As filed with the Securities and Exchange Commission on February 18, 2004
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PHIBRO ANIMAL HEALTH CORPORATION
PHILIPP BROTHERS NETHERLANDS III B.V.
(Exact name of Registrants as specified in their charters)
PHIBRO ANIMAL HEALTH CORPORATION
New York 2819 13-1840497
(State or Other (Primary Standard (I.R.S. employer
Jurisdiction of Industrial Classification identification number)
Incorporation or Code Number)
Organization)
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
(Address, including zip code, and telephone number, including
area code of registrant's principal executive office)
PHILIPP BROTHERS NETHERLANDS III B.V.
The Netherlands 2819 Not Applicable
(State or Other (Primary Standard Industrial (I.R.S. employer
Jurisdiction of Classification Code Number) identification number)
Incorporation or
Organization)
Rokin 55
1012 KK Amsterdam
The Netherlands
(201) 944-6020
(Address, including zip code, and telephone number, including
area code of registrant's principal executive office)
SEE TABLE OF ADDITIONAL REGISTRANTS
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Jack C. Bendheim,
President And Chairman of the Board
Phibro Animal Health Corporation
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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With a copy to:
Lawrence M. Bell, Esq.
Golenbock Eiseman Assor Bell & Peskoe LLP
437 Madison Avenue
New York, New York 10022-7302
(212) 907-7300
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
CALCULATION OF REGISTRATION FEE
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Amount Proposed Proposed Maximum Amount of
Title of each Class of to be Maximum Aggregate Registration
Securities to be Registered Registered Price Per Unit Offering Price(2) Fee(3)
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13% Senior Secured Units due 2007(1) 105,000 $1,000 $105,000,000 $13,303.50
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13% Senior Secured Notes due 2007 of
Phibro Animal Health Corporation(3) N/A -- -- --
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13% Senior Secured Notes due 2007 of
Philipp Brothers Netherlands III B.V.(3) N/A -- -- --
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Guarantees(3) N/A -- -- --
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(1) Each unit consists of $809.5238 principal amount of 13% senior secured
notes due 2007 of Phibro Animal Health Corporation and $190.4762 principal
amount of 13% senior secured notes due 2007 of Philipp Brothers
Netherlands III B.V.
(2) Estimated pursuant to Rule 457(f) under the Securities Act of 1933, as
amended, solely for purposes of calculating the registration fee.
(3) The domestic companies listed in the Table of Additional Registrants below
have guaranteed, jointly and severally, the 13% Senior Secured Notes Due
2007 of Phibro Animal Health Corporation and the 13% Senior Secured Notes
Due 2007 of Philipp Brothers Netherlands III B.V. being registered hereby.
Phibro Animal Health Corporation and the Phibro Animal Health SA have also
guaranteed, jointly and severally, the 13% Senior Secured Notes Due 2007
of Philipp Brothers Netherlands III B.V. The Guarantors are registering
the Guarantees. Pursuant to Rule 457(n) under the Securities Act of 1933,
as amended, no registration fee is required with respect to the Guarantees
or the notes.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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TABLE OF ADDITIONAL REGISTRANTS
Exact Name of Registrant State or Other Jurisdiction of Primary Standard Industrial I.R.S. employer
as Specified in its Charter Incorporation or Organization Classification Code Number identification number
- --------------------------- ------------------------------ --------------------------- ---------------------
Prince Agriproducts, Inc. Delaware 2819 23-1653576
One Prince Plaza
Quincy, Illinois 62301
(217) 222-8854
Phibro-Tech, Inc. Delaware 2819 22-3060339
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
Phibro Animal Health U.S., Inc. Delaware 2819 22-3743224
710 Route 46 East
Fairfield, New Jersey
(201) 944-6020
Phibro Animal Health Holdings, Inc. Delaware 2819 22-3743221
710 Route 46 East
Fairfield, New Jersey
(201) 944-6020
Phibrochem, Inc. New Jersey 2819 22-2758614
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
C P Chemicals, Inc. New Jersey 2819 22-1548721
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
Phibro Chemicals, Inc. New York 2819 22-2871784
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
Western Magnesium Corp. California 2819 13-2849569
One Parker Plaza
Fort Lee, New Jersey 07024
(201) 944-6020
Phibro Animal Health SA Belgium 2819 Not Applicable
Rue de L'Institut, 87A
B-1330 Rixensart, Belgium
(201) 944-6020
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 18, 2004
PROSPECTUS
[Logo] Phibro Animal Health Corporation
Phibro Animal Health Corporation
Philipp Brothers Netherlands III B.V.
OFFER TO EXCHANGE
105,000 Units
consisting of
$85,000,000 13% Senior Secured Notes Due 2007 of Phibro Animal Health
Corporation and $20,000,000 13% Senior Secured Notes Due 2007 of
Philipp Brothers Netherlands III B.V., which have been
registered under the Securities Act of 1933,
for all outstanding Units
consisting of
$85,000,000 13% Senior Secured Notes Due 2007 of Phibro Animal Health
Corporation and $20,000,000 13% Senior Secured Notes Due
2007 of Philipp Brothers Netherlands III B.V.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , 2004, UNLESS EXTENDED.
Terms of the Exchange offer:
We will exchange all old units that are validly tendered and not withdrawn
prior to the expiration of the exchange offer.
You may withdraw tenders of old units at any time prior to the expiration
of the exchange offer.
We believe that the exchange of old units will not be a taxable event for
U.S. federal income tax purposes, but you should see "Certain United States
Federal Income Tax Considerations" on page 139 for more information. See also
"Certain Netherlands Tax Consequences."
We will not receive any proceeds from the exchange offer.
The terms of the new units are substantially identical to the old units,
except that the new units are registered under the Securities Act of 1933 and
the transfer restrictions and registration rights applicable to the old units do
not apply to the new units.
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See "Risk Factors" beginning on page 15 for a discussion of risks that
should be considered by holders prior to tendering their old units.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2004.
TABLE OF CONTENTS
Prospectus Summary.......................................................... 1
Risk Factors................................................................ 15
Use of Proceeds............................................................. 28
Capitalization.............................................................. 28
Unaudited Pro Forma Condensed Consolidated Statements of Operations......... 29
Selected Consolidated Financial Data........................................ 31
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 32
Business.................................................................... 47
Conditions in Israel........................................................ 65
Management.................................................................. 66
Principal Stockholders...................................................... 72
Description of Capital Stock................................................ 73
Certain Relationships and Related Transactions.............................. 75
Description of Certain Indebtedness......................................... 78
The Exchange Offer.......................................................... 80
Desciption of the New Units ................................................ 89
Description of the New Notes................................................ 89
Certain United States Federal Income Tax Consequences....................... 139
Certain Netherlands Tax Consequences........................................ 143
Plan of Distribution........................................................ 146
Legal Matters............................................................... 147
Experts..................................................................... 147
Where You Can Find More Information......................................... 147
Service of Process and Enforcement of Liabilities........................... 148
Philipp Brothers Netherlands III B.V........................................ 148
Index to Consolidated Financial Statements.................................. F-1
You should rely only on the information contained in this prospectus.
Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V. have
not authorized anyone to provide you with information that is different. If
anyone provides you with different or inconsistent information, you should not
rely on it. Phibro Animal Health Corporation and Philipp Brothers Netherlands
III B.V. are not making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted, where the person making the offer is
not qualified to do so, or to any person who cannot legally be offered the
securities. You should assume that the information appearing in this prospectus
is accurate only as of the date on the front cover of this prospectus or any
supplement.
Each broker-dealer that receives new units for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new units. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act of 1933, as amended, which we refer to as the Securities Act. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of new units received in exchange
for old units where the old units were acquired by the broker-dealer as a result
of market-making activities or other trading activities. Phibro Animal Health
Corporation and Philipp Brothers Netherlands III B.V. each has agreed that, for
a period of 90 days after the effective date of the registration statement of
which this prospectus is a part, it will make this prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
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FOR NEW HAMPSHIRE RESIDENTS
Neither the fact that a registration statement or an application for a
license has been filed under Chapter 421-B of the New Hampshire Uniform
Securities Act of 1933 with the state of New Hampshire nor the fact that a
security is effectively registered or a person is licensed in the state of New
Hampshire constitutes a finding by the secretary of state that any document
filed under RSA 421-B is true, complete and not misleading. Neither any such
fact nor the fact that an exemption or exception is available for a security or
a transaction means that the secretary of state has passed in any way upon the
merits or qualifications of, or recommended or given approval to, any person,
security or transaction. It is unlawful to make, or cause to be made, to any
prospective purchaser, customer or client any representation inconsistent with
the provisions of this paragraph.
NETHERLANDS SELLING RESTRICTIONS
Neither the new units nor any of the new notes (or any rights representing
an interest in the global unit or any of the global notes) may be offered, sold,
transferred, or delivered as part of their initial distribution or at any time
thereafter, directly or indirectly, to any individual or legal entity
established, resident or domiciled in The Netherlands. Offers and sales of new
units and new notes to any persons or legal entities established, resident or
domiciled outside The Netherlands must be made in compliance with any applicable
rule in the relevant jurisdictions.
BELGIUM SELLING RESTRICTIONS
This prospectus and related documents are not intended to constitute a
public offering in Belgium. The Belgian Banking and Finance Commission has
neither reviewed nor approved these documents or commented on their accuracy or
adequacy, or recommended or endorsed the new units and new notes.
The new units and new notes may not be offered for sale, sold or marketed
in Belgium by means of a public offering under Belgian law. In addition, the new
units and new notes may not be offered or sold to any person qualifying as a
consumer within the meaning of Article 1.7(o) of the Belgian Law of 14th July
1991 on consumer protection and trade practices, unless such offer or sale is
made in compliance with the Belgian Law of 14th July 1991 on consumer protection
and trade practices and its implementing legislation.
MARKET SHARE, RANKING AND OTHER INDUSTRY DATA
The market share, ranking and other industry data contained in this
prospectus, including our position and the position of our competitors within
these markets, are based either on our management's knowledge of, and experience
in, the markets in which we operate, or derived from industry data or
third-party sources and, in each case, we believe these estimates are reasonable
as of the date of this prospectus or, if an earlier date is specified, as of
such earlier date. However, this information may prove to be inaccurate because
of the method by which we obtained some of the data for our estimates or because
this information is subject to change and cannot always be verified due to
limits on the availability and reliability of independent sources, the voluntary
nature of the data gathering process and other limitations and uncertainties
inherent in any statistical survey of market shares. In addition, purchasing
patterns and consumer preferences can and do change. As a result, you should be
aware that market share, ranking and other similar data set forth herein, and
estimates and beliefs based on such data, may not be reliable.
TRADEMARKS
The following trademarks and service marks used throughout this prospectus
belong to, are licensed to, or are otherwise used by us in our medicated feed
additives business: Stafac(R); Eskalin(R); V-Max(R); Terramycin(R);
Neo-Terramycin(R); CLTC(R); Mecadox(R); Nicarb(R); Amprol(R); Bloatguard(R);
Aviax(R); Coxistac(R); Posistac(R); Banminth(R); Oxibendazole(R); Rumatel(R).
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws. 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:
o our substantial leverage and potential inability to service our debt
o our dependence on distributions from our subsidiaries
o risks associated with our international operations and significant
foreign assets
o our dependence on our Israeli operations
o competition in each of our markets
o potential environmental liability
o potential legislation affecting the use of medicated feed additives
o extensive regulation by numerous government authorities in the
United States and other countries
o our reliance on the continued operation and sufficiency of our
manufacturing facilities
o our reliance upon unpatented trade secrets
o the risks of legal proceedings and general litigation expenses
o potential operating hazards and uninsured risks
o the risk of work stoppages
o our dependence on key personnel
We believe the forward-looking statements in this prospectus are
reasonable; however, you should not place undue reliance on any forward-looking
statements, which are based on current expectations. You should read this
prospectus completely and with the understanding that future results may be
materially different from what we expect. 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.
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PROSPECTUS SUMMARY
The following summary highlights information that we believe is especially
important concerning our business and this exchange offer. The following summary
is qualified in its entirety by the more detailed information and the financial
statements and notes thereto appearing elsewhere in this prospectus. You should
carefully read this entire prospectus and should consider, among other things,
the matters set forth under "Risk Factors" before deciding to participate in the
exchange offer. Unless otherwise indicated or the context requires otherwise,
references in this prospectus to (1) "PAH," "our company," "we," "our," "us" and
similar expressions refer to Phibro Animal Health Corporation, a New York
corporation, and its consolidated subsidiaries, (2) "PB Netherlands" refers to
Philipp Brothers Netherlands III B.V., a company organized under the laws of the
Netherlands, and its consolidated subsidiaries, (3) the "US issuer" refers to
Phibro Animal Health Corporation and not its subsidiaries, and (4) the "Dutch
issuer" refers to Philipp Brothers Netherlands III B.V. and not its
subsidiaries. We formerly conducted business under the name, "Philipp Brothers
Chemicals, Inc." As used herein, references to any "fiscal" year of our company
refer to our fiscal year ended or ending on the June 30 of such year.
The Exchange Offer
On October 21, 2003, the US issuer and Dutch issuer issued and sold
105,000 units, consisting of $85.0 million principal amount of 13% Senior
Secured Notes due 2007 of the US issuer and $20.0 million principal amount of
13% Senior Secured Notes due 2007 of the Dutch issuer, which we refer to
collectively as the old units and the old notes. In connection with that sale,
we entered into a registration rights agreement with the initial purchaser of
the old units in which we agreed to deliver this prospectus to you and to
complete an exchange offer for the old units. As contemplated by the
registration rights agreement, we are offering to exchange 105,000 new units,
consisting of $85.0 million principal amount of new 13% Senior Secured Notes due
2007 of the US issuer and $20.0 million principal amount of new 13% Senior
Secured Notes due 2007 of the Dutch issuer, referred to collectively as the new
units and the new notes, the issuance of which new units have been registered
under the Securities Act, for a like aggregate principal amount of our old
units. We urge you to read the discussions in this Prospectus Summary under the
headings "Summary of Exchange Offer" and "The New Units" and in this Prospectus
under the headings "The Exchange Offer" and "The New Units" for further
information regarding the exchange offer and the new units.
The Company
Overview
We are a leading diversified global manufacturer and marketer of a broad
range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which we sell throughout
the world predominantly to the poultry, swine and cattle markets. MFAs are used
preventively and therapeutically in animal feed to produce healthy livestock. We
believe we are the third largest manufacturer and marketer of MFAs in the world,
and we believe that certain of our MFA products have leading positions in the
marketplace. We are also a specialty chemicals manufacturer and marketer,
serving primarily the United States pressure-treated wood and chemical
industries. We have several proprietary products, and many of our products
provide critical performance attributes to our customers' products, while
representing a relatively small percentage of total end-product cost. We operate
in over 17 countries around the world and sell our animal health and nutrition
products and specialty chemicals products into over 40 countries. Approximately
71% of our fiscal 2003 net sales were from our Animal Health and Nutrition
business, and approximately 29% of our fiscal 2003 net sales were from our
Specialty Chemicals business.
Our Animal Health and Nutrition segment manufactures and markets more than
500 formulations and concentrations of medicated and nutritional feed additives,
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products, to the livestock and pet food industries. Our MFA products are
internationally recognized for quality and efficacy in the prevention and
treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in
swine and acidosis in cattle. We market our Animal Health and Nutrition products
under approximately 450 governmental product registrations, approving our MFA
products with respect to animal drug safety and effectiveness.
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Our Specialty Chemicals business manufactures and markets a number of
specialty chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, aerospace and agricultural industries. We anticipate
that our proprietary manufacturing process for one of the leading new products
for manufacturing pressure-treated wood will represent our largest growth
opportunity in our Specialty Chemicals business. Over 40% of our fiscal 2003 net
sales in our Specialty Chemicals business was derived from copper-based
compounds, solutions or mixes.
We have in recent years focused our business on animal health and
nutrition products. As a result of the rapid decline of the printed circuit
board industry in the United States, we have substantially exited that business,
including our etchant recycling operations, and re-directed our productive
capacity in niche markets. We have also sold other non-strategic businesses,
such as our Agtrol copper fungicide business and Mineral Resource Technologies,
Inc. ("MRT") and closed our facility in Odda, Norway. Recently we completed the
divestiture of our subsidiary, The Prince Manufacturing Company ("PMC"), and
have reached an agreement to sell, subject to the satisfaction of certain
closing conditions, our ferric chloride business associated with one of our
midwestern plants.
Animal Health Industry Overview
According to Wood Mackenzie Animal Health Services, the MFA industry was
approximately $1.6 billion in size in calendar year 2002. The MFA market
includes antibiotics, antibacterials, anticoccidials and anthelmintics. These
products are intended to aid in the prevention and treatment of diseases in
animals, promoting healthy development and improving food quality and safety.
According to Wood Mackenzie, the animal health market will continue to grow
modestly at 1.4% per annum through 2007.
Most MFAs are used for poultry (approximately 40%), swine (approximately
35%) and cattle (approximately 20%). The leading companies participating in the
MFA marketplace are Elanco (a division of Eli Lilly), Alpharma, Intervet (a
division of Akzo Nobel) and ourselves.
The Asian and American markets, which have the world's largest livestock
populations (see the table below indicating 1998 numbers, prepared by FAO), are
expected to enjoy continued growth. We believe this increase is based upon a
growing world population, increasing global demand for meat protein, especially
in developing countries, and growing consumer focus on food quality and safety.
Poultry Swine
Country (production) Country (production)
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US.................. 8.1 billion China.................. 472 million
China............... 5.7 billion US..................... 100 million
Brazil.............. 3.3 billion Germany................ 41 million
France.............. 2.0 billion Spain.................. 32 million
Mexico.............. 0.9 billion France................. 27 million
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Source: 1998 FAO Livestock Slaughter Numbers
Given the large and growing demand for livestock and the widespread
adoption of modern production techniques -- characterized by growing a large
number of livestock in confined areas -- we believe the use of medicated and
nutritional supplements will continue to be necessary to ensure animal health
and the economic viability of such livestock production. The most efficient and
cost effective method to get medicated and nutritional products to such vast
number of animals is through feed additives.
Business Strengths
Top Three MFA Provider in the World. We believe we are the world's third
largest manufacturer and marketer of medicated feed additives in the poultry and
swine markets. We manufacture and market over 200 MFA formulations and
concentrations. We believe our MFAs rank first in sales in Brazil, and third in
the United States. Our Animal Health and Nutrition business serves our customers
in over 40 countries from 17 facilities. Many of our MFA products have been
marketed for over 20 years.
