Phibro Animal Health 10Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

		For the quarterly period ended March 31, 2006

or

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

Commission File Number333-64641

Phibro Animal Health Corporation

(Exact name of registrant as specified in its charter)


New York		13-1840497
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

65 Challenger Road, Ridgefield Park, New Jersey (Address of principal executive offices)		07660 (Zip Code)

(201) 329-7300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

The number of shares outstanding of the Registrant’s Common Stock as of May 9, 2006: 24,488.50

Class A Common Stock, $.10 par value: 12,600.00

Class B Common Stock, $.10 par value: 11,888.50

PHIBRO ANIMAL HEALTH CORPORATION

TABLE OF CONTENTS


		Page

PART I FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

PART II OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
SIGNATURES		39
EX-10.27.7: AMENDMENT NO. 7 TO THE LOAN AND SECURITY AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-31.3: CERTIFICATION
EX-32: CERTIFICATIONS

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the Company’s Annual Report on Form 10-K for its fiscal year ended June 30, 2005 and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this Form 10-Q under the caption “Certain Factors Affecting Future Operating Results.” Unless the context otherwise requires, references in this report to the “Company” or to “we” or “our” refer to Phibro Animal Health Corporation and/or one or more of its subsidiaries, as applicable.

PART I — FINANCIAL INFORMATION


Item 1.	*Condensed Consolidated Financial Statements (Unaudited)*

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			June 30,
			2006			2005

			(Unaudited)
			(In thousands)
ASSETS
Current assets
	Cash and cash equivalents		$	9,752		$	13,001
	Accounts receivable, net			60,009			56,417
	Inventories			93,911			96,621
	Prepaid expenses and other current assets			10,832			12,787

		Total current assets		174,504			178,826
Property, plant and equipment, net				48,972			49,960
Intangibles, net				9,096			10,201
Other assets				11,234			14,070

		Total assets	$	243,806		$	253,057


LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
	Loans payable to banks		$	—		$	8,038
	Current portion of long-term debt			223			1,625
	Accounts payable			38,781			36,537
	Accrued expenses and other current liabilities			53,985			53,815

		Total current liabilities		92,989			100,015
Long-term debt				176,451			176,501
Other liabilities				23,231			21,465

		Total liabilities		292,671			297,981

Commitments and contingencies
Stockholders’ deficit
	Preferred stock			521			521
	Common stock			2			2
	Paid-in capital			27,260			27,260
	Accumulated deficit			(80,544	)		(74,379	)
	Accumulated other comprehensive income
		Gain on derivative instruments, net of income taxes		79			123
		Cumulative foreign currency translation adjustment, net of income taxes		3,817			1,549

		Total stockholders’ deficit		(48,865	)		(44,924	)

		Total liabilities and stockholders’ deficit	$	243,806		$	253,057

See notes to unaudited condensed consolidated financial statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)


		Three Months Ended						Nine Months Ended
		March 31,						March 31,

		2006			2005			2006			2005

		(Unaudited)
		(In thousands)
Net sales		$	100,905		$	90,255		$	293,211		$	269,169
Cost of goods sold (includes Belgium Plant Transactions costs of $975 and $4,372 for the three months ended March 31, 2006 and 2005, respectively, and $10,211 and $13,908 for the nine months ended March 31, 2006 and 2005, respectively)			76,442			71,504			229,343			214,682

	Gross profit		24,463			18,751			63,868			54,487
Selling, general and administrative expenses			17,527			17,019			49,372			49,771

	Operating income		6,936			1,732			14,496			4,716
Interest expense			6,726			6,757			19,183			18,656
Interest (income)			(53	)		(19	)		(259	)		(77	)
Other (income) expense, net			31			77			(2,561	)		(691	)

	Income (loss) from continuing operations before income taxes		232			(5,083	)		(1,867	)		(13,172	)
Provision for income taxes			1,591			773			4,298			699

	(Loss) from continuing operations		(1,359	)		(5,856	)		(6,165	)		(13,871	)
Income from discontinued operations, net of income taxes			—			272			—			575

	Net (loss)		(1,359	)		(5,584	)		(6,165	)		(13,296	)
Other comprehensive income (loss):
	Change in derivative instruments, net of income taxes		76			(27	)		(44	)		295
	Change in foreign currency translation adjustment, net of income taxes		2,482			(1,207	)		2,268			7,104

	Comprehensive income (loss)	$	1,199		$	(6,818	)	$	(3,941	)	$	(5,897	)

	Net (loss)		(1,359	)		(5,584	)		(6,165	)		(13,296	)
Excess of the reduction of Series B and C preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions			—			4,000			—			4,973
Dividends and equity value adjustment on Series C preferred stock			—			(3,582	)		—			(1,723	)

	Net (loss) attributable to common stockholders	$	(1,359	)	$	(5,166	)	$	(6,165	)	$	(10,046	)

See notes to unaudited condensed consolidated financial statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Three Months and Nine Months Ended March 31, 2006


													Accumulated
		Preferred		Common Stock									Other
		Stock						Paid-in		Accumulated			Comprehensive
		Series A		Class A		Class B		Capital		Deficit			Income (Loss)			Total

		(Unaudited)
		(In thousands)
Balance as of June 30, 2005		$	521	$	1	$	1	$	27,260	$	(74,379	)	$	1,672		$	(44,924	)
	Change in derivative instruments, net of income taxes													100			100
	Change in foreign currency translation adjustment, net of income taxes													2,040			2,040
	Net (loss)										(2,791	)					(2,791	)

Balance as of September 30, 2005		$	521	$	1	$	1	$	27,260	$	(77,170	)	$	3,812		$	(45,575	)

	Change in derivative instruments, net of income taxes													(220	)		(220	)
	Change in foreign currency translation adjustment, net of income taxes													(2,254	)		(2,254	)
	Net (loss)										(2,015	)					(2,015	)

Balance as of December 31, 2005		$	521	$	1	$	1	$	27,260	$	(79,185	)	$	1,338		$	(50,064	)

	Change in derivative instruments, net of income taxes													76			76
	Change in foreign currency translation adjustment, net of income taxes													2,482			2,482
	Net (loss)										(1,359	)					(1,359	)

Balance as of March 31, 2006		$	521	$	1	$	1	$	27,260	$	(80,544	)	$	3,896		$	(48,865	)

See notes to unaudited condensed consolidated financial statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


				Nine Months Ended
				March 31,

				2006			2005

				(Unaudited)
				(In thousands)
OPERATING ACTIVITIES
	Net (loss)			$	(6,165	)	$	(13,296	)
	Adjustment for discontinued operations				—			(575	)

	(Loss) from continuing operations				(6,165	)		(13,871	)
	Adjustments to reconcile (loss) from continuing operations to net cash provided (used) by operating activities:
		Depreciation and amortization (includes accelerated depreciation from the Belgium Plant Transactions of $4,533 and $3,628 for the nine months ended March 31, 2006 and 2005, respectively)			11,849			11,586
		Amortization of deferred financing costs			2,486			2,130
		Deferred income taxes			(424	)		(202	)
		Net gain from sales of assets			(464	)		(789	)
		Effects of changes in foreign currency			(226	)		(760	)
		Other			(428	)		430
		Changes in operating assets and liabilities:
			Accounts receivable		(4,041	)		4,460
			Inventories		4,006			(16,378	)
			Prepaid expenses and other current assets		2,845			1,647
			Other assets		121			(618	)
			Accounts payable		2,173			(11,378	)
			Accrued expenses and other liabilities		(1,984	)		9,120
			Accrued expenses: non-completed transaction		—			(3,970	)
			Accrued expenses: Belgium Plant Transactions		(1,608	)		10,280
	Cash provided (used) by discontinued operations				—			808

		Net cash provided (used) by operating activities			8,140			(7,505	)

INVESTING ACTIVITIES
	Capital expenditures				(11,244	)		(5,098	)
	Proceeds from Belgium Plant Transactions				7,997			—
	Proceeds from sales of assets				1,934			1,353
	Other investing				(106	)		(119	)
	Discontinued operations				—			(93	)

		Net cash (used) by investing activities			(1,419	)		(3,957	)

FINANCING ACTIVITIES
	Net increase (decrease) in book overdrafts				(27	)		1,930
	Net (decrease) in short-term debt				(8,038	)		(7,049	)
	Proceeds from long-term debt				—			24,292
	Payments of long-term debt and capital leases				(2,005	)		(3,913	)
	Proceeds from capital contribution by PAHC Holdings Corporation				—			26,400
	Redemption of Series C preferred stock				—			(26,400	)
	Debt financing costs				—			(2,027	)

		Net cash provided (used) by financing activities			(10,070	)		13,233

Effect of exchange rate changes on cash					100			66

		Net increase (decrease) in cash and cash equivalents			(3,249	)		1,837
Cash and cash equivalents at beginning of period					13,001			5,568

Cash and cash equivalents at end of period				$	9,752		$	7,405

Supplemental Cash Flow Information
	Interest paid			$	11,552		$	10,431
	Income taxes paid				2,814			1,130
	Capital lease additions				522			—

See notes to unaudited condensed consolidated financial statements

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In Thousands)


1.	General


	*Principles of Consolidation and Basis of Presentation*

In the opinion of Phibro Animal Health Corporation (the “Company” or “PAHC”), the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to state fairly its financial position at March 31, 2006 and its results of operations and cash flows for the three months and nine months ended March 31, 2006 and 2005. The financial results for any interim period are not necessarily indicative of results for the full year. The Company presents its financial statements on the basis of its fiscal year ending June 30. All references to 2007, 2006 and 2005 refer to the fiscal year ended June 30 of that year.

