10 Form of Severance Agreement, dated as of February 21, 1995, between Registrant and James O. Herlands (1)++ 10.11 Agreement of Limited Partnership of First Dice Road Company, dated June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S. Sussman and James O. Herlands, as amended November 1985 (1) 10.12 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan Trust, dated as of January 1, 1994, by and between Registrant on its own behalf and on behalf of C.P. Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated March 18, 1994 ("Retirement Income and Deferred Compensation Plan") (1)++ 10.12.1 First, Second and Third Amendments to Retirement Income and Deferred Compensation Plan. (2)++ 10.13 Form of Executive Income Deferred Compensation Agreement, each dated March 11, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman (1)++ 10.14 Form of Executive Income Split Dollar Agreement, each dated March 1, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman (1)++ 10.15 [Reserved] 10.16 Administrative Consent Order, dated March 11, 1991, issued by the State of New Jersey Department of Environmental Protection, Division of Hazardous Waste Management, to C.P. Chemicals, Inc. (1) 10.17 Agreement for Transfer of Ownership, dated as of June 8, 2000, between C. P. Chemicals, Inc. ("CP") and the Township of Woodbridge ("Township"), and related Environmental Indemnification Agreement, between CP and Township, and Lease, between Township and CP (2) 10.18 Stockholders' Agreement, dated as of January 5, 2000, among shareholders of Penick Holding Company ("PHC"), and Certificate of Incorporation of PHC and Certificate of Designation, Preferences and Rights of Series A Redeemable Cumulative Preferred Stock of PHC (2) 10.19 [Reserved] 10.20 [Reserved] 10.21 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant, and various exhibits and certain Schedules thereto (3)+ 10.21.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant (10) 10.22 Stock Purchase Agreement, dated as of November 30, 2000, between Registrant and the Purchasers (as defined therein) (4) 10.23 Stockholders' Agreement, dated as of November 30, 2000, among Registrant, the Investor Stockholders (as defined therein) and Jack C. Bendheim (4) 10.24 United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001 (5) 10.24.1 Amendment No. 1 to United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001 (6) 10.25 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001 (5) 10.26 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001 (5) 10.27 Management and Advisory Services Agreement dated November 30, 2000 between Registrant and Palladium Equity Partners, L.L.C. (7)++ 10.27.1 Amended and Restated Management Services Agreement dated as of October 21, 2003 between Registrant and Palladium Capital Management, L.L.C. (15)++ 10.28 Employment Agreement, dated May 28, 2002, by and between Registrant and Gerald K. Carlson (8)++ 10.29 Agreement dated as of May 2, 2003, by and between PAH Management Company, Ltd. and David McBeath (10) ++ 10.30 Stock Purchase Agreement, dated August 14, 2003, by and between Registrant and Cemex, Inc. (9) 10.31 Loan and Security Agreement, dated October 21, 2003, by and among, the lenders identified on the signature pages thereto, Wells Fargo Foothill, Inc., and Phibro Animal Health Corporation ("Parent"), and each of Parent's Subsidiaries identified on the signature pages thereto. (12) 10.31.1 Amendment Number One to Loan and Security Agreement dated November 14, 2003. (12) 10.31.2 Amendment Number Two to Loan and Security Agreement dated April 29, 2004. (14) 10.31.3 Amendment Number Three to Loan and Security Agreement dated as of September 24, 2004. (16) 10.32 Intercreditor and Lien Subordination Agreement, dated as of October 21, 2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA, Phibro Animal Health Corporation ("Parent") and those certain subsidiaries of the Parent party thereto. (12) 10.33 Purchase and Sale Agreement dated as of December 26, 2003 by and among Phibro Animal Health Corporation ("PAHC"), Prince MFG, LLC, ("Prince MFG"), The Prince Manufacturing Company ("Prince" and together with PAHC and Prince MFG, the "Phibro Parties"), Palladium Equity Partners II, L.P. ("PEP II"), Palladium Equity Partners II-A, L.P., ("PEP II-A"), Palladium Equity Investors II, L.P., ("PEI II", and together with PEP II and PEP II-A, the "Investor Stockholders"), and Prince Mineral Company, Inc. ("Buyer"). (15) 10.34 Environmental Indemnification Agreement dated as of December 26, 2003 between the Phibro Parties (as defined therein) and Buyer. (15) 10.35 Amendment to Stockholders Agreement dated as of December 26, 2003 between PAHC, the Investor Stockholders and Jack Bendheim (15) 10.36 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and PAHC(15)++ 21 List of Subsidiaries (16) 31.1 Certification of Gerald K. Carlson, Chief Executive Officer required by Rule 15d-14(a) of the Act (16) 31.2 Certification of Jack C. Bendheim, Chairman of the Board required by Rule 15d-14(a) of the Act (16) 31.3 Certification of Richard G. Johnson, Chief Financial Officer required by Rule 15d-14(a) of the Act (16) - ---------- 1 Filed as an Exhibit to the Registrant's Registration Statement on Form S-4, No. 333-64641. 2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. 3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. 4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated November 30, 2000. 5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2001. 6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated June 14, 2001. 7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. 8 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. 9 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2, 2004. 10 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. 11 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 2, 2003. 12 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2003. 13 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 31, 2003. 14 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2004. 15 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated January 12, 2004. 16 Filed herewith. + A request for confidential treatment has been granted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 406(b). ++ This Exhibit is a management compensatory plan or arrangement. Since the Company does not have securities registered under Section 12 of the Securities Exchange Act of 1934 and is not required to file periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company is not filing the written certification statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The Company submits periodic reports with the Securities and Exchange Commission because it is required to do so by the terms of the indenture governing its senior subordinated notes.
     