Significant Barriers to Entry. Medicated feed additives cannot be
manufactured or marketed without governmental product registrations that are
specific to each country -- the Food and Drug Administration ("FDA") for
example, in the United States, Health Canada in Canada, and EU/EMEA authorities
in Europe. Before a product registration is granted, the applicant must show the
regulatory authority that the product and its
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proposed use are both effective and safe for the specified species and
application. Obtaining an MFA product registration is comparable in cost and
difficulty with obtaining approval for drugs used to treat humans. In addition
to approval of formulation and labeling, regulatory authorities typically
require approval and periodic inspection of the manufacturing facilities.
Because of the costs and difficulties associated with obtaining MFA product
registrations, there have been few new medicated feed additives developed and
marketed over the last decade. The only two new MFA compounds approved for use
in the last 10 years were semduramycin, one of our products, and ractopamine.
Because of the inherent difficulties and high costs of obtaining major product
registrations and their absolute necessity to operate in this business, our
existing broad portfolio of product registrations provides us strength in the
marketplace.
Strong Brand Name Recognition of Our Medicated Feed Additives. We enjoy
strong brand name recognition with our medicated feed additives for the
prevention and control of diseases in poultry, swine and cattle. In particular,
virginiamycin, an antibiotic marketed under the Stafac(R), Eskalin(R) and
V-Max(R) brand names, is a popular and efficacious choice of medicated feed
additive in the poultry, swine and cattle industry. Semduramycin, sold under the
brand name Aviax(R), and salinomycin, sold under the brand name Coxistac(R), are
also leading poultry anticoccidials. In fiscal 2003, branded MFAs accounted for
approximately 56% of our total Animal Health and Nutrition sales.
Established Global Network and Customer Base. From our 20 facilities in 17
countries, we manufacture and market our products, which are sold through
multiple distribution channels to over 2,700 customers in a wide variety of end
use markets. We sell our products through an established global sales, marketing
and distribution network to customers in over 40 countries. In fiscal 2003, no
single customer accounted for more than 5% of total revenues and our top 10
customers accounted for less than 23% of total revenues. In fiscal 2003,
approximately 36% of our net sales were made outside the United States, with 11%
of sales to Europe, 9% of sales to Latin America, 8% of sales to the Middle
East, and 8% of sales to Asia and Australia.
Extensive Technical Support for Customers. We employ over 60 chemists,
technicians, PhDs and veterinarians (DVMs) at our various facilities involved in
providing technical services to customers. Our technical service group and sales
personnel are able to work directly with commercial feed manufacturers and
integrated poultry, swine and cattle producers to promote animal health. We are
able to offer our customers products targeted to local markets, allowing us to
serve those local markets more effectively. Our MFA field personnel are skilled
in the area of product differentiation and have extensive applications knowledge
so as to be able to work closely with customers in determining optimum benefits
from usage of our products. As agricultural food production will continue to
intensify and will adopt evolving technologies, our MFA personnel are constantly
working with customers to better understand their needs in order to best utilize
the products existing within our MFA portfolio. This commercial knowledge also
plays a pivotal role within the R&D function to ensure that research results are
applicable to customer needs and concerns.
Manufacturing Expertise. Our manufacturing expertise and know-how in
antibiotic manufacturing process and organic synthesis has given us unique
positions in the marketplace. We believe that we are the only manufacturer of
virginiamycin, amprolium and semduramycin in the world. Our blending,
compounding and formulation expertise is recognized by our customers in the
animal health and nutrition market. In addition, in our Specialty Chemicals
business, based on our more than 50 years of expertise in the metal chemical
area, we have become a leading supplier of the new copper-containing compound to
the pressure-treated wood industry. We also believe we hold leading positions in
agricultural and other industrial applications for copper-containing compounds.
Proven Management Team. We have assembled a strong and experienced
management team at both the corporate and operating levels. Our top operating
managers have an average of over 30 years of experience in the animal health and
nutrition and specialty chemicals industries. With our expanded management team,
we have added significant operational and international experience to our
businesses. Our founding family owns 100% of our common stock.
Business Strategy
Expand Applications for Animal Health and Nutrition Product Offerings to
Our Primary Markets. We seek to increase our product lines through expanding the
scope of our animal health and nutrition product registrations, through both
extending the use claims and formulations and the geographic areas of such
registrations. In the United States, in fiscal 2003, we obtained from the FDA a
zero-day withdrawal registration
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for the use of our oxytetracycline product in cattle. We are actively working
with the FDA and other regulators to obtain additional registrations, as well as
additional cross-clearances so that our MFA products can continue to be used in
situations where another MFA is also in use. In fiscal 2003, we obtained
approval for Aviax(R) in the EU, and are pursuing a modification of our Aviax(R)
registration in the United States allowing for site change of the active
ingredient. We believe that our receipt of FDA approval of Aviax(R), together
with our EU approval of Aviax(R) and our other registration efforts, has the
potential to increase our sales by $7-10 million over the next two to three
years. By leveraging our global reach and our position as the only leading
animal health company dedicated to MFAs and NFAs, we are natural partners for
small players in the industry, who approach us to help them license or
distribute new products they have developed, because we do not compete with
their other products.
Expand Our Customer Base. We intend to expand and strengthen our customer
base by (i) focusing on relationships with key accounts, (ii) continuing to
incentivize our sales force to concentrate on fast-growing, high-margin areas
within existing product groups, and (iii) pursuing growth opportunities for our
existing products in new markets. As certain of our MFA products are used in
rotation by our customers, we seek to supply all or substantially all of the
various MFA products which our customers may want to use. Our MFA business has
historically been strongest in the poultry market, and we are seeking to develop
it further in the swine and cattle markets. In fiscal year 2003, we increased
our sales force and technical professionals in the swine market for our MFAs,
increasing net sales by approximately $5 million. We expect to continue to
enhance our sales force in the swine market, and believe that there are further
growth opportunities from doing so. In addition, we believe the under-penetrated
Chinese and Latin American markets offer growth opportunities. In China, we are
seeking to partner with local distributors to leverage our existing local sales
force.
Capture Market Share in New Pressure-Treated Wood Business. We seek to
become the leading supplier of the active ingredient copper solution expected to
replace the standard chromated-copper-arsenic solution, which was banned by the
EPA in the residential and recreational pressure-treated wood markets, effective
December 31, 2003. We currently estimate that the total potential size of this
copper solution to the pressure-treated wood market will be approximately $120
million annually. We have already signed a multi-year, take-or-pay contract with
a major chemicals supplier to the pressure-treated wood industry to provide it
with this new solution, which we estimate will increase our sales by
approximately $9 million in fiscal 2004 and by approximately $30 million over
the life of the contract, based on existing forecasts. We have applied for a
patent with respect to the manufacturing process of our solution, and the claims
in our patent application were recently allowed by the United States Patent and
Trademark Office. We believe that our manufacturing process allows us to operate
in this market with a lower cost of capital and higher factory through-put than
our competition. In addition, we have filed a provisional patent for a new,
large molecule copper compound product. We believe that this new product may be
the next generation in copper-based wood treatment products, with the potential
to substantially increase the duration of protection for treated wood.
Continued Rationalization of Operations. We have taken significant steps
to refocus on our core business and to rationalize our operations by
implementing cost-saving and productivity-enhancing programs and yield
improvement programs. Since June 2002, we reduced our employee headcount from
approximately 1,250 to approximately 1,050 employees. We intend to restructure
manufacturing capacity to improve production efficiency. We are analyzing
additional opportunities to increase operating efficiencies and profitability.
We continue to evaluate our specialty chemicals businesses for adequate returns
and will continue to restructure, discontinue or sell those businesses that are
dilutive to earnings. To that end, since May 2001, we sold our Agtrol copper
fungicide business, our fresh ammoniacal etchant and spent cupric chloride
printed circuit board etchant businesses associated with our east coast and
midwestern plants, closed our facility in Odda, Norway, sold Carbide Industries
and MRT, and completed the divestiture of substantially all of the assets of
PMC. See "Recent Developments." In addition, we have reached an agreement to
sell, subject to the satisfaction of certain closing conditions, our ferric
chloride business associated with one of our midwestern plants.
Recent Developments
Sale of MRT. On August 28, 2003, we sold our subsidiary, MRT, to Cemex
Inc. for a net value after payment of transaction expenses of approximately
$13.8 million in cash, subject to certain escrow arrangements and post closing
adjustments. MRT managed and sold coal combustion by-products, including fly
ash.
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The Offering and Consent Solicitation. On October 21, 2003, we completed a
private placement (the "Offering") under Rule 144A and Regulation S of the
Securities Act, pursuant to which the US issuer and the Dutch issuer issued and
sold $105 million of old units, from which we received net proceeds of
$97,347,000. We used the proceeds from the issuance of the old units to: (i)
repurchase $51,971,000 of our 97/8% Senior Subordinated Notes due 2008 at a
price equal to 60% of the principal amount thereof, plus accrued and unpaid
interest; (ii) repay our senior credit facility of $34,888,000 outstanding at
the repayment date; (iii) satisfy, for a payment of approximately $29,315,000,
certain of our outstanding obligations to Pfizer Inc., including: (a)
$20,075,000 aggregate principal amount of our promissory note plus accrued and
unpaid interest, (b) $9,748,000 of accounts payable, (c) $9,040,000 of accrued
expenses; and (d) future contingent purchase price obligations under our
agreements with Pfizer by which we acquired Pfizer's medicated feed additive
business; and (iv) pay fees and expenses relating to the above transactions. In
connection with the completion of the issuance and sale of old units, we
solicited consents with respect to our 97/8% Senior Subordinated Notes due 2008
("Senior Subordinated Notes" or "Existing Notes") to amendments to the indenture
governing the Existing Notes to allow the completion of this offering and the
other transactions described herein. The requisite consents were obtained, and
the amendments became effective on October 1, 2003.
New Senior Credit Facility. Also, on October 21, 2003, we entered into a
new replacement domestic senior credit facility with Wells Fargo Foothill, Inc.,
providing, among other things, for a $25 million senior secured facility
(subject to a borrowing base formula based on percentages of eligible domestic
receivables and domestic inventory, with a sub-limit for inventory) consisting
of a $15 million working capital facility, and a letter of credit facility. See
"Description of Certain Indebtedness."
Divestiture of PMC. On December 26, 2003, we completed the divestiture of
substantially all of the business and assets of our Prince Manufacturing Company
subsidiary to a company formed by Palladium Equity Partners II, LP and certain
of its affiliates (the "Palladium Investors"). In connection with such
transaction, the Palladium Investors reduced their ownership of our preferred
stock from $72.2 million to $16.5 million as of and accreted through the closing
date, we made a cash payment of $10.0 million to the Palladium Investors in
respect of a portion of our preferred stock not exchanged in consideration of
the business of PMC, we satisfied the intercompany debt owed to PMC and made
certain capital expenditure adjustments. The final valuation of PMC is subject
to a post-closing working capital adjustment. In the definitive agreements, we
agreed to pay or reimburse the Palladium Investors for their out-of-pocket
transaction expenses, and we made representations, warranties and environmental
and other indemnities to the Palladium Investors. Also, Palladium was paid a
closing fee of $0.5 million and payments by the buyer to us for central support
services for the next three years of $1.0 million, $0.5 million and $0.2
million, respectively, were pre-paid by the buyer and satisfied for the net
present value of such payments. In addition, our Prince Agriproducts ("Prince
Agri") subsidiary entered into various supply and blending arrangements with the
buyer consistent with the historic relationship between Prince Agri and PMC, and
Prince Agri agreed to continue to provide the buyer with certain laboratory, MIS
and telephone services substantially consistent with historical practices, and
to rent to the buyer certain office space used by PMC in Quincy, Illinois. See
"Certain Relationships and Related Transactions."
Philipp Brothers Netherlands III B.V.
Philipp Brothers Netherlands III B.V., the Dutch issuer, is an indirect
wholly-owned subsidiary of the US issuer and is incorporated under the laws of
the Netherlands as a private company with limited liability. The Dutch issuer is
a holding company formed to finance the operations of Phibro Animal Health SA, a
Belgian company ("PAH Belgium"), which owns and operates our Rixensart, Belgium
plant. Such plant uses fermentation processes to produce the active ingredients
semduramycin and virginiamycin and conducts all of our fermentation development
activities.
----------
We are a New York corporation and our principal executive offices are
located at One Parker Plaza, 400 Kelby Street, Fort Lee, New Jersey 07024 and
our phone number is (201) 944-6020.
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Summary of the Exchange Offer
On October 21, 2003, we completed a private offering of 105,000 old units
consisting of:
o $85.0 million principal amount of 13% Senior Secured Notes due 2007
of the US issuer, referred to as the old US notes; and
o $20.0 million principal amount of 13% Senior Secured Notes due 2007
of the Dutch issuer, referred to as the old Dutch notes.
In connection with that sale, we entered into a registration rights
agreement with the initial purchaser of the old units in which we agreed to
deliver this prospectus to you and to complete an exchange offer for the old
units.
New Units Offered ............... 105,000 new units consisting of:
$85.0 million principal amount of 13% Senior
Secured Notes due 2007 of the US issuer,
referred to as the new US notes; and
$20.0 million principal amount of 13% Senior
Secured Notes due 2007 of the Dutch issuer,
referred to as the new Dutch notes.
The issuance of the new units has been
registered under the Securities Act. The
terms of the new units and old units are
identical in all material respects, except
for transfer restrictions, registration
rights relating to the old units and certain
provisions relating to increased interest
rates in connection with the old units under
circumstances relating to the timing of the
exchange offer. You are urged to read the
discussions under the heading "The New
Units" in this summary for further
information regarding the new units.
The Exchange Offer .............. We are offering the new units to you in
exchange for a like number of old units. The
old units may be exchanged only in integral
multiples of 1,000. We intend by the
issuance of the new units to satisfy our
obligations contained in the registration
rights agreement. After the exchange offer
is complete, you will no longer be entitled
to any exchange or registration with respect
to your old units. In this prospectus, the
term "exchange offer" means this offer to
exchange new units for old units in
accordance with the terms set forth in this
prospectus and the accompanying letter of
transmittal.
Consequences of Failure to
Exchange Units .................. If you do not exchange your old units for
new units, subject to some limited
exceptions, you will no longer be able to
require us to register the old units under
the Securities Act. In addition, you will
not be able to offer or sell the old units
unless:
o they are registered under the Securities
Act and applicable state securities laws
(and we will have no obligation to
register them, except for some limited
exceptions), or
o you offer or sell them under an
exemption from the requirements of, or
in a transaction not subject to, the
Securities Act and applicable state
securities laws.
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We do not currently intend to register the
old units under the Securities Act. Under
some circumstances, however, holders of the
old units, including holders who are not
permitted to participate in the exchange
offer or who may not freely resell new units
received in the exchange offer, may require
us to file, and to cause to become
effective, a shelf registration statement
covering resales of new units by these
holders. For more information regarding the
consequences of not tendering your old
units, see "The Exchange Offer --
Consequences of Failure to Exchange Units."
Expiration Date; Withdrawal
of Tender ....................... The exchange offer will expire at 5:00 p.m.,
New York City time, on , 2004, or
such later date and time to which it may be
extended by us. The tender of old units
pursuant to the exchange offer may be
withdrawn at any time prior to the
expiration date of the exchange offer. Any
old units not accepted for exchange for any
reason will be returned without expense to
the tendering holder thereof promptly after
the expiration or termination of the
exchange offer.
Conditions to the Exchange
Offer ........................... Our obligation to accept for exchange, or to
issue new units in exchange for, any old
units is subject to customary conditions
relating to compliance with any applicable
law or any applicable interpretation by the
staff of the Securities and Exchange
Commission, the receipt of any applicable
governmental approvals and the absence of
any actions or proceedings of any
governmental agency or court which could
materially impair PAH's or PB Netherland's
ability to consummate the exchange offer.
See "The Exchange Offer -- Conditions to the
Exchange Offer."
Procedure for Tendering Old
Units ........................... If you wish to accept the exchange offer and
tender your old units, you must either:
complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal, in accordance with its
instructions and the instructions in this
prospectus, and mail or otherwise deliver
such letter of transmittal, or the
facsimile, together with the old units and
any other required documentation, to the
exchange agent at the address set forth
herein; or
if old units are tendered pursuant to
book-entry procedures, the tendering holder
must deliver a completed and duly executed
letter of transmittal or arrange with The
Depository Trust Company, or DTC, to cause
an agent's message to be transmitted through
DTC's Automated Tender Offer Program System
with the required information (including a
book-entry confirmation) to the exchange
agent.
See "The Exchange Offer -- Procedures for
Tendering Old Units."
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7
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Broker-Dealers .................. Each broker-dealer that receives new units
for its own account in exchange for old
units, where such old units were acquired by
such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such new units. See "Plan of
Distribution."
Use of Proceeds ................. We will not receive any proceeds from the
exchange offer. See "Use of Proceeds."
Exchange Agent .................. HSBC Bank USA is serving as the exchange
agent in connection with the exchange offer.
The address, telephone number and facsimile
number of the exchange agent are provided in
the section "The Exchange Offer," as well as
in the letter of transmittal.
Federal Income Tax
Consequences .................... We believe that the exchange of old units
for new units pursuant to the exchange offer
will not be a taxable event for United
States federal income tax purposes. You are
referred to the discussion of the tax
consequences of the exchange offer under
"Certain United States Federal Income Tax
Consequences" and "Certain Netherlands Tax
Consequences." You should consult your tax
advisor about the tax consequences as they
apply to your individual circumstances.
Consequences of Exchanging Old Units Pursuant to the Exchange Offer
Based on certain interpretive letters issued by the Staff of the
Securities and Exchange Commission to third parties in unrelated transactions,
we are of the view that holders of old units (other than any holder who is an
"affiliate" of PAH or PB Netherlands within the meaning of Rule 405 under the
Securities Act) who exchange their old units for new units pursuant to the
exchange offer generally may offer the new units for resale, resell such new
units and otherwise transfer the new units without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that:
o the new units are acquired in the ordinary course of the holders'
business;
o the holders have no arrangement or understanding with any person to
participate in a distribution of the new units; and
o neither the holder nor any other person is engaging in or intends to
engage in a distribution of the new units.
Each broker-dealer that receives new units for its own account in exchange
for old units must acknowledge that it will deliver a prospectus in connection
with any resale of the new units. See "Plan of Distribution." In addition, to
comply with the securities laws of applicable jurisdictions, the new units may
not be offered or sold unless they have been registered or qualified for sale in
the applicable jurisdiction or in compliance with an available exemption from
registration or qualification. PAH and PB Netherlands have agreed, under the
registration rights agreement and subject to limitations specified in the
registration rights agreement, to register or qualify the new units for offer or
sale under the securities or blue sky laws of the applicable jurisdictions as
any holder of the units reasonably requests in writing. If a holder of old units
does not exchange the old units for new units according to the terms of the
exchange offer, the old units will continue to be subject to the restrictions on
transfer contained in the indenture governing the units and in the legend
printed on the old units. In general, the old units may not be offered or sold,
unless registered under the Securities Act, except under an
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8
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exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Holders of old units do not have any appraisal
or dissenters' rights in connection with the exchange offer. See "The Exchange
Offer -- Resales of New Units."