The Company is a wholly-owned subsidiary of PAHC Holdings Corporation, which was formed in February 2005.

The condensed 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 condensed consolidated financial statements.

The Company consolidates the financial statements of Koffolk (1949) Ltd. (Israel) (“Koffolk”) and Planalquimica Industrial Ltda. (Brazil) (“Planalquimica”) on the basis of their March 31 fiscal year-ends to facilitate the timely inclusion of such entities in the Company’s consolidated financial reporting. The condensed consolidated financial statements include Koffolk’s and Planalquimica’s financial position as of December 31, 2005 and their results of operations and cash flows for the three months and nine months ended December 31, 2005 and 2004.

The condensed consolidated balance sheet as of June 30, 2005 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Additionally it should be noted the accompanying condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting standards appropriate for interim financial statements. While the Company believes the disclosures presented are adequate to make the information herein not misleading, these financial statements should be read in conjunction with the audited consolidated financial statements as found in the Company’s annual report filed on Form 10-K for the year ended June 30, 2005.


	*Risks, Uncertainties and Liquidity*

The Company’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 domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company’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 December 1 and June 1 related to PAHC’s 13% Senior Secured Notes due 2007 and PAHC’s 9⁷/8% Senior Subordinated Notes due 2008. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to provide additional liquidity. The Company also has availability under foreign credit lines that would be available as needed. 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

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.


	*New Accounting Pronouncements*

The Company adopted the following new accounting pronouncements in 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 adoption of SFAS No. 151 did not impact the Company’s financial statements.

	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 adoption of SFAS No. 153 did not impact the Company’s financial statements.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company will adopt the following new accounting pronouncement in 2006:

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.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	Balance Sheet Information


	As of

	March 31, 2006		June 30, 2005

Accounts receivable, net
Trade accounts receivable	$	58,325	$	54,178
Less: allowance for doubtful accounts		1,307		1,372

Trade accounts receivable, net		57,018		52,806
Other receivables		2,991		3,611

Total	$	60,009	$	56,417

Inventories
Raw materials	$	19,816	$	23,703
Work-in-process		869		434
Finished goods		73,226		72,484

Total	$	93,911	$	96,621

Property, plant and equipment, net
Land	$	4,225	$	6,250
Buildings and improvements		21,472		25,967
Machinery and equipment		101,129		108,762

		126,826		140,979
Less: accumulated depreciation		77,854		91,019

Total	$	48,972	$	49,960

Intangibles, net
Cost	$	14,918	$	14,907
Less: accumulated amortization		5,822		4,706

Total	$	9,096	$	10,201

Resulting from the Belgium Plant Transactions discussed below, as of November 30, 2005, the Company removed $1,896 of land, $6,103 of buildings and improvements, $16,301 of machinery and equipment and $22,182 of accumulated depreciation from property, plant and equipment, net on the condensed consolidated balance sheet.

Amortization expense for intangibles was $370 and $375 for the three months ended March 31, 2006 and 2005, respectively, and $1,113 and $1,121 for the nine months ended March 31, 2006 and 2005, respectively.


3.	Belgium Plant Transactions

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreed 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 ($849) for suchcleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreed to pay to GSK EUR 1,500 ($1,821) within six months from the closing date, EUR 1,500 ($1,821) within eighteen months from the closing date, EUR 1,500 ($1,821) within thirty months from the closing date, and EUR 500 ($607) within forty-two months from the closing date; (v) PAH Belgium sold certain excess land for its own account; (vi) PAH Belgium was responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions; and (vii) PAH Belgium retained certain equipment at the Belgium Plant, and has transferred or will transfer such equipment, together with other assets and rights related to the production of virginiamycin, to Phibro Saude Animal Internacional Ltda. (“PAH Brazil”) which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements.

The Dutch Notes (as defined below) and related guarantees were collateralized by a mortgage on the Belgium Plant which was released in connection with the sale of the Belgium Plant to GSK.

As a result of the Belgium Plant Transactions, the Company depreciated the Belgium Plant to its estimated salvage value, recorded expense of early-retirement and severance programs for those employees not transferred to GSK, other transaction-related expenses, a curtailment gain on the Belgium pension plan and a gain on the sales of the Belgium Plant and excess land. Other transaction-related expenses were primarily related to employee retention agreements, plant dismantling and decommissioning, plant shutdown, and site demolition costs payable to GSK.

The following table includes the amounts of these charges and gains.


	Belgium Plant Transactions Costs

	Twelve										Nine
	Months		Three Months Ended								Months
	Ended										Ended
	June 30,		September 30,			December 31,			March 31,		March 31,			Cumulative
	2005		2005			2005			2006		2006			Total

Incremental depreciation	$	7,467	$	2,747		$	1,786		$	—	$	4,533		$	12,000
Employee termination expenses		12,808		287			699			—		986			13,794
Other transaction-related expenses		1,916		979			3,759			975		5,713			7,629
Net (gain) on the curtailment and settlement of the pension plan		—		—			(432	)		—		(432	)		(432	)
(Gain) on the sale of the Belgium Plant and excess land		—		(510	)		(79	)		—		(589	)		(589	)

	$	22,191	$	3,503		$	5,733		$	975	$	10,211		$	32,402

All costs and gains of the Belgium Plant Transactions are included in cost of goods sold on the condensed consolidated statements of operations and comprehensive income (loss) in the periods as described in the table above.

As of March 31, 2006, accrued expenses and other long term liabilities on the condensed consolidated balance sheet included $6,919 payable to GSK and $10,333 payable for employee termination and other transaction-related expenses.

The Company expects to record in future periods an estimated additional $800 of other transaction-related expenses, primarily for plant dismantling and decommissioning, primarily during the remainder of 2006.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In anticipation of transferring production of virginiamycin from the Belgium Plant to an alternative production location, the Company increased inventory levels of virginiamycin until the Belgium Plant sale in November 2005 to ensure adequate supplies during the transfer period. Virginiamycin inventories were approximately $33,400 at March 31, 2006 and $38,800 at June 30, 2005.


4.	Discontinued Operations

The Company divested Wychem Ltd. (U.K.) (“Wychem”) during 2005. Wychem has been classified as a discontinued operation. The condensed consolidated financial statements have been revised to report separately the operating results, financial position and cash flows of the discontinued operation.

Operating results of Wychem were:


	Three Months		Nine Months
	Ended		Ended
	March 31, 2005		March 31, 2005

Net sales	$	1,487	$	3,908
Cost of goods sold		924		2,590
Selling, general and administrative expenses		174		511
Other expense		5		6

Income before income taxes		384		801
Provision for income taxes		112		226

Income from operations	$	272	$	575

Depreciation and amortization	$	105	$	309


5.	Debt


	*Loans Payable to Banks*

At March 31, 2006, PAHC had no amounts borrowed under its domestic senior credit facility, and had $17,500 of borrowings available under the working capital facility that is provided under its domestic senior credit facility.

On October 28, 2005, PAHC amended its domestic senior credit facility in connection with, among other things, yearly determination of certain financial covenants 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 $33,200 for purposes of calculating a certain financial covenant; (ii) establish the Minimum Domestic EBITDA for the 12 month periods ended July 31, 2005 through June 30, 2006 at $17,500 for purposes of calculating a certain financial covenant; (iii) establish the Consolidated Minimum EBITDA for the 12 month periods ended July 31, 2005 through June 30, 2006 at $32,000 for purposes of calculating a certain financial covenant; and (iv) amend the maximum aggregate amount of borrowing available under the working capital and letter of credit facilities from $32,500 to $35,000. The amount of aggregate borrowings available under the working capital facility remained unchanged at $17,500.