Exhibit  
No. Description of Exhibit
   
 3.1 Composite Certificate of Incorporation of Registrant(15)
 3.1(a) Certificate of Amendment of Certificate of Incorporation of Registrant dated February 28, 2005(21)
 
 3.2 By-laws of Registrant(1)
 
 4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits thereto, including Form of 97/8% Senior Subordinated Note due 2008 of Company(1)
 
 4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(10)
 
 4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(10)
 
 4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(10)
 
 4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(11)
 
 4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(12)
 
 4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 97/8% Senior Subordinated Notes due 2008 of Registrant(16)
 
 4.2 Indenture, dated as of October 21, 2003, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent(13)
 4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent(16)
 
 4.2.2 Second Supplemental Indenture, dated as of December 8, 2004, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent(17)
 
 4.2.3 Third Supplemental Indenture, dated as of March 10, 2005, by and among Registrant and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent(22)
 
    Certain instruments which define the rights of holders of long-term debt of Registrant and its consolidated subsidiaries have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis, as of June 30, 2005. For a description of such indebtedness, see Note 12 of Notes to Consolidated Financial Statements. Registrant hereby agrees to furnish copies of such instruments to the Securities and Exchange Commission upon its request.
 
 10.1 Lease, dated September 27, 2004, between Registrant and Hartz Mountain Industries, Inc.(19)
 
 10.2 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech, Inc., as amended May 1998(1)
 
 10.3 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel Land Administration(1)
 
 10.4 Master Lease Agreement, dated February 27, 1998, between General Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1)


     
Exhibit  
No. Description of Exhibit
   
 
 10.5 Stockholders Agreement, dated December 29, 1987, by and between Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman(1)
 
 10.6 Employment Agreement, dated December 29, 1987, by and between Registrant and Marvin S. Sussman(1)††
 
 10.7 Stockholders Agreement, dated February 21, 1995, between James O. Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998(1)
 
 10.8 Form of Severance Agreement, dated as of February 21, 1995, between Registrant and James O. Herlands(1)††
 
 10.9 Agreement of Limited Partnership of First Dice Road Company, dated June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S. Sussman and James O. Herlands, as amended November 1985(1)
 
 10.10 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan Trust, dated as of January 1, 1994, by and between Registrant on its own behalf and on behalf of C.P. Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated March 18, 1994 (“Retirement Income and Deferred Compensation Plan”)(1)††
 
 10.10.1 First, Second and Third Amendments to Retirement Income and Deferred Compensation Plan(2)††
 
 10.11 Form of Executive Income Deferred Compensation Agreement, each dated March 11, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman(1)††
 
 10.12 Form of Executive Income Split Dollar Agreement, each dated March 1, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman(1)††
 
 10.13 Administrative Consent Order, dated March 11, 1991, issued by the State of New Jersey Department of Environmental Protection, Division of Hazardous Waste Management, to C.P. Chemicals, Inc.(1)
 
 10.14 Agreement for Transfer of Ownership, dated as of June 8, 2000, between C. P. Chemicals, Inc. (“CP”) and the Township of Woodbridge (“Township”), and related Environmental Indemnification Agreement, between CP and Township, and Lease, between Township and CP(2)
 
 10.15 Stockholders’ Agreement, dated as of January 5, 2000, among shareholders of Penick Holding Company (“PHC”), and Certificate of Incorporation of PHC and Certificate of Designation, Preferences and Rights of Series A Redeemable Cumulative Preferred Stock of PHC(2)
 
 10.16 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant, and various exhibits and certain Schedules thereto(3)†
 
 10.16.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant(10)
 
 10.17 Stock Purchase Agreement, dated as of November 30, 2000, between Registrant and the Purchasers (as defined therein)(4)
 