The old units are currently eligible for trading in the Private Offerings,
Resales and Trading through Automated Linkages (PORTAL) market. Following
commencement of the exchange offer but prior to its completion, the old units
may continue to be traded in the PORTAL market. Following completion of the
exchange offer, however, the new units will not be eligible for trading in the
PORTAL market.
The New Units
The terms of the new units and the old units are identical in all material
respects, except for transfer restrictions, registration rights relating to the
old units and certain provisions relating to increased interest rates in
connection with the old units under circumstances relating to the timing of the
exchange offer, which rights will terminate upon completion of the exchange
offer. The new units will evidence the same debt as the old units and will be
governed by the same indenture. This summary is not intended to be complete. For
a more complete description of the terms of the new units and new notes, see
"Description of the New Units" and "Description of the New Notes," respectively,
in this prospectus.
Issuers ......................... Phibro Animal Health Corporation, the US
issuer, and Philipp Brothers Netherlands III
B.V., the Dutch issuer.
Securities Offered .............. 105,000 new units consisting of $85.0
million principal amount of 13% senior
secured notes due 2007 of Phibro Animal
Health Corporation, the new US notes, and
$20.0 million principal amount of 13% senior
secured notes due 2007 of Philipp Brothers
Netherlands III B.V., the new Dutch notes.
The new US notes and new Dutch notes are
collectively referred to as the new notes.
Maturity ........................ December 1, 2007.
Interest Rate and
Payment Dates ................... Each issuer will pay interest on its new
notes at a rate equal to 13% per year.
Interest on the notes will be payable
semi-annually in cash in arrears on June 1
and December 1 of each year, beginning on
December 1, 2003.
Use of Proceeds ................. The new units issued in connection with the
exchange offer are only being issued in
exchange for your old units. We will not
receive any cash proceeds from the issuance
of the new units pursuant to the exchange
offer. All old units accepted by us in this
exchange offer will be cancelled.
Separation Events ............... The new notes of each issuer will not trade
separately unless an event of default on the
new notes has occurred, a tax redemption of
the new Dutch notes related to certain
changes affecting withholding taxes has
occurred or a change in control of the Dutch
issuer has occurred.
Guarantees ...................... All of the US issuer's existing and future
domestic restricted subsidiaries will
guarantee the new notes of each issuer on a
senior secured basis. The new Dutch notes
will also be guaranteed by the US issuer and
by the Dutch issuer's current and future
restricted subsidiaries, including PAH
Belgium.
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9
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The guarantees of the new US notes by its
domestic restricted subsidiaries and the
guarantees of the new Dutch notes by the US
issuer, its domestic restricted subsidiaries
and each of the restricted subsidiaries of
the Dutch issuer will be senior secured
obligations of the US guarantors and such
restricted subsidiaries and will rank equal
in right of payment with all of their
respective existing and future senior
indebtedness.
Security Interest ............... The new US notes and related guarantees will
be secured by substantially all of the US
issuer's assets and the assets of the US
issuer's domestic restricted subsidiaries,
other than real property and interests
therein, including a pledge of the capital
stock of domestic restricted subsidiaries
owned directly by the US issuer and such
domestic restricted subsidiaries. However,
no such pledge will include more than 65% of
the voting stock and 100% of the non-voting
stock of foreign subsidiaries owned by the
US issuer's domestic restricted subsidiaries
or the US issuer. Pursuant to the terms of
an intercreditor agreement, the security
interest securing the new US notes and the
related guarantees made by the US issuer's
domestic restricted subsidiaries will be
subordinated to a lien securing the US
issuer's new domestic senior credit
facility. Such security interest will also
be subordinated to Permitted Liens securing
$0.4 million of other existing indebtedness
and certain other secured indebtedness
permitted to be incurred by the US issuer
under the indenture and will be structurally
subordinated to all liabilities of the US
issuer's foreign subsidiaries and
unrestricted subsidiaries.
The new Dutch notes and related guarantees
will be secured by a pledge of all of the
accounts receivable, a security interest or
floating charge on the inventory to the
extent permitted by applicable law, a
mortgage on substantially all of the real
property of the Dutch issuer and each of its
restricted subsidiaries, a pledge of 100% of
the stock of each direct subsidiary of the
Dutch issuer and its restricted
subsidiaries, a pledge of the intercompany
loans made by the Dutch issuer to its
restricted subsidiaries and substantially
all of the assets of the US guarantors,
other than real property and interests
therein.
Ranking ......................... The new notes of each issuer will be senior
secured obligations of that issuer and will
rank equal in right of payment with any of
the other senior indebtedness of that
issuer, including in the case of the US
issuer, indebtedness under the US issuer's
new domestic senior credit facility.
Optional Make-Whole
Redemption ...................... The issuers may, at their option, redeem
some or all of their new notes at any time
prior to June 1, 2005 by paying the greater
of (i) 100% of the aggregate principal
amount of their notes and (ii) the sum of
the present values of 114% of the aggregate
principal amount of their notes plus
scheduled interest payments on the new notes
through and including June 1, 2005,
discounted to the
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redemption date on a semi-annual basis at
the adjusted treasury rate plus 50 basis
points, together with, in each case, accrued
and unpaid interest to the redemption date.
The foregoing optional redemption of the
notes shall include both new US notes and
new Dutch notes on a pro rata basis based
upon the aggregate principal amount of notes
outstanding at the time of redemption,
unless a change of control of the Dutch
issuer has occurred.
Optional Redemption ............. On or after June 1, 2005, the issuers may
redeem all or a portion of the new notes at
their option at the redemption prices
(expressed as a percentage of the principal
amount), plus accrued and unpaid interest,
if redeemed during the six-month period
commencing on the dates indicated below:
Period Percentage
------ ----------
June 1, 2005 .................... 114.0%
December 1, 2005 ................ 109.0%
June 1, 2006 .................... 105.0%
December 1, 2006, and thereafter 101.0%
Prior to June 1, 2005, the issuers may
redeem on one or more occasions up to 35% of
the aggregate principal amount of the new
notes at a redemption price equal to 113%
plus accrued and unpaid interest with the
net proceeds of any public equity offering.
The foregoing optional redemption of the new
notes shall include both new US notes and
new Dutch notes on a pro rata basis based
upon the aggregate principal amount of the
notes outstanding at the time of redemption,
unless a change of control of the Dutch
issuer has occurred.
The Dutch issuer may redeem the new Dutch
notes in whole, and not in part, at 100% of
their principal amount plus accrued and
unpaid interest in the event of certain
changes affecting withholding taxes
described below in "Description of the New
Notes."
Change of Control Offer ......... If the US issuer experiences a change of
control, each holder of new units will have
the right to sell the issuers all or a
portion of the new notes held by it at 101%
of the aggregate principal amount of such
new notes, plus accrued and unpaid interest,
if any, and additional interest, if any, to
the date of purchase. If the Dutch issuer
experiences a change of control, it may, at
its option at any time, redeem its new notes
in whole, and not in part, at the optional
redemption prices otherwise applicable on
the redemption date. If the Dutch issuer has
not delivered a notice of redemption to the
holders within 30 days following a change of
control, it shall be required to commence an
offer to purchase its new notes on the same
terms and conditions that apply to it in the
event of a change in control of the US
issuer; provided, that at any time prior to
the consummation of the offer to purchase
its new notes, the Dutch issuer may deliver
an optional redemption notice to redeem all
of its notes in lieu of completing the offer
to purchase.
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Asset Sale Offers ............... If either issuer or any of its restricted
subsidiaries sells assets and does not
reinvest the proceeds from the sale of its
assets in its respective business, the
issuers may have to offer to use the
proceeds to repurchase new notes at 100% of
their aggregate principal amount plus
accrued and unpaid interest to the date of
purchase. Any such repurchase of the new
notes shall include both new US notes and
new Dutch notes on a pro rata basis based
upon the aggregate principal amount of the
notes outstanding at the time of such
repurchase, unless a change of control of
the Dutch issuer has occurred.
Excess Cash Flow Offers ......... If we have excess cash flow, the issuers may
have to offer to use 50% of the excess cash
flow to repurchase a portion of the new
notes at 102.5% of their aggregate principal
amount, plus accrued and unpaid interest.
Any such repurchase of the new notes shall
include both new US notes and new Dutch
notes on a pro rata basis based upon the
aggregate principal amount of the notes
outstanding at the time of such repurchase,
unless a change of control of the Dutch
issuer has occurred.
Restrictive Covenants ........... The indenture governing the new notes will
contain covenants that, among other things,
limit our ability to:
o incur additional indebtedness or issue
disqualified capital stock;
o make investments;
o pay dividends or make other restricted
payments;
o issue capital stock of certain
subsidiaries;
o enter into transactions with affiliates;
o create or incur liens;
o transfer or sell assets;
o incur dividend or other payment
restrictions affecting certain
subsidiaries; and
o consummate a merger, consolidation or
sale of all or substantially all of our
assets.
These covenants are subject to a number of
important exceptions described below in
"Description of the New Notes -- Certain
Covenants."
Board Representation ............ A Noteholder Representative has been
designated to serve on the board of
directors of the Company. See "Description
of the New Notes -- Certain Covenants --
Noteholder Representative."
Risk Factors
An investment in the new units and the new notes involves risks. You
should carefully consider the information in this prospectus. In particular, you
should evaluate the specific risk factors set forth under the caption "Risk
Factors", as well as all other information set forth in this prospectus.
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Summary Historical and Unaudited Consolidated Financial Data
The summary consolidated financial data set forth below reflect continuing
operations. Our Odda, Carbide and MRT businesses have been classified as
discontinued operations and are not included below. Odda operations were
terminated in February 2003. Carbide was sold in April 2003, and MRT was sold in
August 2003.
The following table sets forth our summary historical and unaudited
consolidated financial data for the periods ended and the dates indicated. We
have derived the summary historical consolidated financial data for the years
ended June 30, 2001, 2002 and 2003 from our audited consolidated financial
statements and the related notes for such years included elsewhere in this
prospectus. We have derived the summary historical consolidated financial data
as of December 31, 2002 and 2003 and for the six-month periods ended December
31, 2002 and 2003 from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus. In the opinion of management, our
unaudited consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of our
financial position, the results of our operations and cash flows.
Six Months Ended
Fiscal Year Ended June 30, December 31,
---------------------------------- --------------------
2001 2002 2003 2002 2003
----- ----- ----- ----- -----
(dollars in thousands)
Results of Operations:
Net sales........................... $319,664 $340,549 $355,225 $176,416 $183,213
Gross profit........................ 69,359 81,994 91,497 46,188 44,017
Selling, general and administrative
expenses......................... 63,925 72,277 66,360 32,053 33,397
Operating income.................... 5,434 9,717 25,137 14,135 10,620
Other Financial Data:
Depreciation and amortization....... 10,405 12,680 12,883 6,687 6,745
Capital expenditures................ 6,610 8,677 9,045 5,385 2,332
As of December 31,
As of June 30, --------------------
2003 2002 2003
-------------- ----- -----
(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents........... $ 11,179 $ 13,788 $ 8,682
Fixed assets........................ 66,440 62,895 63,327
Total assets........................ 274,347 286,051 254,936
Total debt.......................... 165,429 175,086 167,920
Series B and C redeemable
preferred stock(1)............... 68,881 61,888 17,065
Total stockholders' deficit......... (84,510) (78,320) (43,091)
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(1) Includes Liquidation Value plus Equity Value. See "Description of Capital
Stock."
Ratio Of Earnings To Fixed Charges
The following table sets forth our historical consolidated ratio of
earnings to fixed charges for the periods indicated.
Fiscal Six Months
Fiscal Year Ended June 30, Ended December 31,
----------------------------------------------------- ------------------
1999 2000 2001 2002 2003 2002 2003
----- ----- ----- ----- ----- ------ ------
(dollars in thousands, except ratios)
Ratio of earnings to
fixed charges(a)........ -- 1.2 -- -- 1.5 1.6 3.8
- ----------
(a) For purposes of computing the consolidated ratio of earnings to fixed
charges, earnings represent earnings (loss) from continuing operations
before income taxes, loss on equity investments and fixed charges. Fixed
charges include interest expense (whether expensed or capitalized) and a
portion of rentals determined to be representative of the interest
component of such rental expense. Management believes that one-third is
representative of the interest component of such rental expense. The
amounts by which earnings were inadequate to cover fixed charges were
$603, $11,551 and $10,921 for the fiscal years ended June 30, 1999, 2001
and 2002, respectively.
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
The pro forma ratio of earnings to fixed charges for the fiscal year ended
June 30, 2003 and the fiscal six months ended December 31, 2003 was in each case
1.1x, giving pro forma effect to the offering of the Senior Secured Notes due
2007 and the use of net proceeds of the offering as described under "Use of
Proceeds." Earnings reflect the pro forma earnings as if the transaction had
been completed on July 1, 2002. Earnings represent earnings from continuing
operations before income taxes, loss on equity investments and fixed charges.
Fixed charges reflect the change in the interest expense associated with the
offering of the Senior Secured Notes plus the estimate of the portion of rents
representative of interest.
- --------------------------------------------------------------------------------
14
RISK FACTORS
An investment in the new units involves a significant degree of risk,
including the risks described below. You should carefully consider the following
risk factors and the other information in this prospectus before deciding to
exchange old units for new units. The risks described below are not the only
ones facing us. This prospectus contains forward-looking statements that involve
risks and uncertainties, including, in particular, the statements about our
plans, strategies and prospects under the headings "Offering Circular Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business." Although we believe that our plans, intentions and
expenditures reflected in or suggested by such forward-looking statements are
reasonable, we can give no assurance that such plans, intentions or expectations
will be achieved. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth below and elsewhere in this prospectus. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the following cautionary statements.
Risk Factors Related to the Exchange Offer
If you fail to exchange your old units for new units, your old units will
continue to be subject to restrictions on transfer.
The old units were not registered under the Securities Act or under the
securities laws of any state and may not be resold, offered for resale or
otherwise transferred unless they are subsequently registered or resold under an
exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your old units for new
units under the exchange offer, you will not be able to resell, offer to resell
or otherwise transfer the old units unless they are registered under the
Securities Act or unless you resell them, offer to resell or otherwise transfer
them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, we will no longer
be under an obligation to register the old units under the Securities Act except
in the limited circumstances provided under the registration rights agreement.
In addition, if you want to exchange your old units in the exchange offer for
the purpose of participating in a distribution of the new units, you may be
deemed to have received restricted securities, and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
If an active trading market for the new units does not develop, the
liquidity and value of the new units could be harmed.
While the old units are currently eligible for trading on the PORTAL
market, even if the registration statement becomes effective, which will
generally allow resale of the new units, there is no established trading market
for the new units. Neither issuer intends to list the new units on any U.S.
national securities exchange or automated quotation system. We cannot assure you
that an active trading market will develop for the new units. If no active
trading market develops, you may not be able to resell your new units at their
fair market value or at all. Future trading prices of the new units will depend
on many factors, including, among other things, prevailing interest rates, our
operating results, our ability to complete the exchange offer and the market for
similar securities. The initial purchaser has advised us that it currently
intends to make a market in the new units, but it is not obligated to do so and
may discontinue any market making in the new units at any time.
The issuance of the new units may adversely affect the market for the old
units.
To the extent that the old units are tendered for exchange and accepted in
the exchange offer, the trading market for the untendered and tendered but
unaccepted old units could be adversely affected.
You must comply with the exchange offer procedures in order to receive the
new units.
The new units will be issued in exchange for the old units only after
timely receipt by the exchange agent of the old units or a book-entry
confirmation or a confirmation of blocking instructions related thereto, a
properly completed and executed letter of transmittal, or an agent's message and
all other required documentation. If you want to tender your old units in
exchange for new units, you should allow sufficient time to ensure timely
delivery. None of PAH, PB Netherlands nor the exchange agent are under any duty
to give you
15
notification of defects or irregularities with respect to tenders of old units
for exchange. Old units that are not tendered or are tendered but not accepted
will, following the exchange offer, continue to be subject to the existing
transfer restrictions. In addition, if you tender the old units in the exchange
offer to participate in a distribution of the new units, you will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. For additional
information, please refer to the sections entitled "The Exchange Offer" and
"Plan of Distribution" later in this prospectus.
Risk Factors Relating to the New Units and the New Notes
Our substantial level of indebtedness could adversely affect our financial
condition and prevent us from fulfilling our obligations under the new units and
the new notes.
We have a substantial amount of debt. As of December 31, 2003, we had
approximately $167.9 million of total indebtedness outstanding and our ratio of
earnings to fixed charges was 3.8x. We had the ability to borrow, as of December
31, 2003, an additional $9.3 million under the revolving portion of our senior
credit facility, subject to the restrictions in the indenture and in the senior
credit facility. Additionally, subject to restrictions in the indenture and the
senior credit facility, we may incur additional indebtedness.
Our high level of indebtedness could have important consequences to you,
including the following:
o it may make it difficult for us to satisfy our obligations under the
notes and our other indebtedness and contractual and commercial
commitments;
o we must use a substantial portion of our cash flow from operations
to pay interest on the notes and our other indebtedness, which will
reduce the funds available to us for other purposes;
o all of the indebtedness outstanding under our senior credit facility
will have a prior ranking claim on our assets and will mature prior
to the notes;
o our senior credit facility has a variable rate of interest, which
exposes us to the risk of increased interest rates;
o our ability to obtain additional debt financing in the future for
working capital, capital expenditures, acquisitions or general
corporate purposes may be limited;
o our high level of indebtedness could limit our flexibility in
reacting to changes in the industry and make us more vulnerable to
adverse changes in our business or economic conditions in general;
o our high level of indebtedness could place us at a competitive
disadvantage to those of our competitors who operate on a less
leveraged basis;
o if we fail to comply with the covenants in the indenture relating to
the notes, our senior credit facility or in the instruments
governing our other indebtedness (including the existing indenture,
as amended), such failure could have a material adverse effect on
our business and our ability to repay the notes.
Our ability to make payments with respect to the notes and to satisfy our
other debt obligations will depend on our future operating performance and our
ability to refinance our indebtedness, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond our control.
We may not be able to generate sufficient cash flow to meet our debt
service and other obligations due to events beyond our control.