As of March 31, 2006, PAHC was in compliance with the financial covenants of its domestic senior credit facility, as amended. 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 PAHC’s assets, guarantees, dividend payments, redemption or purchase of PAHC’s stock, sale of subsidiaries’ stock, disposition of assets, investments, and mergers and acquisitions.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 on the condensed consolidated balance sheet.


	*Long-Term Debt*


	As of

	March 31, 2006		June 30, 2005

Senior secured notes due December 1, 2007	$	127,491	$	127,491
Senior subordinated notes due June 1, 2008		48,029		48,029
Foreign bank loans		701		2,606
Capitalized lease obligations and other		453		—

		176,674		178,126
Less: current maturities		223		1,625

	$	176,451	$	176,501

Koffolk has aggregate credit lines available for borrowing and letters of credit of $10,500. At March 31, 2006, Koffolk had $9,082 available under these credit lines.


6.	Employee Benefit Plans

PAHC and its domestic subsidiaries maintain noncontributory defined benefit pension plans for all eligible domestic nonunion employees who meet certain requirements of age, length of service and hours worked per year. The Company’s Belgium subsidiary maintains a defined contribution and defined benefit plan for eligible employees.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Components of net periodic pension expense were:


	Three Months						Nine Months
	Ended March 31,						Ended March 31,

	2006			2005			2006			2005

Domestic Pension Expense
Service cost — benefits earned during the period	$	394		$	291		$	1,201		$	915
Interest cost on benefit obligation		246			228			765			707
Expected return on plan assets		(233	)		(218	)		(727	)		(676	)
Amortization of initial unrecognized net transition (asset)		—			(1	)		—			(3	)
Amortization of prior service cost		(34	)		(35	)		(108	)		(107	)
Amortization of net actuarial loss		36			—			106			—

Net periodic pension expense — domestic	$	409		$	265		$	1,237		$	836

Belgium Pension Expense
Service cost — benefits earned during the period	$	73		$	131		$	288		$	367
Interest cost on benefit obligation		168			105			386			314
Expected return on plan assets		(128	)		(84	)		(290	)		(263	)
Amortization of prior service cost		4			—			5			—
Amortization of net actuarial loss		—			6			18			7
Curtailment benefit		—			—			(508	)		—
Settlement charges		—			—			76			—

Net periodic pension (benefit) expense — Belgium	$	117		$	158		$	(25	)	$	425

The reduction of participants in the Belgium pension plan by transfer of employees to GSK, an early retirement program and terminations resulted in a curtailment benefit of $508.

The Company transferred Belgium plan assets of $3,186 and related liabilities to GSK which resulted in a settlement loss of $76.

The approximate funded status of the Belgium plan was:


	As of March 31,			As of June 30,
	2006			2005

Benefit obligation	$	6,465		$	11,264
Fair value of plan assets		5,031			7,408

Funded status of the plan		(1,434	)		(3,856	)
Unrecognized net actuarial loss and prior service cost		255			2,002

(Accrued) pension liability		(1,179	)		(1,854	)


7.	Contingencies


	*Litigation*

On or about April 17, 1997, C.P. Chemicals, Inc., a subsidiary (“CP”), and PAHC were served with a complaint filed by Chevron U.S.A. Inc. (“Chevron”) in the United States District Court for the District of New Jersey, alleging that the operations of CP at its Sewaren plant affected adjoining property owned by Chevron and alleging that PAHC, as the parent of CP, is also responsible to Chevron. In July 2002, a phased settlement agreement was reached and a Consent Order entered by the Court. The Consent Order provided

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for a period of due diligence investigation of the property owned by Chevron and upon completion of the review of the results of the investigation, a decision was to be made whether to opt out of the settlement or proceed. Negotiations with Chevron regarding its allocation of responsibility and associated costs under the Consent Order reached an impasse and it became necessary for 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 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 most of those costs.

The Company’s subsidiary, Phibro-Tech, Inc. (“Phibro-Tech”), was named in 1993 as a potentially responsible party (“PRP”) in connection with an action commenced under the Federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) by the United States Environmental Protection Agency (the “EPA”), involving a former third-party fertilizer manufacturing site in Jericho, South Carolina. An agreement has been reached under which such subsidiary agreed to contribute up to $900 of the first series of contributions of all remaining responsible PRPs (of which $691 has been paid as of March 31, 2006) and up to $1,200 of additional contingent contributions, the payment of which is considered to be remote, and otherwise subject to the PRPs’ right to dispute additional costs. Some recovery from insurance and other sources is expected.

The Company and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. The Company believes that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on its financial position or results of operations.


	*Environmental Remediation*

The Company’s operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company’s current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. Under certain circumstances, the Company or any of its subsidiaries might be required to curtail operations until a particular problem is remedied. Known costs and expenses under environmental laws incidental to ongoing operations are generally included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under environmental laws or to investigate or remediate potential or actual contamination and from time to time the Company establishes reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under environmental laws and the time period during which such costs are likely to be incurred are difficult to predict.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s subsidiaries have, from time to time, implemented procedures at their facilities designed to respond to obligations to comply with environmental laws. The Company believes that its operations are currently in material compliance with such environmental laws, although at various sites its subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with their historic operations.

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’s and its subsidiaries’ current and former operations exposes the Company and its subsidiaries to the risk of claims with respect to environmental matters and the Company cannot assure it will not incur material costs and liabilities in connection with such claims. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not have a material adverse effect on the Company’s financial position.

Based upon information available, the Company estimates the cost of litigation proceedings described above and the cost of further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites to be approximately $2,494 at March 31, 2006, which is included in current and long-term liabilities on the condensed consolidated balance sheet (approximately $2,743 at June 30, 2005).


8.	Business Segments

The Company’s reportable segments are Animal Health and Nutrition, Industrial Chemicals and 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’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, 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. Intersegment sales and transfers were not significant. The following segment data includes information only for continuing operations.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


		Three Months Ended						Nine Months Ended
		March 31,						March 31,

		2006			2005			2006			2005

Net Sales
	Animal Health & Nutrition	$	79,733		$	68,405		$	233,471		$	203,699
	Industrial Chemicals		10,264			13,412			31,992			40,047
	Distribution		10,908			8,438			27,748			25,423
	Corporate		—			—			—			—

		$	100,905		$	90,255		$	293,211		$	269,169

Operating Income
	Animal Health & Nutrition	$	9,671		$	3,157		$	20,045		$	8,856
	Industrial Chemicals		(35	)		1,371			2,078			3,541
	Distribution		1,705			1,158			4,366			3,414
	Corporate		(4,405	)		(3,954	)		(11,993	)		(11,095	)

		$	6,936		$	1,732		$	14,496		$	4,716

Depreciation and Amortization
	Animal Health & Nutrition	$	1,469		$	5,303		$	10,148		$	10,203
	Industrial Chemicals		668			374			1,466			1,190
	Distribution		6			6			18			14
	Corporate		70			63			217			179

		$	2,213		$	5,746		$	11,849		$	11,586


		As of		As of
		March 31,		June 30,
		2006		2005

Identifiable Assets
	Animal Health & Nutrition	$	195,538	$	204,799
	Industrial Chemicals		21,522		21,473
	Distribution		9,680		8,092
	Corporate		17,066		18,693

		$	243,806	$	253,057

The Animal Health and Nutrition segment includes Belgium Plant Transactions costs as follows:


	Three Months Ended				Nine Months Ended
	March 31,				March 31,

	2006		2005		2006		2005

Depreciation expense	$	—	$	3,095	$	4,533	$	3,628
Employee termination and other transaction-related expenses		975		1,277		5,678		10,280

	$	975	$	4,372	$	10,211	$	13,908

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	Consolidating Financial Statements

The units of Senior Secured Notes due 2007, consisting of notes issued by PAHC (the “U.S. Notes”) and notes issued by Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of PAHC (the “Dutch Issuer”, and such notes issued by it the “Dutch Notes”), are guaranteed by certain subsidiaries. PAHC and its U.S. subsidiaries (“U.S. Guarantor Subsidiaries”), excluding PMC Quincy, Inc. (“PMC”), Prince Mfg., LLC and Mineral Resource Technologies, Inc. (“MRT”) (the “Unrestricted Subsidiaries”, as defined in the Indenture), fully and unconditionally guarantee all of the Senior Secured Notes due 2007 on a joint and several basis. In addition, the Dutch Issuer’s subsidiaries, presently consisting of Phibro Animal Health SA (the “Belgium Guarantor”), fully and unconditionally guarantee the Dutch Notes. The Dutch Issuer and the Belgium Guarantor do not guarantee the U.S. Notes. Other foreign subsidiaries (“Non-Guarantor Subsidiaries”) do not presently guarantee the Senior Secured Notes due 2007. The U.S. Guarantor Subsidiaries include all domestic subsidiaries of PAHC other than the Unrestricted Subsidiaries and include: C.P. Chemicals, Inc.; Phibro-Tech, Inc.; Prince Agriproducts, Inc.; Phibrochem, Inc.; Phibro Chemicals, Inc.; Western Magnesium Corp.; Phibro Animal Health Holdings, Inc.; and Phibro Animal Health U.S., Inc.