 10.18 Stockholders’ Agreement, dated as of November 30, 2000, among Registrant, the Investor Stockholders (as defined therein) and Jack C. Bendheim(4)
 
 10.19 United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001(5)
 
 10.19.1 Amendment No. 1 to United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001(6)
 
 10.20 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001(5)
 
 10.21 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001(5)
 
 10.22 Amended and Restated Management and Advisory Services Agreement dated as of October 21, 2003 between Registrant and Palladium Capital Management, L.L.C.(15)††
 
 10.23 Employment Agreement, dated May 28, 2002, by and between Registrant and Gerald K. Carlson(8)††
 
 10.24 Consulting Agreement dated as of November 1, 2004, by and between Registrant and David McBeath(19)††


     
Exhibit  
No. Description of Exhibit
   
 
 10.25 Consulting Agreement dated as of December 13, 2004, by and between Registrant and David McBeath(19)††
 
 10.26 Stock Purchase Agreement, dated August 14, 2003, by and between Registrant and Cemex, Inc.(9)
 
 10.27 Loan and Security Agreement, dated October 21, 2003, by and among, the lenders identified on the signature pages thereto, Wells Fargo Foothill, Inc., and Registrant, and each of Registrant’s Subsidiaries identified on the signature pages thereto(12)
 
 10.27.1 Amendment Number One to Loan and Security Agreement dated November 14, 2003(12)
 
 10.27.2 Amendment Number Two to Loan and Security Agreement dated April 29, 2004(14)
 
 10.27.3 Amendment Number Three to Loan and Security Agreement dated as of September 24, 2004(16)
 
 10.27.4 Amendment Number Four to Loan and Security Agreement dated December 20, 2004(18)
 
 10.28 Intercreditor and Lien Subordination Agreement, dated as of October 21, 2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA, Registrant and those certain subsidiaries of the Registrant party thereto(12)
 
 10.28.1 Amendment One to Intercreditor Agreement dated December 20, 2004(18)
 
 10.29 Purchase and Sale Agreement dated as of December 26, 2003 by and among Registrant, Prince MFG, LLC, (“Prince MFG”), The Prince Manufacturing Company (“Prince” and together with Registrant and Prince MFG, the “Phibro Parties”), Palladium Equity Partners II, L.P. (“PEP II”), Palladium Equity Partners II-A, L.P., (“PEP II-A”), Palladium Equity Investors II, L.P., (“PEI II”, and together with PEP II and PEP II-A, the “Investor Stockholders”), and Prince Mineral Company, Inc. (“Buyer”)(15)
 
 10.30 Environmental Indemnification Agreement dated as of December 26, 2003 between the Phibro Parties (as defined therein) and Buyer(15)
 
 10.31 Amendment to Stockholders Agreement dated as of December 26, 2003 between Registrant, the Investor Stockholders and Jack Bendheim(15)
 
 10.32 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and Registrant(15)††
 
 10.33 Business Purchase Agreement by and between Phibro Animal Health SA and GlaxoSmithKline Biologicals SA, dated December 16, 2004(20)*
 
 10.34 Redemption Agreement, dated as of February 28, 2005, among the Registrant, PAHC Holdings Corporation, Palladium Capital Management, L.L.C., Palladium Equity Partners II, L.P., Palladium Equity Partners II-A, L.P., Palladium Equity Investors II, L.P., Jack C. Bendheim and Marvin S. Sussman(21)
 
 10.35 Agreement for the Sale and Purchase of the Entire Share Capital in Wychem Limited dated as of April 29, 2005 among Ferro Metal and Chemical Corporation Limited, Koffolk (1949) Limited and MRG Holdings Limited(22)
 
 21  List of Subsidiaries
 
 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 Registrant
(1) Filed as an Exhibit to the Registrant’s Registration Statement on Form S-4, No. 333-64641.
(2) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
(3) Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2000.
(4) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated November 30, 2000.
(5) Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2001.
(6) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 14, 2001.
(7) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001.


(8) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
(9) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated September 11, 2003, as amended by the Registrant’s Form 8-K/ A dated June 2, 2004.
(10) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003.
(11) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated October 2, 2003.
(12) Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2003.
(13) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated October 31, 2003.
(14) Filed as an Exhibit to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2004.
(15) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated January 12, 2004.
(16) Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.
(17) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 8, 2004.
(18) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 23, 2004.
(19) Filed as an Exhibit to the Registrant’s Registration Statement on Form S-4, No. 333-122063.
(20) Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2004.
(21) Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated February 28, 2005.
(22) Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
*A request for confidential treatment has been made for certain portions of such document. Confidential portions have been omitted and filed separately with the SEC in accordance with Rule 24b-2 under the Securities Exchange Act.
A request for confidential treatment has been granted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 406(b).
††This Exhibit is a management contract or compensatory plan or arrangement.