Upon the issuance of the old notes, our interest expense increased
compared to prior years. Our ability to generate cash flows from operations and
to make scheduled payments on our indebtedness, including equipment and other
leases, will depend on our future financial performance. Our future performance
will be affected by a range of economic, competitive and business factors that
we cannot control, such as general economic and financial conditions in our
industry or the economy at large. A significant reduction in operating cash
flows resulting from changes in economic conditions, increased competition, or
other events beyond our control could
16
increase the need for additional or alternative sources of liquidity and could
have a material adverse effect on our business, financial condition, results of
operations, prospects and our ability to service our debt and other obligations.
If we are unable to service our indebtedness, we will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
acquisitions and capital expenditures, selling assets, restructuring or
refinancing our indebtedness, or seeking additional equity capital. We cannot
assure you that any of these alternative strategies could be effected on
satisfactory terms, if at all, or that they would yield sufficient funds to make
required payments on the notes and our other indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
We urge you to consider the information under "Capitalization,"
"Prospectus Summary -- Summary Historical and Unaudited Consolidated Financial
Data," "Description of the New Notes," and "Description of Certain Indebtedness"
for more information on these matters.
We will depend on distributions from our subsidiaries to meet our
obligations under the new notes.
Substantially all of our operating income comes from our subsidiaries.
Therefore, we will depend on dividends and other distributions from our
restricted subsidiaries to generate the funds necessary to meet our obligations,
including the payment of principal and interest on the notes. The ability of our
subsidiaries to pay such dividends will be subject to, among other things, the
terms of any debt instruments of our subsidiaries then in effect and applicable
law. In addition, in the case of our foreign subsidiaries, dividends and
interest may be subject to foreign withholding taxes, which would reduce the
amount of funds we receive from such foreign subsidiaries. Distributions from
our foreign subsidiaries may also be subject to fluctuations in currency
exchange rates, which could reduce the amount of funds we receive from such
foreign subsidiaries.
The Dutch issuer is a finance subsidiary with limited assets.
The intercompany loan to PAH Belgium will be the only significant asset of
the Dutch issuer. Therefore the Dutch issuer will be entirely dependent on
payments on the intercompany loan to PAH Belgium to make payments on the Dutch
notes. In return, PAH Belgium will depend on the income it receives from its
business operations to service their indebtedness in respect of the intercompany
loan granted to them by the Dutch issuer. Your right to receive payments on the
Dutch notes could be adversely affected if PAH Belgium is declared bankrupt,
liquidates or reorganizes.
The collateral securing the new notes may be insufficient or unavailable
in the event of a default.
No appraisal of the value of the collateral has been made in connection
with this offering and the value of the collateral in the event of liquidation
will depend on market and economic conditions, the availability of buyers and
other factors. Consequently, we cannot assure you that liquidating the
collateral securing the notes would produce proceeds in an amount sufficient to
pay any amounts due under the notes after also satisfying the obligations to pay
any other senior secured creditors. Nor can we assure you that the fair market
value of the collateral securing the notes would be sufficient to pay any
amounts due under the notes following their acceleration.
The notes and guarantees related thereto will be effectively subordinated,
to the extent of the value of assets securing the notes and such guarantees, to
indebtedness that may be incurred under the domestic senior credit facility and
our performance bonds. In the event of a default under the notes, the proceeds
from the sale of the collateral may not be sufficient to satisfy in full our
obligations under the domestic senior credit facility, our performance bonds and
the notes. The amount to be received upon such a sale would depend upon numerous
factors, including the timing and manner of the sale. The book value of the
collateral will be less than the principal amount of the notes offered hereby.
By its nature, the collateral will be illiquid and may have no readily
ascertainable market value. Accordingly, there can be no assurance that the
collateral can be sold in a short period of time or that the proceeds obtained
therefrom will be sufficient to pay all amounts owing to the lenders under the
domestic senior credit facility and the holders of the notes. In addition, our
failure or inability to pay rent under real property leases could cause the loss
of certain collateral. To the extent that third parties (including the lenders
under the domestic senior credit facility) enjoy permitted liens, such third
parties may have rights and remedies with respect to the property subject to
such liens that, if exercised, could adversely affect the value of the
collateral. Additionally, the terms of the indenture allow us to issue
additional notes provided that we meet a specified coverage ratio. The indenture
does not require that we maintain the current
17
level of collateral or maintain a specific ratio of indebtedness to asset
values. Any additional notes issued pursuant to the indenture will rank pari
passu to the notes issued in the exchange offer and be entitled to the same
rights and priority with respect to the collateral. Thus, the issuance of
additional notes pursuant to the indenture may have the effect of significantly
diluting your ability to recover payment in full from the then existing pool of
collateral. See "Description of the New Notes -- Security."
The lien-ranking provisions set forth in the indenture governing the notes
limit the rights of the holders of the new notes with respect to the collateral
securing the new notes and the guarantees related thereto.
The rights of the holders of the notes with respect to the collateral of
the US issuer and its domestic restricted subsidiaries that secure the notes are
substantially limited pursuant to the terms of the lien-ranking provisions set
forth in the intercreditor agreement relating to the indenture governing the
notes. Under those lien-ranking provisions, at any time that obligations that
have the benefit of liens that are senior to the liens securing the notes and
such guarantees pursuant to the terms thereof are outstanding, any actions that
may be taken in respect of that collateral, including the ability to cause the
commencement of enforcement proceedings against that collateral and to control
the conduct of such proceedings, and releases of that collateral from the lien
of the collateral documents of the US issuer and its domestic restricted
subsidiaries, will be at the direction of the holders of the obligations secured
by such senior liens, and the collateral agent, on behalf of itself, the trustee
and the holders of the notes, will not have the ability to control or direct
such actions, even if the rights of the holders of the notes are adversely
affected. Additional releases of that collateral from the liens securing the
notes are permitted under some circumstances.
The ability of the collateral agent to foreclose on the collateral may be
limited pursuant to bankruptcy laws.
The right of the collateral agent, as a secured party under the collateral
documents for the benefit of itself, the trustee and the holders of the US
notes, to foreclose upon and sell the collateral upon the occurrence of a
payment default is likely to be significantly impaired by applicable bankruptcy
laws, including the automatic stay provision contained in Section 362 of the
Bankruptcy Code. Under applicable federal bankruptcy laws, a secured creditor is
prohibited from repossessing its security from a debtor in a bankruptcy case, or
from disposing of security repossessed from such a debtor, without bankruptcy
court approval. Moreover, applicable federal bankruptcy laws generally permit
the debtor to continue to retain and use collateral even though the debtor is in
default under the applicable debt instruments. In view of the broad
discretionary powers of a bankruptcy court, we cannot predict whether payments
under the US notes would be made following commencement of, and during the
pendency of, a bankruptcy case, whether or when the collateral agent could
foreclose upon or sell the collateral or whether or to what extent holders of
notes would be compensated for any delay in payment or loss of value of the
collateral. Furthermore, if a bankruptcy court determines that the value of the
collateral is not sufficient to repay all amounts due on the notes, holders of
US notes would hold "under-secured claims." Applicable federal bankruptcy laws
do not permit the payment or accrual of interest, costs and attorney's fees for
"under-secured claims" during a debtor's bankruptcy case.
There are two primary insolvency regimes under Dutch law: the first,
moratorium of payment (surseance van betaling) is intended to facilitate the
reorganization of a debtor's debts and enable the debtor to continue as a going
concern. The second, bankruptcy (faillissement), is designed to liquidate and
distribute the assets of a debtor to its creditors. Under Netherlands law the
holders of the Dutch notes can in the event of bankruptcy or moratorium of
payment exercise the rights afforded to pledgees as if there were no bankruptcy
or moratorium of payment. However, bankruptcy or moratorium of payment involving
the Dutch issuer would affect the position of the holders of the Dutch notes as
pledgees in some respects, the most important of which are: (i) the right of
pledge will not extend to accounts receivable that arise under an agreement
creating continuing obligations of the Dutch issuer and become due and payable
on or after the date on which the Dutch issuer is declared bankrupt or granted a
moratorium of payments, (ii) the right of pledge will not extend to inventory
that is acquired by the Dutch issuer on or after the date on which the Dutch
issuer is declared bankrupt or granted a moratorium of payments, (iii) payments
received by the Dutch issuer from the debtors of pledged accounts receivable
after bankruptcy or moratorium of payments involving the Dutch issuer having
been declared, will be part of the bankrupt estate, although the holders of the
Dutch notes have the right to receive such amounts by preference after deduction
of certain costs, (iv) a mandatory "cooling-off" period of up to two months may
apply in case of bankruptcy or moratorium of payments involving the Dutch
issuer, which, if applicable, would
18
delay the exercise of the rights of pledge on the shares of PAH Belgium and the
accounts receivable and (v) the holders of the Dutch notes may be obliged to
enforce their rights of pledge within a reasonable period as determined by the
judge-commissioner (rechter-commissaris) appointed by the court in case of
bankruptcy of the Dutch issuer.
The indenture governing the new notes and the instruments governing our
other indebtedness impose significant operating and financial restrictions on us
that may prevent us from pursuing certain business opportunities and restrict
our ability to operate our business.
The indenture governing the notes and the senior credit facility contain
covenants that restrict our ability to take various actions, such as:
o incur additional indebtedness or issue disqualified capital stock;
o make investments
o pay dividends or make other restricted payments;
o issue capital stock of certain subsidiaries;
o enter into transactions with affiliates;
o create or incur liens;
o transfer or sell assets;
o incur dividend or other payment restrictions affecting certain
subsidiaries; and
o consummate a merger, consolidation or sale of all or substantially
all of our assets.
Our ability to comply with these covenants can be affected by events
beyond our control and we cannot assure you that we will satisfy those
requirements. A breach of any of these provisions could result in a default
under these instruments, which could allow all amounts outstanding thereunder to
be declared immediately due and payable. We cannot assure you that our assets
would be sufficient to repay such amounts (including amounts due under the
notes) in full. We may also be prevented from taking advantage of business
opportunities that arise if we fail to meet certain financial ratios or because
of the limitations imposed on us by the restrictive covenants under these
instruments. We urge you to read the information under "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Description of Certain Indebtedness" and "Description of
the New Notes -- Certain Covenants" for a more detailed discussion of the
substantive requirements of these covenants.
We may be unable to purchase the new notes upon a change of control.
Upon the occurrence of a change of control, we will be required to offer
to purchase all outstanding notes at a price equal to 101% of the principal
amount of the notes, together with accrued and unpaid interest, if any, and
additional interest or liquidated damages, if any, to the date of repurchase.
However, it is possible that we will not have sufficient funds at the time
of the change of control to make the required repurchase of the notes or that
restrictions in our new domestic senior credit facility will not allow such
repurchases. If we are required to repurchase the notes, we would probably
require third party financing. We cannot be sure that we would be able to obtain
third party financing on acceptable terms, or at all. Our failure to purchase
the notes would be a default under the indenture, which would result in a
default under our new domestic senior credit facility. See "Description of the
New Notes -- Change of Control" and "Description of Certain Indebtedness --
Senior Credit Facility."
One of the circumstances under which a change of control may occur is upon
the sale or disposition of all or substantially all of our capital stock or
assets. However, the phrase "all or substantially all" will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or disposition of "all or substantially all" of our
capital stock or assets has occurred, in which case, the ability of a holder of
the notes to obtain the benefit of an offer to repurchase all of a portion of
the notes held by such holder may be impaired.
19
A court could cancel the guarantees and security interests under
fraudulent conveyance laws or certain other circumstances.
All of our present and future domestic restricted subsidiaries will
guarantee the notes and provide assets as security for such guarantees. If,
however, such a subsidiary becomes a debtor in a case under the Bankruptcy Code
or encounters other financial difficulty, under federal or state fraudulent
conveyance laws, renewable transactions or preferential payments, a court in the
relevant jurisdiction might avoid or cancel its guarantee and/or the liens
created by the security interest. The court might do so if it found that, when
the subsidiary entered into its guarantee and security arrangement or, in some
states, when payments become due thereunder, it received less than reasonably
equivalent value or fair consideration for such guarantee and/or security
arrangement and either was or was rendered insolvent, was left with inadequate
capital to conduct its business, or believed or should have believed that it
would incur debts beyond its ability to pay. The court might also avoid such
guarantee and/or security arrangement, without regard to the above factors, if
it found that the subsidiary entered into its guarantee and/or security
arrangement with actual or deemed intent to hinder, delay, or defraud its
creditors.
A court could find that a subsidiary did not receive reasonably equivalent
value or fair consideration for its guarantee and/or security arrangement unless
it benefited directly or indirectly from the issuance of the notes. If a court
avoided such guarantee and/or security arrangement, you would no longer have a
claim against such subsidiary. In addition, the court might direct you to repay
any amounts already received from such subsidiary. If the court were to avoid
any guarantee and/or security arrangement, we cannot assure you that funds would
be available to pay the notes from another subsidiary or from any other source.
In addition to the grounds set out above and other grounds for invalidating
guarantees and security in insolvency, PAH Belgium's guarantee of the Dutch
notes and/or the security interests securing such guarantee could be invalidated
by a Belgian court if it is held to be ultra vires or contrary to PAH Belgium's
corporate interest. This could be the case if the court were to find that PAH
Belgium did not receive a benefit proportionate to the risk it incurred under
the guarantee, or if such risk is disproportionate to PAH Belgium's financial
means.
The indenture will state that the liability of each subsidiary on its
guarantee and security arrangement is limited to the maximum amount that the
subsidiary can incur without risk that the guarantee or security arrangement
will be subject to avoidance as a fraudulent conveyance. This limitation may not
protect the guarantees and/or security arrangements from a fraudulent conveyance
attack or, if it does, that the guarantees and/or security arrangements will be
in amounts sufficient, if necessary, to pay obligations under the notes when
due.
The new notes will be effectively subordinated to all existing and future
liabilities, including all indebtedness, of our foreign and unrestricted
subsidiaries.
Our operations are predominantly conducted through subsidiaries. Although
our domestic restricted subsidiaries have guaranteed the notes and entered into
security arrangements with respect to certain of their assets to secure
repayment of the notes, our foreign and unrestricted subsidiaries (other than
the Dutch issuer and its restricted subsidiaries with respect to the Dutch notes
and the related guarantees) have not guaranteed, granted liens or otherwise
become obligated with respect to the notes. Claims of creditors of such
subsidiaries, including trade creditors, will generally have priority as to the
assets of such subsidiaries over the claims of us and the holders of our
indebtedness, including the notes. The notes will therefore be effectively
subordinated to all existing and future liabilities, including indebtedness, of
our foreign subsidiaries (other than the Dutch issuer and its restricted
subsidiaries with respect to the Dutch notes and the related guarantees). As of
June 30, 2003, our foreign subsidiaries had indebtedness for borrowed money and
had other liabilities of approximately $44 million reflected on our consolidated
balance sheet. For fiscal 2003, our foreign subsidiaries contributed
approximately 36% of our consolidated net sales.
In addition, distributions and intercompany transfers to us from our
subsidiaries will depend on:
o their earnings;
o covenants contained in our and their debt agreements, including our
new domestic senior credit facility and the notes;
o covenants contained in other agreements to which we or our
subsidiaries are or may become subject;
20
o business and tax considerations; and
o applicable law, including laws regarding the payment of dividends
and distributions.
We cannot assure you that the operating results of our subsidiaries at any
given time will be sufficient to make distributions or other payments to us or
that any distributions and/or payments will be adequate to pay any amounts due
under the notes or our other indebtedness.
There is no established trading market for the new units, and you may not
be able to sell them quickly or at the price you paid.
The units are a new issue of securities and there is no established
trading market for the units. Although, upon being declared effective, the
registration statement will generally allow resales of the exchange units, the
exchange units will constitute a new issue of securities with no established
trading market. We do not intend to apply for the units or any exchange units to
be listed on any security exchange or to arrange for quotation on any automated
dealer quotation systems; however, we expect that the units will be eligible for
trading in the PORTAL market by qualified institutional buyers. The initial
purchaser has advised us that it intends to make a market in the units and the
exchange units, but it is not obligated to do so and may discontinue any market
making in the units or exchange units at any time, in its sole discretion. You
may not be able to sell your units or exchange units at a particular time or at
favorable prices. As a result, we cannot assure you as to the liquidity of any
trading market for the units or the exchange units or, in the case of any
holders or the units that do not exchange them, the trading market for the units
following the offer to exchange the units for exchange units. As a result, you
may be required to bear the financial risk of your investment in the units
indefinitely. Future trading prices of the units and exchange units may be
volatile and will depend on many factors, including:
o our operating performance and financial condition;
o our ability to complete the offer to exchange the units for the
exchange units;
o the interest of securities dealers in making a market for them; and
o the market for similar securities.
As a result of the Dutch notes being issued in U.S. dollars, we may be
subject to additional currency risks.
The Dutch notes will be issued and paid for, and the interest paid on
these notes will be paid in, U.S. dollars. The Dutch issuer will lend the
proceeds of the Dutch notes to PAH Belgium, and will pay interest and principal
on the Dutch notes primarily from interest and principal repayments on such loan
to PAH Belgium or through dividends from PAH Belgium. PAH Belgium, however,
receives its revenues primarily in Euros. As a result, in the event that the
U.S. dollar appreciates against the Euro, PAH Belgium may have difficulty in
generating the U.S. dollars necessary to repay the U.S. dollar loan from its
parent, the Dutch issuer. From time to time, if we determine it is appropriate
and advisable to do so, we may seek to lessen the effect of exchange rate
fluctuations through the use of derivative financial instruments. We cannot
assure you, however, that we will be successful in these efforts.
Belgian law may limit the guarantee and the related security of PAH
Belgium with respect to the Dutch notes.
Under Belgian law, the following factors may limit the proceeds which
could ultimately be obtained in respect of the security provided by PAH Belgium:
o The floating charge over the assets of PAH Belgium is restricted by
statute to 50% of all of the inventory (work-in-progress and
finished goods) of PAH Belgium. The remaining one-half of the
inventory would thus fall outside the scope of the charge, and would
be available for payment to unsecured creditors.
o Enforcement of the floating charge may trigger the bankruptcy of PAH
Belgium, as it could significantly impair the use of the business
assets for the ongoing conduct of PAH Belgium's business.
o Enforcement of the share pledge over the shares of PAH Belgium, the
floating charge and the real property mortgage of PAH Belgium is
subject to mandatory court intervention and approval. In insolvency,
the insolvency official (under supervision of the court) will handle
the sale. At certain stages of the process,
21
PAH Belgium itself or other creditors could intervene. This could
lead to significant delays in enforcement, which in turn could
adversely affect the value of the assets, the timing of realization
and therefore the amount of proceeds ultimately obtained for the
benefit of the noteholders.
o In any Belgian insolvency proceedings involving PAH Belgium, stays
on enforcement of security are likely to be imposed. These stays
could be significant, which could adversely affect the ultimate
value of the collateral. In addition, under Belgian bankruptcy law,
the trustee in bankruptcy may seek to set aside certain
pre-bankruptcy transactions, including transactions at an
undervalue, new security for pre-existing debts, and transactions
entered into with the knowledge that the bankrupt debtor was in a
state of insolvency.