The Senior Subordinated Notes due 2008, issued by PAHC, are guaranteed by certain subsidiaries. PAHC’s U.S. subsidiaries, including the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and unconditionally guarantee the Senior Subordinated Notes due 2008 on a joint and several basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not presently guarantee the Senior Subordinated Notes due 2008. The U.S. Guarantor Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of PAHC including: C.P. Chemicals, Inc.; Phibro-Tech, Inc.; Prince Agriproducts, Inc.; PMC; Prince Mfg., LLC; MRT (until it was 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 PAHC, the 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 PAHC.

Investments in subsidiaries are accounted for by PAHC 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.

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

As of March 31, 2006


						U.S. Guarantor			Dutch			Belgium			Non-Guarantor			Consolidation			PAHC
			PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

ASSETS
Current assets
	Cash and cash equivalents		$	567		$	844		$	81		$	484		$	7,776		$	—		$	9,752
	Accounts receivable, net			4,183			27,443			—			2,884			25,499			—			60,009
	Inventory			2,984			35,298			—			22,346			33,283			—			93,911
	Prepaid expenses and other			3,030			445			7			1,003			6,347			—			10,832

		Total current assets		10,764			64,030			88			26,717			72,905			—			174,504

Property, plant & equipment, net				1,031			11,554			—			467			35,920			—			48,972
Intangibles, net				—			3,508			—			1,182			4,406			—			9,096
Other assets				9,617			721			—			—			896			—			11,234
Investment in subsidiaries				103,088			—			(24,724	)		—			(1,007	)		(77,357	)		—
Intercompany				10,775			103,298			30,847			(1,764	)		(20,818	)		(122,338	)		—

		Total assets	$	135,275		$	183,111		$	6,211		$	26,602		$	92,302		$	(199,695	)	$	243,806


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
	Loan payable to banks		$	—		$	—		$	—		$	—		$	—		$	—		$	—
	Current portion of long-term debt			—			—			—			—			223			—			223
	Accounts payable			1,950			23,067			—			644			13,120			—			38,781
	Accrued expenses and other			19,469			8,108			1,021			11,796			13,591			—			53,985

		Total current liabilities		21,419			31,175			1,021			12,440			26,934			—			92,989

Long-term debt				151,236			—			24,284			—			931			—			176,451
Other liabilities				11,485			5,461			—			4,900			1,385			—			23,231
Intercompany debt				—			26,581			5,654			33,986			56,117			(122,338	)		—

		Total liabilities		184,140			63,217			30,959			51,326			85,367			(122,338	)		292,671

Stockholders’ equity (deficit)
	Preferred stock			521			—			—			—			—			—			521
	Common stock			2			33			—			—			—			(33	)		2
	Paid-in capital			27,260			108,383			21			52			(21	)		(108,435	)		27,260
	Retained earnings (accumulated deficit)			(80,544	)		11,738			(28,696	)		(28,703	)		6,727			38,934			(80,544	)
	Accumulated other comprehensive income (loss)
		Gain on derivative instruments, net of income taxes		79			79			—			—			—			(79	)		79
		Cumulative currency translation adjustment, net of income taxes		3,817			(339	)		3,927			3,927			229			(7,744	)		3,817

		Total stockholders’ equity (deficit)		(48,865	)		119,894			(24,748	)		(24,724	)		6,935			(77,357	)		(48,865	)

		Total liabilities and stockholders’ equity (deficit)	$	135,275		$	183,111		$	6,211		$	26,602		$	92,302		$	(199,695	)	$	243,806

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For The Three Months Ended March 31, 2006


					U.S. Guarantor			Dutch			Belgium			Non-Guarantor			Consolidation			PAHC
		PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

Net sales		$	8,654		$	61,887		$	—		$	2,240		$	28,124		$	—		$	100,905
Net sales — intercompany			265			—			—			3,837			2,863			(6,965	)		—
Cost of goods sold (includes Belgium Plant Transactions costs of $975)			6,523			46,518			—			5,788			24,578			(6,965	)		76,442

	Gross profit		2,396			15,369			—			289			6,409			—			24,463
Selling, general and administrative expenses			5,398			7,637			7			766			3,719			—			17,527

	Operating income (loss)		(3,002	)		7,732			(7	)		(477	)		2,690			—			6,936
Interest expense			5,593			—			789			66			278			—			6,726
Interest (income)			(10	)		(15	)		—			—			(28	)		—			(53	)
Other (income) expense, net			—			598			—			(227	)		(340	)		—			31
Intercompany interest and other			(6,053	)		5,133			(796	)		1,096			620			—			—
(Profit) loss relating to subsidiaries			(1,579	)		—			1,412			—			—			167			—

	Income (loss) before income taxes		(953	)		2,016			(1,412	)		(1,412	)		2,160			(167	)		232
Provision for income taxes			406			145			—			—			1,040			—			1,591

	Net income (loss)	$	(1,359	)	$	1,871		$	(1,412	)	$	(1,412	)	$	1,120		$	(167	)	$	(1,359	)

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For The Nine Months Ended March 31, 2006


					U.S. Guarantor			Dutch			Belgium			Non-Guarantor			Consolidation			PAHC
		PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

Net sales		$	23,080		$	177,603		$	—		$	9,208		$	83,320		$	—		$	293,211
Net sales — intercompany			380			48			—			24,068			8,527			(33,023	)		—
Cost of goods sold (includes Belgium Plant Transactions costs of $10,211)			16,801			134,066			—			35,387			76,112			(33,023	)		229,343

	Gross profit		6,659			43,585			—			(2,111	)		15,735			—			63,868
Selling, general and administrative expenses			15,053			20,903			46			1,888			11,482			—			49,372

	Operating income (loss)		(8,394	)		22,682			(46	)		(3,999	)		4,253			—			14,496
Interest expense			16,754			—			2,367			115			(53	)		—			19,183
Interest (income)			(78	)		(24	)		—			—			(157	)		—			(259	)
Other (income) expense, net			1			347			(2	)		(171	)		(2,736	)		—			(2,561	)
Intercompany interest and other			(18,430	)		15,388			(2,390	)		3,287			2,145			—			—
(Profit) loss relating to subsidiaries			(1,442	)		—			7,230			—			—			(5,788	)		—

	Income (loss) before income taxes		(5,199	)		6,971			(7,251	)		(7,230	)		5,054			5,788			(1,867	)
Provision for income taxes			966			421			—			—			2,911			—			4,298

	Net income (loss)	$	(6,165	)	$	6,550		$	(7,251	)	$	(7,230	)	$	2,143		$	5,788		$	(6,165	)

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended March 31, 2006


							U.S.									Non-
							Guarantor			Dutch			Belgium			Guarantor			Consolidation			PAHC
				PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

OPERATING ACTIVITIES
	Net income (loss)			$	(6,165	)	$	6,550		$	(7,251	)	$	(7,230	)	$	2,143		$	5,788		$	(6,165	)
	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 $4,533)			217			2,407			—			5,712			3,513			—			11,849
		Amortization of deferred financing costs			2,486			—			—			—			—			—			2,486
		Deferred income taxes			—			—			—			—			(424	)		—			(424	)
		Net gain from sales of assets			—			200			—			(589	)		(75	)		—			(464	)
		Effects of changes in foreign currency			—			68			—			162			(456	)		—			(226	)
		Other			13			3			—			(432	)		(12	)		—			(428	)
		Changes in operating assets and liabilities:
			Accounts receivable		(1,000	)		(3,410	)		—			1,185			(816	)		—			(4,041	)
			Inventory		(315	)		865			—			7,414			(3,958	)		—			4,006
			Prepaid expenses and other		1,280			350			(7	)		757			465			—			2,845
			Other assets		295			(174	)		—			—			—			—			121
			Accounts payable		267			2,758			—			(2,719	)		1,867			—			2,173
			Accrued expenses and other		3,494			(1,237	)		804			(3,573	)		(1,472	)		—			(1,984	)
			Accrued expenses: Belgium Plant Transactions		—			—			—			(1,608	)		—			—			(1,608	)
			Intercompany		5,681			(9,332	)		6,518			(6,768	)		9,689			(5,788	)		—

		Net cash provided (used) by operating activities			6,253			(952	)		64			(7,689	)		10,464			—			8,140

INVESTING ACTIVITIES
	Capital expenditures				(70	)		(1,619	)		—			(112	)		(9,443	)		—			(11,244	)
	Proceeds from Belgium Plant Transactions				—			—			—			7,997			—			—			7,997
	Proceeds from sale of assets				—			1,655			—			42			237			—			1,934
	Other investing				(106	)		—			—			—			—			—			(106	)

		Net cash provided (used) by investing activities			(176	)		36			—			7,927			(9,206	)		—			(1,419	)

FINANCING ACTIVITIES
	Net (decrease) in book overdrafts				—			(27	)		—			—			—			—			(27	)
	Net (decrease) in short-term debt				(8,000	)		—			—			—			(38	)		—			(8,038	)
	Payments of long-term debt				—			—			—			—			(2,005	)		—			(2,005	)

		Net cash provided (used) by financing activities			(8,000	)		(27	)		—			—			(2,043	)		—			(10,070	)

Effect of exchange rate changes on cash					—			—			—			(9	)		109				��		100

Net increase (decrease) in cash and cash equivalents					(1,923	)		(943	)		64			229			(676	)		—			(3,249	)
Cash and cash equivalents at beginning of period					2,490			1,787			17			255			8,452			—			13,001

Cash and cash equivalents at end of period				$	567		$	844		$	81		$	484		$	7,776		$	—		$	9,752

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

As of June 30, 2005


						U.S.									Non-
						Guarantor			Dutch			Belgium			Guarantor			Consolidation			PAHC
			PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

ASSETS
Current assets
	Cash and cash equivalents		$	2,490		$	1,787		$	17		$	255		$	8,452		$	—		$	13,001
	Accounts receivable, net			3,377			25,762			—			4,784			22,494			—			56,417
	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	)		—

		Total assets	$	136,983		$	176,409		$	13,651		$	43,967		$	84,240		$	(202,193	)	$	253,057


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
	Loan payable to banks		$	8,000		$	—		$	—		$	—		$	38		$	—		$	8,038
	Current portion of long-term debt			—			—			—			—			1,625			—			1,625
	Accounts payable			1,683			20,327			—			3,320			11,207			—			36,537
	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)
	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	)

		Total liabilities and stockholders’ equity (deficit)	$	136,983		$	176,409		$	13,651		$	43,967		$	84,240		$	(202,193	)	$	253,057

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For The Three Months Ended March 31, 2005


						U.S. Guarantor		Dutch			Belgium			Non-Guarantor			Consolidation			PAHC
			PAHC			Subsidiaries		Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

Net sales			$	6,769		$	54,591	$	—		$	3,328		$	25,567		$	—		$	90,255
Net sales — intercompany				44			—		—			9,787			2,115			(11,946	)		—
Cost of goods sold (includes Belgium Transactions costs of $4,372)				4,876			40,751		—			14,492			23,331			(11,946	)		71,504

	Gross profit			1,937			13,840		—			(1,377	)		4,351			—			18,751
Selling, general and administrative expenses				4,929			7,520		8			736			3,826			—			17,019

	Operating income (loss)			(2,992	)		6,320		(8	)		(2,113	)		525			—			1,732
Interest expense				5,779			—		652			15			311			—			6,757
Interest (income)				(3	)		—		—			—			(16	)		—			(19	)
Other (income) expense, net				—			587		—			301			(811	)		—			77
Intercompany interest and other				(6,847	)		5,176		(797	)		1,095			1,373			—			—
Loss relating to subsidiaries				3,755			—		3,505			—			—			(7,260	)		—

	Income (loss) from continuing operations before income taxes			(5,676	)		557		(3,368	)		(3,524	)		(332	)		7,260			(5,083	)
Provision (benefit) for income taxes				180			171		—			(19	)		441			—			773

	Income (loss) from continuing operations			(5,856	)		386		(3,368	)		(3,505	)		(773	)		7,260			(5,856	)
Income from discontinued operations, net of income taxes				—			—		—			—			272			—			272
Profit relating to discontinued operations				272			—		—			—			—			(272	)		—

		Net income (loss)	$	(5,584	)	$	386	$	(3,368	)	$	(3,505	)	$	(501	)	$	6,988		$	(5,584	)

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For The Nine Months Ended March 31, 2005


						U.S.									Non-
						Guarantor			Dutch			Belgium			Guarantor			Consolidation			PAHC
			PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

Net sales			$	20,165		$	167,837		$	—		$	7,556		$	73,611		$	—		$	269,169
Net sales — intercompany				137			131			—			20,447			5,534			(26,249	)		—
Cost of goods sold (includes Belgium Plant Transactions costs of $13,908)				14,840			125,433			—			35,276			65,382			(26,249	)		214,682

	Gross profit			5,462			42,535			—			(7,273	)		13,763			—			54,487
Selling, general and administrative expenses				14,197			21,555			14			2,102			11,903			—			49,771

	Operating income (loss)			(8,735	)		20,980			(14	)		(9,375	)		1,860			—			4,716
Interest expense				15,980			—			1,951			38			687			—			18,656
Interest (income)				(5	)		(4	)		—			—			(68	)		—			(77	)
Other (income) expense, net				4			213			—			90			(998	)		—			(691	)
Intercompany interest and other				(20,781	)		15,562			(2,113	)		2,976			4,356			—			—
Loss relating to subsidiaries				9,244			—			11,009			—			—			(20,253	)		—

	Income (loss) from continuing operations before income taxes			(13,177	)		5,209			(10,861	)		(12,479	)		(2,117	)		20,253			(13,172	)
Provision (benefit) for income taxes				694			470			—			(1,470	)		1,005			—			699

	Income (loss) from continuing operations			(13,871	)		4,739			(10,861	)		(11,009	)		(3,122	)		20,253			(13,871	)
Income from discontinued operations, net of income taxes				—			—			—			—			575			—			575
Profit relating to discontinued operations				575			—			—			—			—			(575	)		—

		Net income (loss)	$	(13,296	)	$	4,739		$	(10,861	)	$	(11,009	)	$	(2,547	)	$	19,678		$	(13,296	)

PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended March 31, 2005


							U.S.									Non-
							Guarantor			Dutch			Belgium			Guarantor			Consolidation			PAHC
				PAHC			Subsidiaries			Issuer			Guarantor			Subsidiaries			Adjustments			Consolidated

OPERATING ACTIVITIES
	Net income (loss)			$	(13,296	)	$	4,739		$	(10,861	)	$	(11,009	)	$	(2,547	)	$	19,678		$	(13,296	)
	Adjustment for discontinued operations				(575	)		—			—			—			(575	)		575			(575	)

	Income (loss) from continuing operations				(13,871	)		4,739			(10,861	)		(11,009	)		(3,122	)		20,253			(13,871	)
	Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities:
		Depreciation and amortization (includes accelerated depreciation from the Belgium Plant Transactions of $3,628)			179			2,113			—			5,880			3,414			—			11,586
		Amortization of deferred financing costs			2,130			—			—			—			—			—			2,130
		Deferred income taxes			—			—			—			—			(202	)		—			(202	)
		Net gain from sales of assets			—			(777	)		—			—			(12	)		—			(789	)
		Effects of changes in foreign currency			—			(554	)		—			(87	)		(119	)		—			(760	)
		Other			289			37			—			—			104			—			430
		Changes in operating assets and liabilities:
			Accounts receivable		(392	)		2,066			—			(575	)		3,361			—			4,460
			Inventory		(428	)		2,772			—			(9,857	)		(8,865	)		—			(16,378	)
			Prepaid expenses and other		1,656			631			—			(1,277	)		637			—			1,647
			Other assets		(2	)		(241	)		—			—			(375	)		—			(618	)
			Accounts payable		(1,610	)		(8,573	)		—			(152	)		(1,043	)		—			(11,378	)
			Accrued expenses and other		4,707			1,285			650			237			2,241			—			9,120
			Accrued expenses: non-completed transaction		(3,970	)		—			—			—			—			—			(3,970	)
			Accrued expenses: Belgium Plant Transactions		—			—			—			10,280			—			—			10,280
			Intercompany		2,274			(4,843	)		5,926			7,605			9,291			(20,253	)		—
	Cash provided by discontinued operations				—			—			—			—			808			—			808