Risk Factors Relating to Our Business
We have significant assets located outside the United States and a
significant portion of our sales and earnings are attributable to operations
conducted abroad.
During fiscal 2003, we operated manufacturing and other facilities in over
17 countries and sold our products in over 40 countries. At June 30, 2003,
approximately 53% of our assets were located outside the United States,
representing manufacturing facilities in Belgium, Brazil, Israel, the United
Kingdom and France, and, for fiscal 2003, approximately 36% of our net sales
consisted of sales made by us outside the United States. Changes in the relative
values of currencies take place from time to time and could in the future
adversely affect our results of operations as well as our ability to meet
interest and principal obligations on the notes. To the extent that the U.S.
dollar weakens or strengthens versus the applicable foreign currency, our
results are favorably or unfavorably affected. We may from time to time manage
this exposure by entering into foreign currency forward exchange contracts. Such
contracts generally are entered into with respect to anticipated revenues
denominated in foreign currencies for which timing of the receipt of payment can
be reasonably estimated. No assurances can be given that such hedging activities
will not result in losses which will have an adverse effect on our financial
condition or results of operations. In addition, there are times when we do not
hedge against foreign currency fluctuations and are therefore subject to the
risks associated with fluctuations in currency exchange rates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 15 to our Consolidated Financial Statements included elsewhere herein.
In addition, international manufacturing, sales and raw materials sourcing
are subject to other inherent risks, including possible nationalization or
expropriation, labor unrest, political instability, price and exchange controls,
limitation on foreign participation in local enterprises, health-care
regulation, export duties and quotas, domestic and international customs and
tariffs, unexpected changes in regulatory environments, difficulty in obtaining
distribution and support, and potentially adverse tax consequences. Although
such risks have not had a material adverse effect on us in the past, there can
be no assurance that these factors will not have a material adverse impact on
our ability to increase or maintain our international sales or on our results of
operations in the future.
We have assets located in Israel and a portion of ours sales and earnings
are attributable to operations conducted in Israel.
Israeli operations are conducted through Koffolk (1949) Ltd., a wholly
owned subsidiary, and accounted for approximately 14% of our consolidated assets
as of June 30, 2003 and approximately 13% of our consolidated net sales for the
same period. We maintain two manufacturing facilities in Israel, one located
near Tel Aviv in Petach Tikva, which manufacturers and markets nutritional feed
additives for the livestock feed industry, and the second located south of
Beersheba in Ramat Hovav, which synthesizes anticoccidials (nicarbazin and
amprolium) and vitamins, the bulk of which are exported from Israel to the major
world markets. Accordingly, Koffolk is dependent on foreign markets and its
ability to reach those markets. Consequently, we are 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 us. See "Conditions in
Israel."
22
We face competition in each of our markets from a number of large and
small companies, some of which have greater financial, research and development,
production and other resources than we have.
Many of our products, including our Animal Health and Nutrition and
Specialty Chemicals products, face competition from products which may be used
as an alternative or substitute therefor. In addition, we compete with several
large companies in the animal health and nutrition and specialty chemicals
businesses. To the extent these companies, or new entrants into the market,
offer comparable animal health and nutrition or specialty chemical products at
lower prices, our business could be adversely affected.
Our competitive position is based principally on our product
registrations, customer service and support, breadth of product line, product
quality, manufacturing technology, facility location, and the selling prices of
our products. Our competitors can be expected to continue to improve the design
and performance of their products and to introduce new products with competitive
price and performance characteristics. There can be no assurance that we will
have sufficient resources to maintain our current competitive position or market
share. We typically do not enter into long-term agreements with our customers.
See "Business -- Competition" and "Business -- Sales, Marketing and
Distribution."
Our 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
(collectively, "Environmental Laws").
Pursuant to these Environmental Laws, certain of our subsidiaries are
required to obtain and retain numerous governmental permits and approvals,
including RCRA Part B permits, to conduct various aspects of their operations,
any of which may be subject to revocation, modification or denial under certain
circumstances. U.S. manufacturers of specialty chemicals, including certain of
our subsidiaries, have expended, and may be required to expend in the future,
substantial funds for compliance with such Environmental Laws.
As recyclers of hazardous metal-containing chemical waste, certain of our
subsidiaries have been, and are likely to be, the focus of extensive compliance
reviews by federal, state and local environmental regulatory authorities. In the
past, certain of our subsidiaries have paid certain fines and agreed to certain
consent orders. While procedures have been implemented at each facility which
are intended to achieve compliance in all material respects with Environmental
Laws, there can be no assurance that our operations or activities or those of
certain of our subsidiaries will not result in civil or criminal enforcement
actions or private actions, resulting in mandatory clean-up requirements,
revocation of required permits or licenses or significant fines, penalties or
damages which could have a material adverse effect on us. In addition, we cannot
predict the extent to which any further legislation or regulation may affect the
market for our services or our cost of doing business. For instance, if
governmental enforcement efforts should lessen, the market for the recycling
services by certain of our subsidiaries could decline. Alternatively, changes in
Environmental Laws (some of which are set forth below) might increase the cost
of such services by imposing additional requirements. States that have received
authorization to administer their own hazardous waste management programs may
also amend their applicable Environmental Laws, and may impose requirements
which are stricter than those imposed by the U.S. Environmental Protection
Agency ("EPA"). No assurance can be provided that such changes will not
adversely affect the ability of our subsidiaries to provide services at a
competitive price and thereby reduce the market for their services.
As such, the nature of our current and former operations and those of our
subsidiaries exposes us and our subsidiaries to the risk of claims with respect
to such matters and there can be no assurance that material costs and
liabilities will not be incurred in connection with such claims. Based upon our
experience to date, we believe that the future cost of compliance with existing
Environmental Laws, and liability for known environmental claims pursuant to
such Environmental Laws, will not have a material adverse effect on us. However,
future events, such as new information, changes in existing Environmental Laws
or their interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities that could be
material. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Environmental Matters," "Business -- Legal
Proceedings," and our Consolidated Financial Statements included herein.
23
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest.
The issue of potential for increased bacterial resistance to certain
antibiotics used in certain food-producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotic MFAs in these food-producing animals. The
sale of medicated feed additives containing antibiotics is a material portion of
our business. Legislative bills are introduced in the U.S. Congress from time to
time, some of which, if adopted, could have an adverse effect on our business.
However, in the past, such bills that could have had a material adverse effect,
have not had sufficient support to become law. The animal pharmaceutical
industry is actively engaged in the legislative process. One of these
initiatives is a proposed bill (S.1460) referred to the Committee on Health,
Education, Labor, and Pensions of the Senate, called the Preservation of
Antibiotics for Medical Treatment Act of 2003, sponsored by Senator Edward
Kennedy. Should legislative, regulatory or other developments, including
increased influence of consumer groups and other special interest lobbyists on
the legislative and/or regulatory process, 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.
In August 2002, Japan's Ministry of Agriculture, Forests and Fisheries
(MAFF) launched a review of 29 U.S., European, and Japanese animal feed
additives to determine whether the preventive use of certain medicated animal
feed additives should be restricted because of the potential transfer of
antimicrobial resistance to similar drugs used in treating humans. In January
2003, MAFF announced that it would conduct a transparent science-based risk
assessment of certain feed additives, consistent with the World Trade
Organization's ("WTO") Agreement on the Application of Sanitary and
Phyto-Sanitary Measures (SPS Agreement), and thus was no longer considering an
immediate ban on such products. The SPS Agreement requires the 165 countries
that are WTO Members to base food safety and animal health measures on
scientific principles and evidence. Accordingly, such a risk assessment involves
a detailed study of potential risks and appropriate methods of managing such
risks, and must be based on valid scientific principles and evidence.
Australia's National Regulatory Authority (NRA) is conducting a review of
virginiamycin, which is likely to result in additional restrictions on the
labeling of virginiamycin.
In February 2003, the Sixtieth Joint FAO/WHO Expert Committee on Food
Additives (JECFA) was held in Geneva, Switzerland to evaluate certain residues
of veterinary drugs in food. Based on an earlier opinion from the thirty-sixth
JECFA meeting in 1990, the Committee determined that an "acceptable daily
intake" (ADI) of carbadox and another animal drug, flumequine, could not be
established, because of the lack of an internationally agreed methodology for
evaluating the scientific risks posed by such products. Accordingly, the JECFA
recommended that the international Maximum Residue Levels (MRLs) for such
products be withdrawn.
The JECFA consists of experts from various countries acting in their
individual capacities. Its recommendations are not binding on the full Codex
Alimentarius Commission ("Codex"), which is the recognized international
standard-setting body for animal drugs. The Codex and its member countries are
responsible for any final decision regarding the MRL, and must review JECFA's
recommendations before any decision could be made. At present, the MRL for
carbadox, which was established by JECFA in 1990, remains the international
standard. Nevertheless, foreign governments could decide to restrict the uses of
carbadox in the interim, as has occurred in the European Union. Japan has banned
the use of carbadox in Japan, while allowing the import of pork from swine fed a
carbadox containing MFA so long as no residues are detectable in the imported
pork.
In 1998, the FDA conducted an evaluation of carbadox and found that it was
safe based on the U.S. "sensitivity of the method" policy. Accordingly, the FDA
continues to permit the approved use of carbadox in the United States.
In the European Union, the Commission withdrew marketing authorization of
a number of anticoccidials, including nicarbazin, as the Commission did not
consider the submissions to be in full compliance with its new regulations. We
have since completed the necessary data and resubmitted our nicarbazin dossier.
Feasibility and timetable for new registration will depend on the nature of
demands and remarks from the Commission.
24
There can be no assurance that the United States, Japan or other countries
may not decide to ban or curtail the uses of certain medicated feed additives.
Such a ban, depending upon the product involved and its importance to our MFA
business, in one or more countries could have a material adverse effect on our
business.
The testing, manufacturing, and marketing of certain of our products are
subject to extensive regulation by numerous government authorities in the United
States and other countries, including, but not limited to, the United States
Food and Drug Administration (FDA).
Among other requirements, FDA approval of our MFA and NFA products,
including a review of the manufacturing processes and facilities used to produce
such products, is required before such products may be marketed in the United
States. Similarly, marketing approval by a foreign governmental authority is
typically required before such MFA and NFA products may be marketed in a
particular foreign country. In order to obtain FDA approval of a new animal
health and nutrition product, we must, among other things, demonstrate to the
satisfaction of the FDA that the product is safe and effective for its intended
uses and that we are capable of manufacturing the product with procedures that
conform to the FDA's then current good manufacturing practice ("cGMP")
regulations, which must be followed at all times. The process of seeking FDA
approvals can be costly, time consuming, and subject to unanticipated and
significant delays. There can be no assurance that such approvals will be
granted to us on a timely basis, or at all. Any delay in obtaining or any
failure to obtain such approvals would adversely affect our ability to introduce
and market MFA and NFA products and to generate product revenue. See "Business
- -- Government Regulation."
FIFRA, a health and safety statute, requires that all pesticides sold or
distributed in the U.S. must first be registered with the EPA. In order to
obtain a registration, an applicant typically must demonstrate through test data
that its product will not cause unreasonable adverse effects on the environment.
Depending on the specific requirements at issue, these tests can be very
expensive, running to millions of dollars. However, if the product in question
is generic in nature (i.e., chemically identical or substantially similar to a
previously-registered product), the applicant has the option of citing and
relying on the test data supporting the original registrant's product, in lieu
of submitting data. Should the generic applicant choose the citation option, it
must offer to pay compensation to the original submitter and must agree to enter
into binding arbitration with the original submitter if the parties are unable
to agree on the terms and amount of compensation.
We have elected the citation option in the past and may use the citation
option in the future should we conclude that it is economically desirable to do
so. While there are cost savings associated with the opportunity to avoid one's
own testing and demonstration to the EPA of test data, there is, in each
instance, a risk that the level of compensation ultimately required to be paid
by us to the original registrant will be substantial. There is also the risk
that a third party will elect the citation option with respect to one of our
products, and that the level of compensation ultimately required to be paid to
us as the original registrant will not be substantial.
Mr. Jack Bendheim owns a substantial amount of outstanding shares of our
voting capital stock.
Pursuant to corporate law and certain shareholder agreements, Mr. Bendheim
controls the election of three of seven of the directors of the Company and
Marvin Sussman, Mr. Bendheim's brother-in-law, controls the election of one of
the directors of the Company. Mr. Bendheim's capital stock in the Company and
board seats give him substantial influence on the outcome of corporate
transactions or other matters submitted to the board of directors or
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, and also the power to prevent or cause a
change in control. Mr. Bendheim is also the Chairman of the Board and President.
The interests of Mr. Bendheim could conflict with your interests. For
example, if we encounter financial difficulties or are unable to pay our debts
as they mature, the interests of Mr. Bendheim as a significant holder of our
equity might conflict with your interests as a holder of the notes. Mr. Bendheim
also may have an interest in pursuing acquisitions, divestitures, financings or
other transactions that, in his judgment, could enhance his equity investment,
even though such transactions might involve risks to you, as holders of the
notes. See "Management -- Directors and Executive Officers" and "Principal
Stockholders."
25
The principal raw materials used by us in the manufacture of our products
can be subject to cyclical price fluctuations.
No single raw material accounted for more than 5% of our fiscal 2003 cost
of goods sold. While the selling prices of our products tend to increase or
decrease over time with the cost of raw materials, such changes may not occur
simultaneously or to the same degree. There can be no assurance that we will be
able to pass any increases in raw material costs through to our customers in the
form of price increases. Significant increases in the price of raw materials, if
not offset by product price increases, would have an adverse impact upon our
profitability.
Our revenues are dependent on the continued operation of our various
manufacturing facilities and intellectual property.
Although presently all our operating plants are considered to be in good
condition, the operation of animal health and nutrition and specialty chemical
manufacturing plants involves many risks, including the breakdown, failure or
substandard performance of equipment, power outages, the improper installation
or operation of equipment, natural disasters and the need to comply with
environmental and other directives of governmental agencies. Certain of our
product lines are manufactured at a single facility and production would not be
transferable to another site. The occurrence of material operational problems,
including but not limited to the above events, may adversely affect our
profitability during the period of such operational difficulties.
Our competitive position is also dependent upon unpatented trade secrets,
which generally are difficult to protect. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets, that such trade
secrets will not be disclosed or that we can effectively protect our rights to
unpatented trade secrets.
We have been and may continue to be subject to claims of injury from
direct exposure to certain of our subsidiaries' products, which constitute or
contain hazardous materials and from indirect exposure when such materials are
incorporated into other companies' products.
Because certain of our subsidiaries' products constitute or contain
hazardous materials, and because the production of certain chemicals involves
the use, handling, processing, storage and transportation of hazardous
materials, we and our subsidiaries have been subject to claims of injury from
direct exposure to such materials and from indirect exposure when such materials
are incorporated into other companies' products. There can be no assurance that
as a result of past or future operations, there will not be additional claims of
injury by employees or members of the public due to exposure, or alleged
exposure, to such materials. In most cases, such claims are covered by insurance
and, where applicable, worker's compensation insurance, subject to policy limits
and exclusions.
Furthermore, we and our subsidiaries are parties to a number of claims and
lawsuits arising out of the normal course of business including product
liabilities and governmental regulation. Certain of these actions seek damages
in various amounts. In most cases, such claims are covered by insurance. We also
have exposure to present and future claims with respect to workplace exposure,
workers' compensation and other matters. There can be no assurance as to the
actual amount of these liabilities or the timing thereof.
We are subject to risks that may not be covered by our insurance policies.
In addition to pollution and other environmental risks, we are subject to
risks inherent in the animal health and nutrition and specialty chemicals
industries, such as explosions, fires and spills or releases. Any significant
interruption of operations at our principal facilities could have a material
adverse effect on us. We maintain general liability insurance and property and
business interruption insurance with coverage limits that we believe are
adequate. Because of the nature of industry hazards, it is possible that
liabilities for pollution and other damages arising from a major occurrence may
not be covered by our insurance policies or could exceed insurance coverages or
policy limits or that such insurance may not be available at reasonable rates in
the future. Any such liabilities, which could arise due to injury or loss of
life, severe damage to and destruction of property and equipment, pollution or
other environmental damage or suspension of operations, could have a material
adverse effect on us. See "-- Our 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
26
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 (collectively, `Environmental Laws')."
Certain of our employees are covered by collective bargaining agreements.
As of December 31, 2003, approximately 16 of our domestic employees were
covered by a collective bargaining agreement which expires in 2006. Most of our
employees in Israel and France are covered by collective bargaining agreements.
We believe that we have satisfactory relations with our unions and, therefore,
anticipate reaching new agreements on satisfactory terms as the existing
agreements expire or shortly thereafter. There can be no assurance, however,
that new agreements will be reached without a work stoppage or strike or will be
reached on terms satisfactory to us. A prolonged work stoppage or strike at any
of our manufacturing facilities could have a material adverse effect on our
results of operations.
We are dependent on key personnel.
Our operations are dependent on the continued efforts of our senior
executive officers, Jack Bendheim, Gerald Carlson and Richard Johnson. The loss
of the services of any of Messrs. Bendheim, Carlson or Johnson could have a
material adverse effect on us. We do not carry key-man life insurance other than
to fund stock repurchase or compensation obligations and other than pursuant to
our arrangements with the Palladium Investors. See "Management -- Directors and
Executive Officers."
27
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer. In
consideration for issuing the new units, we will receive in exchange a like
amount of the old units. The old units surrendered in exchange for the new units
will be retired and cancelled and cannot be reissued. Accordingly, issuance of
the new notes will not result in any increase in our indebtedness. We have
agreed to bear the expenses of this exchange offer. No underwriter is being used
in connection with the exchange offer.
The net proceeds from the sale of the old units were approximately $97.3
million, after deducting fees and expenses from the offering of the old units.
See "Description of Certain Indebtedness" for more information. These net
proceeds were used to repay approximately $34.9 million of indebtedness
outstanding under our previous credit facility, purchase $52.0 million of our
senior subordinated notes at a price of 60% plus accrued and unpaid interest
through the purchase date and pay certain of our obligations to Pfizer Inc.
CAPITALIZATION
The following table sets forth our capitalization at December 31, 2003.
This presentation should be read in conjunction with our consolidated financial
statements and footnotes related thereto appearing elsewhere in this prospectus.