		Net cash provided (used) by operating activities			(9,038	)		(1,345	)		(4,285	)		1,045			6,118			—			(7,505	)

INVESTING ACTIVITIES
	Capital expenditures				(909	)		(1,626	)		—			(726	)		(1,837	)		—			(5,098	)
	Proceeds from sale of assets				—			1,320			—			—			33			—			1,353
	Other investing				(119	)		—			—			(154	)		154			—			(119	)
	Discontinued operations				—			—			—			—			(93	)		—			(93	)

		Net cash (used) by investing activities			(1,028	)		(306	)		—			(880	)		(1,743	)		—			(3,957	)

FINANCING ACTIVITIES
	Net increase in book overdraft				—			1,930			—			—			—			—			1,930
	Net increase (decrease) in short-term debt				(7,083	)		—			—			—			34			—			(7,049	)
	Proceeds from long-term debt				19,107			—			4,284			—			901			—			24,292
	Payments of long-term debt				—			(103	)		—			—			(3,810	)		—			(3,913	)
	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				(2,027	)		—			—			—			—			—			(2,027	)

		Net cash provided (used) by financing activities			9,997			1,827			4,284			—			(2,875	)		—			13,233

Effect of exchange rate changes on cash					—			8			—			16			42			—			66

Net increase (decrease) in cash and cash equivalents					(69	)		184			(1	)		181			1,542			—			1,837
Cash and cash equivalents at beginning of period					136			801			17			212			4,402			—			5,568

Cash and cash equivalents at end of period				$	67		$	985		$	16		$	393		$	5,944		$	—		$	7,405


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

This information should be read in conjunction with the condensed consolidated financial statements and related notes contained in this Report. Phibro Animal Health Corporation (the “Company” or “PAHC”) presents its annual consolidated financial statements on the basis of its fiscal year ending June 30.

General

The Company is a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives (MFAs) and nutritional feed additives (NFAs), which are sold throughout the world predominantly to the poultry, swine and cattle markets. MFAs are used preventatively and therapeutically in animal feed to produce healthy livestock. The Company believes it is the third largest manufacturer and marketer of MFAs in the world, and that certain of its MFA products have leading positions in the marketplace. The Company is also a specialty chemicals manufacturer and marketer, serving primarily the United States pressure-treated wood and chemical industries. The Company has several proprietary products, and many of the Company’s products provide critical performance attributes to customers’ products, while representing a relatively small percentage of total end-product cost.


	*Belgium Plant Transactions*

On November 30, 2005, Phibro Animal Health SA (“PAH Belgium”) sold to GlaxoSmithKline Biologicals (“GSK”) substantially all of PAH Belgium’s facilities in Rixensart, Belgium (the “Belgium Plant”). The sale (the “Belgium Plant Transactions”) included the following elements (U.S. dollar amounts at the March 31, 2006 exchange rate except where otherwise indicated): (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 ($7.3 million at the November 30, 2005 exchange rate), paid 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 agreed 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 suchcleaning-up costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreed 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) withinforty-two months from the closing date; (v) PAH Belgium sold certain excess land for its own account; (vi) PAH Belgium was responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions; and (vii) PAH Belgium retained certain equipment at the Belgium Plant, and has transferred or will transfer such equipment, together with other assets and rights related to the production of virginiamycin, to Phibro Saude Animal Internacional Ltda. (“PAH Brazil”) which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements.

The Dutch Notes (as defined below) and related guarantees were collateralized by a mortgage on the Belgium Plant which was released in connection with the sale of the Belgium Plant to GSK.

The following table includes the amounts (in thousands) of these charges and gains.


	Belgium Plant Transactions Costs

	Twelve										Nine
	Months		Three Months Ended								Months
	Ended										Ended
	June 30,		September 30,			December 31,			March 31,		March 31,			Cumulative
	2005		2005			2005			2006		2006			Total

Incremental depreciation	$	7,467	$	2,747		$	1,786		$	—	$	4,533		$	12,000
Employee termination expenses		12,808		287			699			—		986			13,794
Other transaction-related expenses		1,916		979			3,759			975		5,713			7,629
Net (gain) on the curtailment and settlement of the pension plan		—		—			(432	)		—		(432	)		(432	)
(Gain) on the sale of the Belgium Plant and excess land		—		(510	)		(79	)		—		(589	)		(589	)

	$	22,191	$	3,503		$	5,733		$	975	$	10,211		$	32,402

All costs and gains of the Belgium Plant Transactions are included in cost of goods sold on the Company’s condensed consolidated statements of operations and comprehensive income (loss) in the periods as described in the table above.

As of March 31, 2006, accrued expenses and other long term liabilities on the Company’s condensed consolidated balance sheet included $6.9 million payable to GSK and $10.3 million payable for employee termination and other transaction-related expenses.

The Company expects to record in future periods an estimated additional $0.8 million of other transaction-related expenses, primarily for plant dismantling and decommissioning, primarily during the remainder of 2006.

In anticipation of transferring production of virginiamycin from the Belgium Plant to an alternative production location, the Company increased inventory levels of virginiamycin until the Belgium Plant sale in November 2005 to ensure adequate supplies during the transfer period. Virginiamycin inventories were approximately $33.4 million at March 31, 2006 and $38.8 million at June 30, 2005.

Risks and Uncertainties

The Company’s ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company’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 December 1 and June 1 related to PAHC’s 13% Senior Secured Notes due 2007 and PAHC’s 9⁷/8% Senior Subordinated Notes due 2008. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to provide additional liquidity. The Company also has availability under foreign credit lines that would be available as needed. There can be no assurance the Company will be successful in any of the above-noted actions.

The testing, manufacturing, and marketing of certain of the Company’s products are subject to extensive regulation by numerous government authorities in the United States and other countries.

The Company has significant assets located outside of the United States, and a significant portion of the Company’s sales and earnings are attributable to operations conducted abroad.

Summary Consolidated Results of Continuing Operations


	Three Months Ended						Nine Months Ended
	March 31,						March 31,

	2006			2005			2006			2005

	(In thousands)
Net sales	$	100,905		$	90,255		$	293,211		$	269,169
Belgium plant transaction costs		975			4,372			10,211			13,908
Gross profit		24,463			18,751			63,868			54,487
Selling, general and administrative		17,527			17,019			49,372			49,771
Operating income		6,936			1,732			14,496			4,716
Interest expense, net		6,673			6,738			18,924			18,579
Other (income) expense, net		31			77			(2,561	)		(691	)
Provision for income taxes		1,591			773			4,298			699
Loss from continuing operations	$	(1,359	)	$	(5,856	)	$	(6,165	)	$	(13,871	)

Comparison of Three Months Ended March 31, 2006 and 2005

Net Salesof $100.9 million increased $10.7 million, or 12%. Animal Health and Nutrition sales of $79.7 million grew $11.3 million, or 17%, due to volume increases and also higher average selling prices for NFAs related to cost increases. Specialty Chemical Group (comprised of the Industrial Chemicals and Distribution segments) sales of $21.2 million decreased $0.6 million due to lower unit volumes offset in part by higher average selling prices.

Gross Profitof $24.5 million increased $5.7 million, to 24.2% of net sales. The Belgium Plant Transactions costs for the three months ended March 31, 2006 and 2005 were $1.0 million and $4.4 million, respectively. Excluding these charges, Animal Health and Nutrition gross profit improved due to increased unit volume, favorable product mix and higher average selling prices offset in part by higher unit costs. The Specialty Chemical Group’s gross profit decreased from last year due to lower sales of wood treatment

products and lower production levels in the Industrial Chemicals segment offset in part by increased sales of higher margin products in the Distribution segment.

Selling, General and Administrative Expensesof $17.5 million increased $0.5 million. Expenses increased over the prior year due to higher salary costs offset in part by reduced registration trials and reduced advertising and promotional expenditures.

Operating Incomeof $6.9 million increased $5.2 million from last year. Belgium Plant Transaction costs were $1.0 million and $4.4 million, respectively, generating $3.4 million of the income increase. Operating income, excluding the Belgium Plant Transactions, increased by $3.1 million in Animal Health and Nutrition primarily due to improved margins from higher unit volumes. Specialty Chemical Group operating income decreased $0.9 million due to lower sales of wood treatment products and lower production levels in the Industrial Chemicals segment offset in part by higher margins in the Distribution segment. Corporate expenses increased by $0.4 million which partially offset the operating improvements.

Interest Expense, Netof $6.7 million was slightly below the prior year due to a lower net effective interest rate as overall debt levels approximated the prior year.

Other (Income) Expense, Netprincipally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses.

Income Taxesof $1.6 million were recorded on a consolidated pre-tax income of $0.2 million. The tax rate reflects income tax provisions in profitable foreign jurisdictions and for state income taxes. A provision for U.S. federal income taxes has not been recorded due to the utilization of net operating loss carryforwards. The Company has recorded valuation allowances related to substantially all deferred tax assets. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance.

Comparison of Nine Months Ended March 31, 2006 and 2005

Net Salesof $293.2 million increased $24.0 million, or 9%. Animal Health and Nutrition sales of $233.5 million grew $29.8 million, or 15%, due to volume increases and also higher average selling prices for NFAs related to cost increases. Specialty Chemical Group (comprised of the Industrial Chemicals and Distribution segments) sales of $59.7 million decreased $5.7 million due to lower unit volumes offset in part by higher average selling prices.

Gross Profitof $63.9 million increased $9.4 million, to 21.8% of net sales. The Belgium Plant Transactions costs for the nine months ended March 31, 2006 and 2005 were $10.2 million and $13.9 million, respectively. Excluding these charges, Animal Health and Nutrition gross profit improved due to increased unit volume, favorable product mix and higher average selling prices offset in part by higher unit costs. The Specialty Chemical Group’s gross profit decreased over last year due to lower sales of wood treatment products in the Industrial Chemicals segment offset in part by increased sales of higher margin products in the Distribution segment.

Selling, General and Administrative Expensesof $49.4 million decreased $0.4 million. Expenses decreased from the prior year due to reduced advertising and promotional expenditures and registration trials offset in part by higher salary costs.

Operating Incomeof $14.5 million increased $9.8 million from last year. Belgium Plant Transaction costs were $10.2 million and $13.9 million, respectively , generating $3.7 million of the income increase. Operating income, excluding the Belgium Plant Transactions, increased by $7.5 million in Animal Health and Nutrition primarily due to improved margins from higher unit volumes and lower selling, general and administrative expenses. Specialty Chemical Group operating income decreased $0.5 million due to lower sales of wood treatment products in the Industrial Chemicals segment offset in part by sales of higher margin products in the Distribution segment. Corporate expenses increased by $0.9 million which partially offset the operating improvements.

Interest Expense, Netof $18.9 million increased $0.3 million from last year, primarily due to lower short-term borrowing levels offset in part by higher borrowing levels associated with the issuance of additional Senior Secured Notes and increased amortization of deferred financing costs. Interest expense was also reduced by the reversal of $0.6 million of accrued interest related to an excise tax assessment resolved in the Company’s favor in the period.

Other (Income) Expense, Netprincipally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. During 2005, the Company received a favorable ruling on an excise tax assessment and reversed $2.0 million previously accrued.

Income Taxesof $4.3 million were recorded on a consolidated pre-tax loss of $1.9 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 and Planalquimica. The Industrial Chemicals segment, through its Phibro-Tech subsidiary, manufacturers and markets specialty chemicals for use in the pressure treated wood and chemical industries and also includes contract manufacturing of crop protection chemicals. The Distribution segment markets a variety of specialty chemicals, and includes PhibroChem and Ferro operations.


		Three Months Ended						Nine Months Ended
		March 31,						March 31,

		2006			2005			2006			2005

		(In thousands)
Net Sales
Animal Health & Nutrition		$	79,733		$	68,405		$	233,471		$	203,699
Industrial Chemicals			10,264			13,412			31,992			40,047
Distribution			10,908			8,438			27,748			25,423

Total		$	100,905		$	90,255		$	293,211		$	269,169

Operating Income
Animal Health & Nutrition
	Excluding Belgium Plant Transactions	$	10,646		$	7,529		$	30,256		$	22,764
	Belgium Plant Transactions		(975	)		(4,372	)		(10,211	)		(13,908	)

	Total		9,671			3,157			20,045			8,856
Industrial Chemicals			(35	)		1,371			2,078			3,541
Distribution			1,705			1,158			4,366			3,414
Corporate expenses and adjustments			(4,405	)		(3,954	)		(11,993	)		(11,095	)

Total		$	6,936		$	1,732		$	14,496		$	4,716

Operating Segments Comparison of Three Months Ended March 31, 2006 and 2005


	*Animal Health and Nutrition*

Net Salesof $79.7 million increased $11.3 million, or 17%. MFA net sales increased by $5.1 million. Revenues were higher for all product types, including antibiotics, antibacterials and anticoccidials. The increase in MFA revenues was primarily due to higher unit volumes. NFA net sales increased by $6.3 million

principally due to overall higher average selling prices (which offset cost increases) and improved sales of higher margin products.

Operating Incomeof $9.7 million increased $6.5 million from last year. Operating income, excluding the Belgium Plant Transactions costs, increased $3.1 million due to higher unit volumes and average selling prices which were partially offset by higher unit costs. Selling, general and administrative expenses approximated the prior period. Higher salary costs were offset by reduced registration trials and reduced advertising and promotional expenditures.


	*Specialty Chemicals*

Industrial Chemicalsnet sales of $10.3 million decreased $3.1 million, or 24%. Sales of copper-related products to the wood treatment markets were below last year, but were partially offset by higher sales of other specialty copper products arising from capacity expansion. Revenues for contract manufacturing decreased due to lower unit volumes offset in part by higher average selling prices. Operating income of break-even decreased by $1.4 million from last year due to lower unit volumes. The Company has reduced the work force and operating levels at our Sumter, South Carolina facility to mitigate these sales volume declines.

Distributionnet sales of $10.9 million increased $2.5 million, or 29%. Higher domestic unit volumes and higher average selling prices were offset in part by lower sales volumes in Europe. Distribution operating income of $1.7 million increased $0.5 million over the prior year as increased sales of higher margin products offset unit volume declines.

Operating Segments Comparison of Nine Months Ended March 31, 2006 and 2005


	*Animal Health and Nutrition*

Net Salesof $233.5 million increased $29.8 million, or 15%. MFA net sales increased by $16.0 million. Revenues were higher for all product types, including antibiotics, antibacterials and anticoccidials. The increase in MFA revenues was primarily due to higher unit volumes. NFA net sales increased by $13.8 million principally due to overall higher average selling prices (which offset cost increases) and improved sales of higher margin products.

Operating Incomeof $20.0 million increased $11.2 million from last year. Operating income, excluding Belgium Plant Transaction costs, increased $7.5 million due to higher unit volumes and average selling prices which were partially offset by higher unit costs. Lower selling, general and administrative expenses due to reduced registration trials and reduced advertising and promotional expenditures were offset by higher salary and related costs.


	*Specialty Chemicals*

Industrial Chemicalsnet sales of $32.0 million decreased $8.1 million, or 20%. Sales of copper-related products to the wood treatment markets were below last year, but were partially offset by higher sales of other specialty copper products arising from capacity expansion. Revenues for contract manufacturing decreased due to lower unit volumes offset in part by higher average selling prices. Operating income of $2.1 million decreased by $1.5 million from last year due to lower unit volumes. The Company reduced the work-force and operating levels at our Sumter, South Carolina facility to mitigate these sales volume declines.

Distributionnet sales of $27.7 million increased $2.3 million, or 9%. Higher domestic unit volumes and higher average selling prices were offset in part by lower sales volumes in Europe. Distribution operating income of $4.4 million improved $1.0 million due to increased sales of higher margin products.

Discontinued Operations

Operating results of Wychem were:


	Three Months Ended		Nine Months Ended
	March 31, 2005		March 31, 2005

	(In thousands)
Net sales	$	1,487	$	3,908
Cost of goods sold		924		2,590
Selling, general and administrative expenses		174		511
Other expense		5		6

Income before income taxes		384		801
Provision for income taxes		112		226

Income from operations	$	272	$	575

Depreciation and amortization	$	105	$	309

Liquidity and Capital Resources

Net Cash Provided (Used) by Operating Activities. Cash provided (used) by operations for the nine months ended March 31, 2006 and 2005 was $8.1 million and ($7.5) million, respectively. Cash provided by operations increased due to improved operating performance and working capital improvements, primarily in the reduction of Animal Health and Nutrition inventories. These improvements were offset in part by payments related to the Belgium Plant Transactions. The Company increased its levels of virginiamycin inventory until the Belgium Plant sale in November 2005 to support the transition of production to PAH Brazil. Inventory levels are expected to decline during the remainder of the year.