December 31, 2003
(dollars in thousands)
----------------------
Cash and cash equivalents................................ $ 8,682
========
Total debt:
Credit facility(1).................................... $ 5,684
Senior secured notes due 2007......................... 105,000
Senior subordinated notes due 2008.................... 48,029
Other debt............................................ 9,207
--------
Total debt......................................... 167,920
--------
Series C redeemable preferred stock(2)................... 17,065
Stockholders' deficit.................................... (43,091)
--------
Total capitalization.................................. $141,894
========
- ----------
(1) Represents indebtedness under our senior working capital credit facility.
See "Description of Certain Indebtedness -- Senior Credit Facility" for
more information.
(2) Includes Liquidation Value plus Equity Value. See "Description of Capital
Stock."
28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations are presented to illustrate the estimated effects of the divestiture
of PMC, as described in this prospectus in Management's Discussion and Analysis
of Financial Condition and Results of Operations and Certain Relationships and
Related Transactions, on our historical results of operations. We have derived
the historical consolidated financial data for the year ended June 30, 2003 from
our audited consolidated financial statements and related notes included
elsewhere in this prospectus. We have derived the historical consolidated
financial data for the six months ended December 31, 2003 from our unaudited
condensed consolidated financial statements and related notes included elsewhere
in this prospectus.
The unaudited pro forma condensed consolidated statements of operations
for the year ended June 30, 2003 and for the six months ended December 31, 2003
assume that the divesture took place on July 1, 2002, the beginning of our 2003
fiscal year. The information presented in the unaudited pro forma condensed
consolidated statements of operations is not necessarily indicative of our
results of operations that would have occurred if the divesture had occurred at
an earlier date, nor indicative of results of operations which may occur in the
future.
The pro forma adjustments are based upon available information and certain
assumptions that we believe are reasonable under the circumstances. These
adjustments are more fully described in the notes to the unaudited pro forma
condensed consolidated statements of operations below.
The unaudited pro forma condensed consolidated statements of operations
should be read in conjunction with the accompanying notes and assumptions,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements, the related notes and the
other financial information included elsewhere in this prospectus.
29
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Year Ended June 30, 2003
(in thousands)
Historical Pro forma Pro forma
Results Adjustments Results
---------- ------------ ---------
Net Sales..................................................... $355,225 $(22,332)(a) $332,893
Cost of Goods Sold............................................ 263,728 (16,178)(a) 247,550
-------- -------- --------
Gross Profit................................................ 91,497 (6,154) 85,343
Selling, General and Administrative Expenses 66,360 (2,575)(a) 60,635
(2,250)(b)
(1,000)(c)
100 (d)
-------- -------- --------
Operating Income............................................ 25,137 (429) 24,708
Other:
Interest expense, net 16,256 1,391 (e) 17,647
Other expense, net.......................................... 1,150 -- 1,150
-------- -------- --------
Income From Continuing Operations
Before Income Taxes....................................... 7,731 (1,820) 5,911
Provision for Income Taxes.................................... 10,076 (52)(a) 10,024
-------- -------- --------
(Loss) From Continuing Operations........................... $ (2,345) $ (1,768) $ (4,113)
======== ======== ========
See notes to unaudited pro forma condensed
consolidated statements of operations
For the Six Months Ended December 31, 2003
(in thousands)
Historical Pro forma Pro forma
Results Adjustments Results
---------- ----------- ---------
Net Sales..................................................... $183,213 $(11,118)(a) $172,095
Cost of Goods Sold............................................ 139,196 (7,541)(a) 131,655
-------- -------- --------
Gross Profit................................................ 44,017 (3,577) 40,440
Selling, General and Administrative Expenses.................. 33,397 (1,299)(a) 30,523
(1,125)(b)
(500)(c)
50 (d)
-------- -------- --------
Operating Income............................................ 10,620 (703) 9,917
Other:
Interest expense, net....................................... 8,450 695 (e) 9,145
Other (income), net......................................... (701) -- (701)
Net (gain) on extinguishment of debt........................ (23,226) -- (23,226)
-------- -------- --------
Income From Continuing Operations Before
Income Taxes............................................. 26,097 (1,398) 24,699
Provision for Income Taxes.................................... 3,663 (96)(a) 3,567
-------- -------- --------
Income From Continuing Operations........................... $ 22,434 $ (1,302) $ 21,132
======== ======== ========
See notes to unaudited pro forma condensed
consolidated statements of operations
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations
The unaudited pro forma condensed consolidated statements of operations
give effect to the following adjustments:
(a) To reflect the removal of the income statement accounts of PMC for
each period presented.
(b) To reflect the removal of the management fee paid to Palladium by
the Company.
(c) To reflect the inclusion of advisory fee paid to the Company by the
Buyer.
(d) To reflect the inclusion of the treasury services fee paid to
Palladium by the Company.
(e) To reflect interest expense on cash paid at 5.16%, the Company's
average interest rate on its senior credit facility, plus pro rata
discount related to the prepaid advisory fee.
30
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain of our historical financial data.
We have derived the selected historical consolidated financial data as of June
30, 2002 and 2003 and for each of the three years ended June 30, 2001, 2002 and
2003 from our audited consolidated financial statements and related notes as of
such dates and for such years included elsewhere in this prospectus. We have
derived the selected historical consolidated financial data as of June 30, 1999
and 2000 and for each of the two years ended June 30, 1999 and 2000 from our
audited consolidated financial statements and related notes as of such dates and
for such years, which are not included in this prospectus. We have derived the
selected historical consolidated financial data as of December 31, 2002 and 2003
and for the six months ended December 31, 2002 and 2003 from our unaudited
condensed consolidated financial statements and related notes as of such dates
and for such periods included elsewhere in this prospectus. In the opinion of
our management, our unaudited condensed consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our financial position, the results of our
operations and cash flows. The results of operations for the six months ended
December 31, 2003 are not necessarily indicative of the operating results to be
expected for the full fiscal year. The selected historical consolidated
financial data set forth below are not necessarily indicative of the results of
future operations and should be read in conjunction with the discussion under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the historical consolidated financial statements and
related notes included elsewhere in this prospectus.
Six Months Ended
Fiscal Year Ended June 30, December 31,
---------------------------------------------- -----------------
1999 2000 2001 2002 2003 2002 2003
---- ---- ---- ---- ---- ---- ----
(dollars in thousands)
Results of Operations:
Net sales.......................... $267,234 $280,618 $319,664 $340,549 $355,225 $176,416 $183,213
Cost of goods sold................. 210,800 216,510 250,305 258,555 263,728 130,228 139,196
-------- -------- -------- -------- -------- -------- --------
Gross profit....................... 56,434 64,108 69,359 81,994 91,497 46,188 44,017
Selling, general and administrative
expenses........................ 46,896 50,454 63,925 72,277 66,360 32,053 33,397
Curtailment of operations at
manufacturing Facility.......... (500) (1,481) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income................... 10,038 15,135 5,434 9,717 25,137 14,135 10,620
Interest expense................... 13,142 14,754 18,297 18,158 16,342 8,160 8,524
Interest (income).................. (628) (600) (566) (356) (86) (96) (74)
Other expense (income), net........ 1,828 (506) 855 3,104 1,277 1,205 (701)
(Gain) from property damage claim.. (3,701) (946) -- -- -- --
(Gain) from sale of assets......... -- -- (1,457) (18) (127) --
Net (gain) on extinguishment of debt -- -- -- -- -- (23,226)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.. (603) 2,433 (11,695) (11,171) 7,731 4,866 26,097
Provision (benefit) for income taxes 773 1,188 (381) 14,829 10,076 1,841 3,663
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations...................... (1,376) 1,245 (11,314) (26,000) (2,345) 3,025 22,434
Income (loss) from discontinued
operations...................... 910 8,808 (3,581) (25,770) (14,531) (11,017) (124)
Gain (loss) on disposal of
discontinued operations......... -- -- -- -- (683) -- 231
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. (466) 10,053 (14,895) (51,770) (17,559) (7,992) 22,541
Change in derivative instruments... -- -- -- 1,062 (981) (1,241) 419
Change in foreign currency
translation adjustments......... (2,043) 55 (5,146) (6,125) 7,377 (3,654) 2,172
-------- -------- -------- -------- -------- -------- --------
Comprehensive income (loss)........ $ (2,509) $ 10,108 $(20,041) $(56,833) $(11,163) (12,887) 25,132
======== ======== ======== ======== ======== ======== ========
Net income (loss).................. (466) 10,053 (14,895) (51,770) (17,559) (7,992) 22,541
Excess of the reduction of reedemable
preferred stock over total assets
divested and costs and liabilities
incurred in the Prince transactions -- -- -- -- -- -- 20,138
Dividends on preferred stock....... -- -- (8,172) (7,623) (12,278) (4,244) (3,851)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to
common shareholders............. (466) 10,053 (23,067) (59,393) (29,837) (12,236) 38,828
======== ======== ======== ======== ======== ======== ========
Other Financial Data:
Depreciation and amortization...... $ 8,253 $ 8,383 $ 10,405 $ 12,680 $ 12,883 $ 6,687 $ 6,745
Capital expenditures............... 7,663 11,080 6,610 8,677 9,045 5,385 2,332
Balance Sheet Data:
Cash and cash equivalents.......... $ 3,022 $ 2,403 $ 14,845 $ 6,419 $ 11,179 $ 13,788 $ 8,682
Total assets....................... 238,779 258,451 330,019 296,444 274,347 286,051 253,636
Long-term debt..................... 134,088 139,722 139,464 136,641 102,391 128,418 156,410
Series B and C redeemable
preferred stock................. -- -- 48,980 56,602 68,881 60,847 17,065
Total stockholders' equity (deficit) 21,448 31,618 3,405 (61,189) (84,510) (78,320) (43,091)
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This information should be read in conjunction with the consolidated
financial statements and related notes contained in this prospectus. See also
"Selected Financial Data." The Company's Odda, Carbide and MRT businesses have
been classified as discontinued operations. This discussion presents information
only for continuing operations, unless otherwise indicated. The Company presents
its consolidated financial statements on the basis of its fiscal year ending
June 30. All references to years 2003, 2002 and 2001 in this discussion refer to
the fiscal year ended June 30 of that year.
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which are sold
throughout the world predominantly to the poultry, swine and cattle markets.
MFAs are used preventatively and therapeutically in animal feeds 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. The Company operates in over 17 countries around the world and
sells its animal health and nutrition products and specialty chemicals products
into over 40 countries. Approximately 71% of 2003 net sales were from the Animal
Health and Nutrition business, and approximately 29% of 2003 net sales were from
the Specialty Chemicals businesses, included in the Industrial Chemicals,
Distribution, and All Other segments.
The Company recently changed its name to Phibro Animal Health Corporation.
The Company was formerly known as Philipp Brothers Chemicals, Inc. The new name
reflects the core focus and strategic direction of the Company.
During 2003, the Company took significant steps to refocus on its core
business, to improve operating results and to reduce debt levels. Operating
income improved more than $15 million, and total debt, net of cash, decreased
more than $26 million. Actions included the shutdown of the Company's Norwegian
subsidiary, Odda Smelteverk ("Odda") and the sale of its Carbide business. Odda
and Carbide's operating losses (included in discontinued operations) were $13.5
million, $27.7 million and $3.1 million in 2003, 2002 and 2001, respectively.
Actions also included partial disposal of the ammoniacal etchant business
related to the printed circuit board market, headcount and other cost
reductions, and aggressive working capital management. The Company continues to
evaluate its Specialty Chemicals businesses and will continue to restructure,
discontinue or sell those businesses that are dilutive to earnings. In August
2003, the Company completed the sale of Mineral Resource Technologies, Inc.
("MRT") for net proceeds, after transaction costs, of approximately $13.8
million, the amount dependent upon certain post-closing adjustments. MRT's
operating losses (included in discontinued operations) were $3.5 million, $2.9
million and $1.3 million in 2003, 2002 and 2001, respectively. In December 2003,
the Company completed the divestiture of The Prince Manufacturing Company
("PMC"). See "Recent Transactions" below.
The Offering and Refinancing
On October 21, 2003, the Company issued 105,000 units, consisting of $85.0
million of 13% Senior Secured Notes due 2007 of Phibro Animal Health Corporation
("PAHC") (the "US Senior Notes") and $20.0 million of 13% Senior Secured Notes
due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Notes" and,
together with the US Senior Notes, the "Senior Secured Notes"), an indirect
wholly-owned subsidiary of PAHC (the "Dutch issuer"). The Company used the
proceeds from the issuance to: (i) repurchase $52.0 million of its 97?8% Senior
Subordinated Notes due 2008 at a price equal to 60% of the principal amount
thereof, plus accrued and unpaid interest; (ii) repay its senior credit facility
of $34.9 million outstanding at the repayment date; (iii) satisfy, for a payment
of approximately $29.3 million, certain of its outstanding obligations to Pfizer
Inc., including: (a) $20.1 million aggregate principal amount of its promissory
note plus accrued and
32
unpaid interest, (b) $9.7 million of accounts payable, (c) $9.0 million of
accrued expenses, and (d) future contingent purchase price obligations under its
agreements with Pfizer by which the Company acquired Pfizer's medicated feed
additive business, and (iv) pay fees and expenses relating to the above
transactions.
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of PAHC and the Dutch issuer, respectively. The US Senior
Notes and the Dutch Senior Notes are guaranteed on a senior secured basis by all
PAHC's domestic restricted subsidiaries, and the Dutch Senior Notes are
guaranteed on a senior secured basis by PAHC and by the restricted subsidiaries
of the Dutch issuer, including Phibro Animal Health SA. See "Description of
Certain Indebtedness."
Also, on October 21, 2003, we entered into a new replacement domestic
senior credit facility with Wells Fargo Foothill, Inc., providing, among other
things, for a $25 million senior credit facility (subject to a borrowing base
formula based on percentages of eligible domestic receivables and domestic
inventory, with a sub-limit for inventory), consisting of a $15 million working
capital facility and a letter of credit facility. See "Description of Certain
Indebtedness."
Pursuant to the terms of an intercreditor agreement, the security interest
securing the Senior Secured Notes and the guarantees made by the Company's
domestic restricted subsidiaries is subordinated to a lien securing the
replacement senior credit facility.
The Company believes that, through the refinancings referred to above, the
liquidity issues mentioned in the Company's June 30, 2003 consolidated financial
statements have been resolved. The Company's replaced senior bank credit
facility and its note payable to Pfizer were to mature in November 2003 and
March 2004, respectively.
The Company's ability to fund its operating plan relies upon its ability
to continue to successfully implement its efforts to improve its overall
liquidity (through cost reduction activities, working capital improvement plans,
shutdown of unprofitable operations and sales of certain business operations and
other assets) and the continued availability of borrowing under the senior
credit facility. The Company believes that it will be able to comply with the
terms of its covenants under the 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 consents on favorable terms, if at all.
The effect of the above refinancing transactions are included in the
December 31, 2003 financial statements.
Recent Transactions
On December 26, 2003, we completed the divestiture of substantially all of
the business and assets of our PMC subsidiary to a company formed by Palladium
Equity Partners II, LP and certain of its affiliates (the "Palladium
Investors"). In connection with such transaction, the Palladium Investors
reduced their ownership of our preferred stock from $72.2 million to $16.5
million as of and accreted through the closing date, we made a cash payment of
$10.0 million to the Palladium Investors in respect of a portion of our
preferred stock not exchanged in consideration of the business of PMC, we
satisfied the intercompany debt owed to PMC and made certain capital expenditure
adjustments. The final valuation of PMC is subject to a post-closing working
capital adjustment. In the definitive agreements, we agreed to pay or reimburse
the Palladium Investors for their out-of-pocket transaction expenses, and we
made representations, warranties and environmental and other indemnities to the
Palladium Investors. Also, Palladium was paid a closing fee of $0.5 million and
payments by the buyer to us for central support services for the next three
years of $1 million, $0.5 million and $0.2 million, respectively, were pre-paid
by the buyer and satisfied for the net present value of such payments. In
addition, our Prince Agriproducts ("Prince Agri") subsidiary entered into
various supply and blending arrangements with the buyer consistent with the
historic relationship between Prince Agri and PMC, and Prince Agri agreed to
continue to provide the buyer with certain laboratory, MIS and telephone
services substantially consistent with historical practices, and to rent to
buyer certain office space used by PMC in Quincy, Illinois. The divestiture of
PMC has not been reflected as a discontinued operation due to the existence of a
backstop indemnity and continuing supply and service agreements. See "Certain
Relationships and Related Transactions."
Other Risks and Uncertainties
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on
33
the use of antibiotics in food-producing animals. The sale of feed additives
containing antibiotics is a material portion of the Company's business. Should
regulatory or other developments result in further restrictions on the sale of
such products, it could have a material adverse impact on the Company's
financial position, results of operations and cash flows.
The testing, manufacturing and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and subsidiaries are subject to a
wide variety of complex and stringent federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials and wastes, the remediation of contaminated soil and
groundwater, the manufacture, sale and use of pesticides and the health and
safety of employees. As such, the nature of the Company's current and former
operations and those of its subsidiaries exposes the Company and its
subsidiaries to the risk of claims with respect to such matters.
Summary Consolidated Results of Continuing Operations
Six Months Ended
Year Ended June 30, December 31,
---------------------------------- --------------------
2003 2002 2001 2003 2002
---- ---- ---- ---- ----
(thousands)
Net sales........................... $355,225 $340,549 $319,664 $183,213 $176,416
Gross profit........................ 91,497 81,994 69,359 44,017 46,188
Selling, general and administrative. 66,360 72,277 63,925 33,397 32,053
Operating income.................... 25,137 9,717 5,434 10,620 14,135
Interest expense, net............... 16,256 17,802 17,731 8,450 8,064
Other expense (income), net......... 1,150 3,086 (602) (701) 1,205
Gain on extinguishment of debt...... -- -- -- (23,226) --
Provision (benefit) for income
taxes............................ 10,076 14,829 (381) 3,663 1,841
Income (loss) from continuing
operations....................... $ (2,345) $(26,000) $(11,314) $ 22,434 $ 3,025
Six Months Ended December 31, 2003 Compared to Six Months Ended December 31,
2002
Net Sales of $183.2 million increased $6.8 million, or 4%. Animal Health
and Nutrition sales of $128.5 million increased $1.9 million from the prior
year. Specialty Chemical sales of $54.7 million increased $4.9 million,
primarily due to volume increases in the All Other businesses.
Gross Profit of $44.0 million decreased $2.2 million to 24.0% of net
sales, compared with 26.2% in 2002. Animal Health and Nutrition cost of goods
sold increased due to unfavorable currency related to the effect of the Euro on
Belgium manufacturing costs. Improvements in the Specialty Chemical group
partially offset the Animal Health and Nutrition decline.