Net Cash Provided (Used) by Investing Activities. Net cash provided (used) by investing activities for the nine months ended March 31, 2006 and 2005 was ($1.4) million and ($4.0) million, respectively. Capital expenditures of $11.2 million and $5.1 million for 2006 and 2005, respectively, were for expansion of production capacity in Brazil in 2006, for maintaining the Company’s existing asset base and for environmental, health and safety projects. The Belgium Plant Transactions provided funds of $8.0 million during 2006. Sales of assets provided funds of $1.9 million and $1.4 million in 2006 and 2005, respectively.

Net Cash Provided (Used) by Financing Activities. Net cash provided (used) by financing activities for the nine months ended March 31, 2006 and 2005 was ($10.1) million and $13.2 million, respectively. The decrease in short-term debt is due to the reduction of the senior credit facility. Payments of long-term debt reflect the repayments of Koffolk borrowings. Proceeds from long-term debt reflect the borrowings of Koffolk and the issuance of additional senior secured indebtedness in December 2004.

Working Capital and Capital Expenditures. Working capital as of March 31, 2006 was $81.5 million compared to $78.8 million at June 30, 2005, an increase of $2.7 million. The increase in working capital primarily was due to reduced short-term debt levels resulting from the proceeds of the Belgium Plant Transactions.

The Company anticipates spending approximately $15.0 million for capital expenditures in 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 March 31, 2006, PAHC had no amounts borrowed under its domestic senior credit facility and PAHC had $17.5 million of borrowings available under the working capital facility that is provided under its domestic senior credit facility. At March 31, 2006 PAHC had $15.9 million of letters of credit outstanding under its domestic senior credit facility. In addition, a foreign subsidiary also had availability totaling $9.1 million under its loan agreements.

charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $33.2 million for purposes of calculating a certain financial covenant; (ii) establish the Minimum Domestic EBITDA for the 12 month periods ended July 31, 2005 through June 30, 2006 at $17.5 million for purposes of calculating a certain financial covenant; (iii) establish the Consolidated Minimum EBITDA for the twelve month periods ended July 31, 2005 through June 30, 2006 at $32.0 million for purposes of calculating a certain financial covenant; and (iv) amend the maximum aggregate amount of borrowing available under the working capital and letter of credit facilities from $32.5 million to $35.0 million. The amount of aggregate borrowings available under the working capital facility remained unchanged at $17.5 million.

The domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the condensed consolidated balance sheet.

The Company’s contractual obligations at March 31, 2006 become due as follows:


		Within 1 Year		Over 1 to 3 Years		Over 3 to 5 Years		Over 5 Years		Total

		(In thousands)
Loans payable to banks		$	—	$	—	$	—	$	—	$	—
Long-term debt (including current portion)			223		176,451		—		—		176,674
Interest payments			21,954		18,247		—		—		40,201
Lease commitments			1,407		2,352		1,682		1,078		6,519
Acquisition of rights			350		550		—		—		900
Employee termination payments relating to the Belgium Plant Transactions			10,333		—		—		—		10,333
Payments to GSK relating to the Belgium
	Plant Transactions		2,670		3,642		607		—		6,919

	Total contractual obligations	$	36,937	$	201,242	$	2,289	$	1,078	$	241,546

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.

Critical Accounting Policies

Critical accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates. The accounting policies and related risk described in our Annual Report on Form 10-K for the year ended June 30, 2005 are those that depend most heavily on these judgments and estimates. As of March 31, 2006 there have been no material changes to any of the critical accounting policies contained therein.

New Accounting Pronouncements

The Financial Accounting Standards Board has released new and revised standards. These standards will be adopted by the Company during 2006 and 2007 and are discussed in the notes to condensed consolidated financial statements included in this Report.

Quantitative and Qualitative Disclosure About Market Risk

In the normal course of operations, the Company is exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates, and commodity prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. The Company uses, from time to time, foreign currency forward contracts as a means of hedging exposure to foreign currency risks. The Company also utilizes, on a limited basis, certain commodity derivatives, primarily on copper used in its manufacturing processes, to hedge the cost of its anticipated purchase requirements. The Company does not utilize derivative instruments for trading purposes. The Company does not hedge its exposure to market risks in a manner that completely eliminates the effects of changing market conditions on earnings, cash flows and fair values. The Company monitors the financial stability and credit standing of its major counterparties.

For financial market risks related to changes in interest rates, foreign currency exchange rates and commodity prices, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, in our annual report on Form 10-K for the fiscal year ended June 30, 2005 and to Notes 2 and 19 to our Consolidated Financial Statements included therein.

Certain Factors Affecting Future Operating Results


	*Forward-Looking Statements*

This Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available

information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:


	•	our substantial leverage and potential inability to service our debt

	•	our dependence on distributions from our subsidiaries

	•	risks associated with our international operations and significant foreign assets

	•	our dependence on our Israeli operations

	•	competition in each of our markets

	•	potential environmental liability

	•	potential legislation affecting the use of medicated feed additives

	•	extensive regulation by numerous government authorities in the United States and other countries

	•	our reliance on the continued operation and sufficiency of our manufacturing facilities, including the transition of virginiamycin production 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 “Risks, Uncertainties and Liquidity” in Note 1 of our Condensed Consolidated Financial Statements included in this Report.

In addition, the issue of the potential for increased bacterial resistance to certain antibiotics used in certain food producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in these food producing animals. The sale of feed additives containing antibiotics is a material portion of our business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on our financial position, results of operations and cash flows.

We believe the forward-looking statements in this Report are reasonable; however, no undue reliance should be placed on any forward-looking statements, as they are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*

Information regarding quantitative and qualitative disclosures about market risk is set forth in Part I Item 2 of this Form 10-Q.


Item 4.	*Controls and Procedures*

(a) Based upon an evaluation, under the supervision and with the participation of our Principal Executive Officers and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, they have concluded that, as of the end of the period covered by this

Report, our disclosure controls and procedures, as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended, are effective.

(b) As of the end of the period covered by this Report there have been no changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

PART II — OTHER INFORMATION


Item 1.	*Legal Proceedings*

See Note 7 to the Condensed Consolidated Financial Statements.


Item 5.	*Other Information*

On March 8, 2006, Mr. Richard C. Rosenzweig joined the Company as Senior Vice President, General Counsel. Mr. Rosenzweig is expected to be elected Secretary by the Board of Directors in the near future.


Item 6.	*Exhibits*


Exhibit No.		Description

	10.27.7	Amendment Number Seven dated April 18, 2006 to 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.
	31.1	Certification of Gerald K. Carlson, Chief Executive Officer, required by Rule 15d-14(a) of the Act.
	31.2	Certification of Jack C. Bendheim, Chairman of the Board, required by Rule 15d-14(a) of the Act.
	31.3	Certification of Richard G. Johnson, Chief Financial Officer, required by Rule 15d-14(a) of the Act.
	32	Section 1350 Certifications of Phibro Animal Health Corporation.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PHIBRO ANIMAL HEALTH CORPORATION


	By:	/s/ JACK C. BENDHEIM



	Jack C. Bendheim
	Chairman of the Board

Date: May 15, 2006


	By:	/s/ GERALD K. CARLSON



	Gerald K. Carlson
	Chief Executive Officer

Date: May 15, 2006


	By:	/s/ RICHARD G. JOHNSON



	Richard G. Johnson
	Chief Financial Officer
	(Principal Financial Officer and
	Principal Accounting Officer)

Date: May 15, 2006

Exhibit Index


Exhibit No.		Description

	10.27.7	Amendment Number Seven dated April 18, 2006 to 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.
	31.1	Certification of Gerald K. Carlson, Chief Executive Officer, required by Rule 15d-14(a) of the Act.
	31.2	Certification of Jack C. Bendheim, Chairman of the Board, required by Rule 15d-14(a) of the Act.
	31.3	Certification of Richard G. Johnson, Chief Financial Officer, required by Rule 15d-14(a) of the Act.
	32	Section 1350 Certifications of Phibro Animal Health Corporation.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Phibro Animal Health (PAHC) 10-Q2006 Q3 Quarterly report

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