Selling, General and Administrative Expenses of $33.4 million increased
$1.3 million, or 4%. Expenses in the operating segments increased over the prior
year due to unfavorable foreign exchange rates. Corporate expenses rose due to
increased levels of amortization and higher insurance, bank charges and other
general spending increases.
Operating Income of $10.6 million decreased $3.5 million to 5.8% of sales.
The decrease was primarily due to gross profit declines in the Animal Health and
Nutrition segment offset in part by improved operating performance of the
Specialty Chemical group.
Interest Expense, Net of $8.4 million increased $0.4 million, from the
prior year, primarily due to higher average interest rates associated with the
issuance of the Company's Senior Secured Notes.
34
Other (Income) Expense, Net of ($0.7) million improved in comparison with
expense of $1.2 million last year. The (income) expense principally reflects
foreign currency transaction net (gains) losses related to short-term
inter-company balances and foreign currency translation (gains) losses.
Gain on extinguishment of debt of $23.2 million consists of a $16.6
million net gain on the repurchase of senior subordinated notes, a $7.6 million
net gain on payment of Pfizer obligations, offset by $1.0 million of costs
associated with the repayment of the former senior credit facility.
Income Taxes of $3.7 million on consolidated pre-tax income of $26.1
million primarily were due to 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 previously had recorded valuation allowances related
to substantially all deferred tax assets. The Company will continue to evaluate
the likelihood of recoverability of these deferred tax assets based upon actual
and expected operating performance.
2003 Compared with 2002
Net Sales of $355.2 million increased $14.7 million, or 4%. Animal Health
and Nutrition sales of $250.7 million grew $11.1 million, or 5%, due to volume
increases. Specialty Chemical sales of $104.5 million increased $3.6 million, or
4%, primarily due to volume increases in the Distribution and All Other
businesses.
Gross Profit of $91.5 million improved $9.5 million to 25.8% of net sales,
compared with 24.1% in 2002. Animal Health and Nutrition gross profit
improvements were responsible for the overall increase. Purchase accounting
adjustments related to the MFA acquisition resulted in a $3.3 million increase
to cost of goods sold in 2002. Excluding the purchase accounting adjustment, the
gross profit ratio would have been 25.0% in 2002.
Selling, General and Administrative Expenses of $66.4 million decreased
$5.9 million, or 8%. Expenses declined $6.8 million in the Specialty Chemicals
businesses due to downsizing and restructuring of the Industrial Chemicals
segment, reflecting the decline in the printed circuit board market. Industrial
Chemicals included expense for additional environmental reserves and write-offs
of unamortized permit fees at closed facilities of $1.0 million and $1.6 million
for 2003 and 2002, respectively. Animal Health and Nutrition expenses decreased
by approximately $0.4 million. Corporate expenses increased $1.3 million,
primarily due to increased staff levels. Corporate also included income of $3.0
million and $0.7 million in 2003 and 2002, respectively, from the settlement of
class action litigation against European vitamin manufacturers. Debt
restructuring costs of $0.8 million, severance of $0.4 million, and expense
related to a divested business of $0.2 million were also recorded in 2003.
Included in 2002 was $0.4 million non-cash income to reflect the decrease in
value of redeemable common stock; no amount was recorded in 2003.
Operating Income of $25.1 million increased $15.4 million to 7.1% of
sales. The improvement was due to sales growth, gross margin improvements in
Animal Health and Nutrition, and operating expense reductions.
Interest Expense, Net of $16.3 million decreased $1.5 million, compared
with $17.8 million in 2002, primarily due to lower average interest rates and
reduced average borrowing levels.
Other Expense, Net of $1.2 million improved in comparison with $3.1
million last year. The expense principally reflects foreign currency transaction
and translation net losses related to short-term inter-company balances.
Income Taxes of $10.1 million were primarily due to a $5.6 million
increase in valuation allowances for deferred tax assets in foreign
jurisdictions where future profitability is not currently considered more likely
than not, and income tax provisions in profitable foreign jurisdictions. The
Company has recorded valuation allowances related to substantially all deferred
tax assets. The Company will continue to evaluate the likelihood of
recoverability of these deferred tax assets based upon actual and expected
operating performance.
2002 Compared with 2001
Net Sales of $340.6 million increased $20.9 million, or 7%. Animal Health
and Nutrition sales increased $41.8 million, primarily due to a full year of the
MFA acquisition in 2002, compared with 7 months of operations in 2001. Specialty
Chemicals net sales decreased $20.9 million due to the divestiture of the Agtrol
crop protection business to Nufarm in the fourth quarter of 2001, the continued
decline in the sale and recycling of etchant related to the printed circuit
board market, and lower sales of the Distribution segment.
35
Gross Profit of $82.0 million increased $12.6 million to 24.1% of net
sales, compared with 21.7% in 2001. Animal Health and Nutrition gross profit
increased $21.4 million due to a full year of the MFA acquisition. Purchase
accounting adjustments relating to inventory acquired in the MFA acquisition
resulted in an increase to cost of goods sold of $3.3 million and $8.9 million
for 2002 and 2001, respectively. Specialty Chemicals gross profit declined $8.8
million due to lower sales volumes and environmental recovery services revenues
related to the printed circuit board market, lower unit volume of the
Distribution segment and lower margins from contract manufacturing revenues,
compared with higher margin 2001 sales of crop protection chemicals to third
parties prior to the Agtrol divestiture.
Selling, General and Administrative Expenses of $72.3 million increased
$8.4 million, or 13%. Animal Health and Nutrition expenses increased $10.7
million due to a full year of the MFA acquisition versus seven months in 2001.
Specialty Chemicals expenses decreased $5.6 million, due to the divestiture of
Agtrol, which reduced expenses by $8.0 million. Expenses for 2002 increased by
$1.6 million due to the write-off of unamortized permit fees at closed
facilities and additional environmental reserves. Corporate expenses increased
$3.3 million. The full year 2002 management advisory fee to Palladium was $2.3
million, compared with $1.4 million for a partial year in 2001. In 2002, the
Company recorded a $0.4 million non-cash gain to adjust the value of redeemable
common stock; the 2001 gain was $3.1 million. In 2001, the Company recorded $1.3
million of expense for the severance of an executive.
Operating Income of $9.7 million increased $4.3 million. The improvement
was due to a full year of the MFA acquisition and improved operating results in
Animal Health and Nutrition. Specialty Chemicals reported increased losses
related to declining sales to the printed circuit board market, offset in part
by the elimination of losses related to the Agtrol business, divested in 2001.
Interest Expense, Net of $17.8 million increased $0.1 million primarily
due to debt incurred in connection with the MFA acquisition and higher levels of
average bank borrowings, offset in part by lower interest rates.
Other Expense, Net principally reflects foreign currency transaction and
translation gains and losses of the Company's foreign subsidiaries. During 2001,
a $1.5 million gain was recorded on the divestiture of the Agtrol crop
protection business.
Income Taxes of $14.8 million were primarily due to an increase in
valuation allowances for domestic deferred tax assets and income tax provisions
in profitable foreign jurisdictions. The Company incurred domestic losses in
recent years and a reassessment of the likelihood of recovering net domestic
deferred tax assets resulted in the recording of a full domestic valuation
allowance of $14.7 million.
Operating Segments
Six Months Ended
Year Ended June 30, December 31,
----------------------------------- --------------------
2003 2002 2001 2003 2002
---- ---- ---- ---- ----
Net Sales
Animal Health & Nutrition........ $250,706 $239,602 $197,806 $128,528 $126,626
Specialty Chemicals:
Industrial Chemicals........... 48,797 50,854 55,111 23,661 25,125
Distribution................... 30,072 27,852 34,074 15,595 15,293
All Other...................... 25,650 22,241 32,673 15,429 9,372
-------- -------- -------- -------- --------
$355,225 $340,549 $319,664 183,213 176,416
======== ======== ======== ======== ========
Six Months Ended
Year Ended June 30, December 31,
----------------------------------- --------------------
2003 2002 2001 2003 2002
---- ---- ---- ---- ----
Operating Income
Animal Health & Nutrition........ $ 38,472 $ 28,298 $ 17,562 $14,555 $21,013
Specialty Chemicals:
Industrial Chemicals........... (1,855) (7,324) 664 1,600 (822)
Distribution................... 3,207 2,345 3,057 1,533 1,552
All Other...................... 261 252 (5,763) 846 (130)
Corporate........................ (14,948) (13,854) (10,086) (7,914) (7,478)
-------- -------- -------- ------- -------
$ 25,137 $ 9,717 $ 5,434 10,620 14,135
======== ======== ======== ======= =======
36
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 Agri, Koffolk Israel, and Koffolk
Brazil. The Industrial Chemicals segment manufactures and markets specialty
chemicals for use in the pressure treated wood, brick, glass and chemical
industries, and includes Phibro-Tech and, until its divestiture, PMC. The
Distribution segment markets a variety of specialty chemicals, and includes
PhibroChem and Ferro operations. The All Other segment includes contract
manufacturing of crop protection chemicals, Wychem and all other operations. The
All Other segment in 2001 includes the Agtrol crop protection business, which
was divested in the fourth quarter of fiscal 2001.
Operating Segments Six Months Ended December 31, 2003 Compared to Six
Months Ended December 31, 2002
Animal Health and Nutrition
Net Sales of $128.5 million increased $1.9 million. Medicated Feed
Additives net sales decreased by $3.3 million. Revenues were lower for
antibiotics and anticoccidials but were offset in part by higher sales of
antibacterials, anthelmintics and other medicated feed additives. The decrease
in MFA revenues was due to lower average selling prices offset in part by
favorable currency effect on international sales. Nutritional Feed Additives net
sales increased by $5.2 million, principally due to volume increases in core
inorganic minerals, trace mineral premixes and other ingredients.
Operating Income of $14.6 million decreased $6.5 million. Operating income
declined due to higher cost of goods reflecting the stronger Euro's effect on
Belgian manufacturing cost and unfavorable currency effects on international
selling, general and administrative expense. Lower average selling prices also
contributed to the decrease.
Specialty Chemicals
Industrial Chemicals net sales of $23.7 million decreased $1.5 million, or
6%. Industrial Chemicals net sales decreased $1.6 million principally due to
lower sales of etchants and copper related products to the printed circuit board
market offset in part by higher sales to the wood treatment industries. Sales of
iron and manganese compounds to the brick, masonry, glass and other chemical
industries increased $0.1 million primarily due to higher unit volumes.
Operating income of $1.6 million improved by $2.4 million from the prior year.
The improvement principally was due to the partial disposal during the quarter
ended December 31, 2002 of the ammoniacal etchant business and savings from
headcount reductions and facility restructurings. The Company continues its
existing etchant business at one remaining facility.
Distribution net sales of $15.6 million increased $0.3 million, or 2%.
Higher unit sales volumes in Europe were partially offset by lower sales volumes
in the U.S. Operating income of $1.5 million approximated the prior year. As a
percentage of sales, operating income was 10% in 2003 and 2002, respectively.
All Other net sales of $15.4 million increased $6.1 million, or 65%.
Revenues for contract manufacturing increased $5.9 million due to increased
volumes and average selling prices. Specialized lab projects and formulations
increased $0.2 million. Operating income of $0.8 million improved by $1.0
million from the prior year due to higher revenues and increased margins on
contract manufacturing.
Operating Segments 2003 Compared to 2002
Animal Health and Nutrition
Net Sales of $250.7 million increased $11.1 million, or 5%. Medicated Feed
Additives net sales increased by $6.7 million. Revenues were higher for
antibacterials, antibiotics and anticoccidials but were offset in part by lower
sales of anthelmintics and other medicated feed additives. The increased
revenues were due to volume increases offset in part by lower average selling
prices, including the effect of currency devaluations in Latin America.
Nutritional Feed Additives net sales increased by $4.4 million, principally due
to volume increases in core inorganic minerals, trace mineral premixes and other
ingredients.
37
Operating Income of $38.5 million increased $10.2 million, or 36%.
Purchase accounting adjustments relating to inventory in the MFA acquisition
resulted in a $3.3 million increase to 2002 cost of goods sold. The operating
income ratio increased to 15% in 2003 from 13% in 2002 (excluding the purchase
accounting adjustments). The improvement in operating income resulted from
increased sales of higher margin products and close control of operating
expenses.
Specialty Chemicals
Industrial Chemicals net sales of $48.8 million decreased $2.1 million, or
4%. Industrial Chemicals net sales decreased $2.9 million principally due to
reduced sales of etchants to the printed circuit board market. Sales of iron and
manganese compounds to the brick, masonry, glass, and other chemical industries
increased $0.8 million. Industrial Chemicals operating loss of $1.9 million
improved $5.5 million. The improvement principally was due to the partial
disposal during 2003 of the ammoniacal etchant business and savings from
headcount reductions and facility restructurings. The Company continues its
existing etchant business at one remaining facility. No manufacturing
facilities, equipment or inventory were included in the transaction. The gain on
the transaction was not material.
Distribution net sales of $30.1 million increased $2.2 million, or 8%.
Higher sales volumes in Europe and improved product mix in domestic operations
accounted for the increase. Distribution operating income of $3.2 million
increased $0.9 million, or 37%. As a percentage of sales, operating income
increased to 11% in 2003 from 8% in 2002. The improvement in operating income
margins resulted principally from increased sales of higher margin products.
All Other net sales of $25.7 million increased $3.4 million, or 15%. Sales
to new customers accounted for the increase, as contract manufacturing declined
$0.8 million and specialized lab projects and formulations declined $0.6
million. All Other operating income of $0.3 million approximated the prior year.
Operating Segments 2002 Compared to 2001
Animal Health and Nutrition
Net sales of $239.6 million increased $41.8 million, or 21%. The net sales
increase was due to a full year of the MFA acquisition. Excluding the MFA
acquisition, 2002 net sales increased $0.4 million. The adverse business climate
in Israel and discontinuation of sales of vitamin exports by Koffolk Israel
lowered international net sales. Domestic operations reported higher net sales
due to increased unit volume sales of vitamin, mineral and other pre-mix
products offset in part by lower average selling prices and other product mix
changes.
Operating Income of $28.3 million increased $10.7 million, or 61%. The
increase primarily was due to a full year of the MFA acquisition offset by the
adverse business climate in Israel. Purchase accounting adjustments relating to
inventory from the MFA acquisition resulted in increased cost of goods sold of
$3.3 million and $8.9 million in 2002 and 2001, respectively. Adjusted to
exclude the purchase accounting adjustments, the operating income margin was 13%
in 2002, approximately the same as the prior year.
Specialty Chemicals
Industrial Chemicals net sales of $50.9 million decreased $4.3 million, or
8%. Industrial Chemicals net sales declined $3.7 million due to volume declines
in the sales and recycling revenues of etchants related to the contraction of
the U.S. printed circuit board industry. Sales price declines at the Company's
PMC operations, partially offset by volume improvements of iron and manganese
oxides, decreased revenues $0.6 million. Industrial Chemicals operating loss was
$7.3 million in fiscal 2002 compared to income of $0.7 million in the prior
year. These losses were primarily due to reduced sales volumes from printed
circuit board customers.
Distribution net sales of $27.9 million decreased $6.2 million, or 18%.
The net sales decrease was primarily due to lower unit volumes of carbide,
dicyandiamide and cyanide products in 2002. Distribution operating income of
$2.3 million decreased $0.7 million, or 23%, primarily due to sales volume
declines.
38
All Other net sales of $22.2 million decreased $10.4 million, or 32%. This
decrease principally was due to the divestiture of the Agtrol crop protection
business during the fourth quarter of 2001. The transaction included multi-year
supply agreements to continue to produce crop protection chemicals for Nufarm.
The sales decline reflects contract manufacturing volumes under the supply
agreements, compared with sales to third-party customers in 2001. Specialized
lab projects and formulations net sales increased $1.3 million. All Other
operating income was $0.3 million in 2002 compared to an operating loss of $5.8
million in the prior year. The improvement was primarily the result of the sale
of Agtrol, which generated 2001 operating losses of $6.4 million. An increase in
specialized lab projects and formulations also contributed to improved 2002
profitability.
Discontinued Operations
During 2003, the Company decided to shutdown or divest Odda Smelteverk
(Norway), Carbide Industries (U.K.) and Mineral Resource Technologies, Inc.
These businesses have been classified as discontinued operations. The Company's
consolidated financial statements have been reclassified to report separately
the operating results, financial position, and cash flows of the discontinued
operations. Prior year financial statements have been reclassified to conform to
the 2003 presentation.
Six Months Ended
December 31, 2003
-----------------
MRT
---
Net sales .............................................. $3,327
Pre-tax income (loss) from discontinued operations ..... $ (124)
Provision (benefit) for income tax ..................... $ --
Net Income (loss) from discontinued operations ......... $ (124)
Depreciation and amortization .......................... $ --
Year Ended June 30, 2003
---------------------------------------------------
Odda/Carbide MRT Total
------------ --- -----
Net sales...................................... $ 11,217 $18,671 $ 29,888
======== ======= ========
Loss before income taxes....................... $(11,135) $(3,454) $(14,589)
Provision (benefit) for income tax............. (58) -- (58)
-------- ------- --------
(Loss) from discontinued operations............ $(11,077) $(3,454) $(14,531)
======== ======= ========
Depreciation and amortization.................. $ 894 $ 1,309 $ 2,203
======== ======= ========
Year Ended June 30, 2002
---------------------------------------------------
Odda/Carbide MRT Total
------------ --- -----
Net sales...................................... $ 31,219 $17,045 $ 48,264
======== ====== ========
Loss before income taxes....................... $(24,010) $(2,930) $(26,940)
Provision (benefit) for income tax............. (1,170) -- (1,170)
-------- ------- --------
(Loss) from discontinued operations............ $(22,840) $(2,930) $(25,770)
======== ======= ========
Depreciation and amortization.................. $ 17,676 $ 1,192 $ 18,868
======== ======= ========
Year Ended June 30, 2001
---------------------------------------------------
Odda/Carbide MRT Total
------------ --- -----
Net sales...................................... $30,440 $14,306 $44,746
======= ======= =======
Loss before income taxes....................... $(3,858) $(1,323) $(5,181)
Provision (benefit) for income tax............. (1,150) (450) (1,600)
------- ------- -------
(Loss) from discontinued operations............ $(2,708) $ (873) $(3,581)
======= ======= =======
Depreciation and amortization.................. $ 2,962 $ 465 $ 3,427
======= ======= =======
39
Odda and Carbide. During 2003, the Company determined that it would
permanently shutdown and no longer fund the operations of Odda. On February 28,
2003, Odda filed for bankruptcy in Norway. The bankruptcy is proceeding in
accordance with Norwegian law. The Company has been advised that, as a result of
the bankruptcy, the creditors of Odda have recourse only to the assets of Odda,
except in the case of certain debt guaranteed by the Company. The Company
obtained the consent of a majority of the holders of its senior subordinated
notes due 2008 to amend the indenture governing these existing notes in such a
manner that the bankruptcy of Odda did not create an event of default
thereunder. The Company is the guarantor of certain debt of Odda. As of June 30,
2003, debt of Norwegian Krone (NOK) 41.1 million ($5.7 million) was outstanding
and was included in loans payable to banks on the Company's consolidated balance
sheet, which has since been paid in full. The Company has been advised by
Norwegian counsel that it will obtain the benefit of the banks' position as a
secured creditor in connection with payment pursuant to the guarantees.
During 2003, the Company sold Carbide, previously a distributor for one of
Odda's product lines. Proceeds from the divestiture were not material. Odda was
included in the Company's Industrial Chemicals segment and Carbide was included
in the Company's Distribution segment. The Company recorded a $0.7 million loss
on disposal of Odda and Carbide. The loss primarily related to the write-off of
Odda's remaining net assets, including the related cumulative currency
translation adjustment.
Mineral Resource Technologies, Inc. During 2003, the Company sold MRT. MRT
provides management and recycling of coal combustion residues, principally fly
ash. The sale was completed in August 2003 for net proceeds, after transaction
costs, of approximately $14.0 million, the amount dependent upon certain
post-closing adjustments. The Company does not anticipate a material gain or
loss on disposal based upon its assessment of the likely outcomes of the
post-closing adjustments. MRT was included in the Company's All Other segment.
Liquidity and Capital Resources Comparison of Six Months Ended December 31, 2003
to Six Months Ended December 31, 2002
Net Cash (Used) Provided by Operating Activities. Cash (used) provided by
operations for the six months ended December 31, 2003 and 2002 was ($0.7)
million and $27.4 million, respectively. Cash used in 2003 was attributable to
lower income and increased working capital requirements. Cash provided in 2002
was due to improved income from continuing operations and aggressive working
capital management. The increase in cash overdrafts of $2.2 million is a partial
offset to the decline in working capital in 2003, and is included in the
financing activities section of the cash flow statement.
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for the six months ended December 31, 2003 and 2002 was
$12.1 million and ($1.4) million, respectively. Discontinued operations provided
$14.4 million and $1.5 million in 2003 and 2002, respectively. Capital
expenditures of $2.3 million and $5.4 million in the respective 2003 and 2002
periods were for new product capacity, for maintaining the Company's existing
asset base and for environmental, health and safety projects.
Net Cash (Used) by Financing Activities. Net cash (used) by financing
activities for the six months ended December 31, 2003 and 2002 was ($14.2)
million and ($18.9) million, respectively. Short-term debt decreased due to the
reduction of the senior credit facility of $26.5 million, debt payments related
to Odda of $5.7 million, and offset by other increases of $2.2 million. Proceeds
from long-term debt reflects the issuance of the Senior Secured Notes of $105.0
million and an increase of $2.5 million in foreign bank loans. Payments of
long-term debt primarily reflect the retirement of senior subordinated debt.
Payments of the Pfizer obligations, the PMC transactions and costs related to
the refinancing account for the remainder of funds used by financing activities.
Working Capital and Capital Expenditures. Working capital as of December
31, 2003 was $60.4 million compared to $9.1 million at fiscal year end June 30,
2003, an increase of $51.3 million. The increase in working capital was due to
reduced current debt, accounts payable and accrued expense levels, principally
as a result of the Company's refinancing and satisfaction of its obligations due
Pfizer.
The Company anticipates spending approximately $6.0 million for capital
expenditures related to continuing operations in fiscal 2004, primarily to cover
the Company's asset replacement needs, to improve processes, and for
environmental and regulatory compliance, subject to the availability of funds.
Stockholders' Deficit as of December 31, 2003 was $43.1 million compared
to $84.5 million at fiscal year end June 30, 2003, an improvement of $41.4
million. Net income of $25.1 million, which included a gain on extinguishment of
debt of $23.2 million, and the excess of the reduction in redeemable preferred
stock over total
40
assets divested and costs and liabilities incurred on the PMC transactions of
$20.1 million were the major components of the change. Foreign currency,
derivative instruments, dividends and equity value accretion on the series B and
C redeemable preferred stock partially offset the improvement.
Liquidity. At December 31, 2003, the Company was in compliance with the
financial covenants included in its senior credit facility. At December 31,
2003, the amount of credit extended under the Company's senior credit facility
totaled $5.7 million under the revolving credit facility and $10.5 million under
the letter of credit facility, and the Company had $9.3 million available under
the borrowing base formula in effect. In addition, certain of the Company's
foreign subsidiaries also had availability totaling $5.1 million under their
respective loan agreements. At February 16, 2004, the amount of credit extended
under the Company's senior credit facility totaled $5.8 million under the
revolving credit facility and $8.1 million under the letter of credit facility,
and the Company had $9.2 million available under the borrowing base formula in
effect.
The senior credit facility contains a lock-box requirement and an
acceleration clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the condensed consolidated balance
sheet.
The Company's ability to fund its operating plan relies upon its ability
to continue to successfully implement its efforts to improve its overall
liquidity (through cost reduction activities, working capital improvement plans,
shutdown of unprofitable operations and sales of certain business operations and
other assets) and the continued availability of borrowing under the senior
credit facility. The Company believes that it will be able to comply with the
terms of its covenants under the 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 consents on favorable terms, if at all.
The Company anticipates taxable gains on extinguishment of debt and other
aspects of the refinancing structure will be substantially offset by existing
net operating loss carry forwards, and that the Company will not incur
significant cash income tax payments related to these gains.
The Company's contractual obligations (in millions) at December 31, 2003
mature as follows:
Years
-------------------------------------------
Within 1 Over 1 to 3 Over 3 to 5 Total
-------- ----------- ----------- -------
Loans payable to banks ............. $ 9.1 $ -- $ -- $ 9.1
Lease commitments .................. 2.1 1.6 0.7 4.4
Long-term debt (including current
portion) ......................... 2.4 3.4 153.0 158.8
----- ---- ------ ------
Total contractual obligations .... $13.6 $5.0 $153.7 $172.3
===== ==== ====== ======
Liquidity and Capital Resources 2003 Compared to 2002
Net Cash Provided (Used) by Operating Activities. Cash provided (used) by
operations for 2003 and 2002 was $34.7 million and ($4.7) million, respectively.
Cash provided in 2003 was due to improved income from continuing operations and
aggressive working capital management. Improvements in net working capital,
principally due to close control of accounts receivables and accounts payable,
contributed $15.8 million to operating cash flow. Cash of $6.1 million used for
the reduction of cash overdrafts is a partial offset to the working capital
improvement, and is included in the financing activities section of the cash
flow statement.
Net Cash (Used) by Investing Activities. Net cash used by investing
activities for 2003 and 2002 was ($4.0) million and ($17.4) million,
respectively. Capital expenditures of $9.0 million and $8.7 million for 2003 and
2002, respectively, were for new product capacity, for maintaining the Company's
existing asset base and for environmental, health and safety projects. Included
in 2002 was $7.2 million for contingent purchase price payments for the MFA
acquisition. Proceeds from sales of fixed assets and discontinued operations
accounted for the remainder of cash provided by investing activities in 2003.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used)
by financing activities for 2003 and 2002 was ($26.4) million and $13.7 million,
respectively. The domestic credit facility and related capital expenditure line
were reduced $10.1 million during 2003. Debt payments related to Odda were $6.8
million, funded by the reductions in Odda's working capital, asset sales and
cash provided by the Company. The Company made a $2.5 million scheduled payment
on the Pfizer note. Cash overdrafts declined $6.1 million as the Company
improved its cash management practices.
41
Working Capital and Capital Expenditures. Working capital, defined as
accounts receivables, inventories and prepaid expenses and other current assets,
less accounts payable and accrued expenses and other current liabilities, was
$59.7 million and $93.8 million as of June 30, 2003 and 2002, respectively. The
decrease was primarily due to improved management of accounts receivables and
accounts payable. In addition, $9.0 million of accrued purchase price payable to
Pfizer, due March 2004, was included in Other current liabilities at June 30,
2003, and was classified as a long-term liability at the prior year end.
The Company's contractual obligations (in millions) at June 30, 2003
mature as follows:
Years
-----------------------------------------------------
Within 1 Over 1 to 3 Over 3 to 5 After 5 Total
-------- ----------- ----------- ------- -------
Loans payable to banks(1)................. $38.9 $-- $ -- -- $ 38.9
Lease commitments......................... 2.4 2.3 0.9 0.1 5.7
Long-term debt (including current
portion)................................ 24.1 2.2 100.2 -- 126.5
----- ---- ------ ---- ------
Total contractual obligations........... $65.4 $4.5 $101.1 $0.1 $171.1
===== ==== ====== ==== ======
- ----------
(1) Includes $33.6 million outstanding under the Company's replaced senior
working capital facility which matured in November 2003 (see Note 8 to the
year end Consolidated Financial Statements).
On November 30, 2000, the Company issued $25 million of redeemable Series
B preferred stock and $20 million of redeemable Series C preferred stock. On
December 26, 2003, the Company redeemed all of the Series B preferred stock and
a portion of the Series C preferred stock in connection with the PMC
transactions. The Series C preferred is entitled to cumulative cash dividends,
payable semi-annually at 15% per annum of the liquidation value. The liquidation
value of the Series C preferred stock is an amount equal to $1,000 per share
plus all accrued and unpaid dividends (Liquidation Value) plus a percentage of
the equity value of the Company, as defined in the amended Certificate of
Incorporation. The equity value is calculated as a multiple of the earnings
before interest, tax, depreciation and amortization of the Company (Equity
Value). On the third closing anniversary and on each closing anniversary
thereafter, the Company may redeem for cash only in whole the Series C preferred
shares, at the Liquidation Value plus the Equity Value payment. At any time
after the redemption of the Company's Senior Subordinated Notes due 2008, the
holders of Series C preferred have the right to require the Company to redeem
for cash all such preferred shares outstanding.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC" or the "Commission")
recently issued disclosure guidance for "critical accounting policies". The SEC
defines "critical accounting policies" as 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.
The Company's significant accounting policies are described in Note 2 to
the year end Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, management of the Company is required to make
certain estimates and assumptions during the preparation of consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America. 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 materially differ from those estimates. Following are some of the
Company's critical accounting policies impacted by judgments, assumptions and
estimates.
Revenue Recognition
Revenues are recognized when title to products and risk of loss are
transferred to customers. Additional conditions for recognition of revenue are
that collection of sales proceeds is reasonably assured and the Company has no
further performance obligations. Net sales are comprised of total sales billed,
less reductions for returned goods, trade discounts and customer allowances.
42
Allowance for Doubtful Accounts
We estimate the allowance for doubtful accounts considering a number of
factors, including: (1) historical experience, (2) aging of the accounts
receivable and (3) specific information obtained by us on the condition and the
current creditworthiness of our customers. If the financial conditions of our
customers were to deteriorate and affect the ability of our customers to make
payments on their accounts, we may be required to increase our allowance by
recording additional bad debt expense. Likewise, should the financial condition
of our customers improve and result in payments or settlements of previously
reserved amounts, we may be required to record a reduction in bad debt expense
to reverse the recorded allowance.
Litigation
The Company is subject to legal proceedings and claims arising out of the
normal course of business. The Company routinely assesses the likelihood of any
adverse judgments or outcomes to these matters as well as ranges of probable
losses. A determination of the amount of the reserves required for these
contingencies is based on an analysis of the various issues, historical
experience, other third party judgments and outside specialists, where required.
The required reserves may change in the future due to new developments in each
matter. For further discussion, see Note 14 to the year end Consolidated
Financial Statements.
Environmental Matters
The Company determines the costs of environmental remediation of its
facilities and formerly owned properties on the basis of current law and
existing technologies. Uncertainties exist in these evaluations primarily due to
unknown conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies. The liabilities are adjusted
periodically as remediation efforts progress or as additional information
becomes available. The Company has recorded liabilities of $2.2 million at
December 31, 2003 for such activities.
Long Lived Assets
Long-lived assets, including plant and equipment, and other intangible
assets are reviewed for impairment when events or circumstances indicate that a
diminution in value may have occurred, based on a comparison of undiscounted
future cash flows to the carrying amount of the long-lived asset. If the
carrying amount exceeds undiscounted future cash flows, an impairment charge is
recorded based on the difference between the carrying amount of the asset and
its fair value.
The assessment of potential impairment for a particular asset or set of
assets requires certain judgments and estimates by the Company, including the
determination of an event indicating impairment; the future cash flows to be
generated by the asset, including the estimated life of the asset and likelihood
of alternative courses of action; the risk associated with those cash flows; and
the Company's cost of capital or discount rate to be utilized.
Useful Lives of Long-Lived Assets
Useful lives of long-lived assets, including plant and equipment and other
intangible assets are based on management's estimates of the periods that the
assets will be productively utilized in the revenue-generation process. Factors
that affect the determination of lives include prior experience with similar
assets and product life expectations and management's estimate of the period
that the assets will generate revenue.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
on a first-in, first-out (FIFO) and average methods for most inventories;
however certain subsidiaries of the Company use the last-in, first-out (LIFO)
method for valuing inventories. The determination of market value to compare to
cost involves assessment of numerous factors, including costs to dispose of
inventory and estimated selling prices. Reserves are recorded for inventory
determined to be damaged, obsolete, or otherwise unsaleable.
Income Taxes
Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets when appropriate to reflect the expected future
tax benefits to be realized. In determining the appropriate valuation allowance,
certain judgments are made relating to
43
recoverability of deferred tax assets, use of tax loss carryforwards, level of
expected future taxable income and available tax planning strategies. These
judgments are routinely reviewed by management. For further discussion, see Note
13 to the year end Consolidated Financial Statements.
New Accounting Pronouncements
The Company adopted the following new accounting pronouncements in fiscal
2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS
No. 149 amends and clarifies accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS
No. 149 did not result in a material impact on the Company's financial
statements.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a
financial instrument, that is within its scope, as a liability (or an asset in
some circumstances). SFAS No. 150 also revises the definition of liabilities to
encompass certain obligations that can, or must, be settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 did not result in an impact
on the Company's financial statements.
The Company will adopt the following new accounting pronouncement in
fiscal 2004:
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits (revised 2003)"
("SFAS No. 132"). This revision to SFAS No. 132 relates to employers'
disclosures about pension plans and other postretirement benefit plans. SFAS No.
132 now requires additional disclosures to describe the types of plan assets,
investment strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods. SFAS
No. 132 is effective for financial statements with fiscal years ending after
December 15, 2003. The interim-period disclosures required by SFAS No. 132 are
effective for interim periods beginning after December 15, 2003. The adoption of
this revision to SFAS No. 132 will not result in a material impact on the
Company's financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. FIN No. 46 is effective for financial statements
for periods ending after March 15, 2004. The adoption of FIN No. 46 will not
result in an impact on the Company's financial statements.
Effect of Inflation; Foreign Currency Exchange Rates
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. The Company does not believe that inflation has had
any material effect on the Company's business over the last two years.
The Company's substantial foreign operations expose it to risk of exchange
rate fluctuations. Financial position and results of operations of the Company's
international subsidiaries generally are measured using local currencies as the
functional currency. Assets and liabilities of these operations are translated
at the exchange rates in effect at each fiscal year end. The translation
adjustments related to assets and liabilities that arise from the use of
differing exchange rates from period to period are included in accumulated other
comprehensive loss in shareholders' equity. Income statement accounts are
translated at the average rates of exchange prevailing during the year.
A business unit of Koffolk and all of Planalquimica operate primarily in
U.S. dollars. The U.S. dollar is designated as the functional currency for these
businesses and translation gains and losses are included in determining net
income or loss.
44
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction and
translation losses were $480, $3,027 and $711 for 2003, 2002 and 2001,
respectively, and were included in other expense, net in the consolidated
statements of operations.
Quantitative and Qualitative Disclosure About Market Risk
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates, foreign currency exchange rates,
and commodity prices. As a result, future earnings, cash flows and fair values
of assets and liabilities are subject to uncertainty. The Company uses, from
time to time, foreign currency forward contracts as a means of hedging exposure
to foreign currency risks. The Company also utilizes, on a limited basis,
certain commodity derivatives, primarily on copper used in its manufacturing
processes, to hedge the cost of its anticipated purchase requirements. The
Company does not utilize derivative instruments for trading purposes. The
Company does not hedge its exposure to market risks in a manner that completely
eliminates the effects of changing market conditions on earnings, cash flows and
fair values. The Company monitors the financial stability and credit standing of
its major counterparties.
Interest Rate Risk
The Company uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined for
these purposes as the potential change in the fair value resulting from an
adverse movement in interest rates.
The Company's debt portfolio is comprised of fixed rate and variable rate
debt of approximately $167.9 million as of December 31, 2003. Approximately 9%
of the debt is variable and would be interest rate sensitive. For further
details, see Note 6 to the six month Condensed Consolidated Financial Statements
of the Company appearing elsewhere herein.
For the purposes of the sensitivity analysis, an immediate 10% change in
interest rates would not have a material impact on the Company's cash flows and
earnings over a one year period.
As of December 31, 2003, the fair value of the Company's senior
subordinated notes is estimated based on quoted market rates at $30.7 million
and the related carrying amount is $48.0 million, and the fair value of the
Company's senior secured notes is estimated based on quoted market rates at
$109.5 million and the related carrying amount is $105.0 million.
Foreign Currency Exchange Rate Risk
A significant portion of the financial results of the Company is derived
from activities conducted outside the U.S. and denominated in currencies other
than the U.S. dollar. Because the financial results of the Company are reported
in U.S. dollars, they are affected by changes in the value of the various
foreign currencies in relation to the U.S. dollar. Exchange rate risks are
reduced, however, by the diversity of the Company's foreign operations and the
fact that international activities are not concentrated in any single non-U.S.
currency. Short-term exposures to changing foreign currency exchange rates are
primarily due to operating cash flows denominated in foreign currencies. From
time to time, the Company may cover known and anticipated operating exposures by
using purchased foreign currency exchange option and forward contracts. The
primary currencies for which the Company has foreign currency exchange rate
exposure are the Euro, the Brazilian Real, and Japanese yen.
The Company uses sensitivity analysis to assess the market risk associated
with its foreign currency transactions. Market risk is defined for these
purposes as the potential change in fair value resulting from an adverse
movement in foreign currency exchange rates. The fair value associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date. Based on the limited amount of foreign currency contracts at December 31,
2003, the Company does not believe that an instantaneous 10% adverse movement in
foreign currency rates from their levels at December 31, 2003, with all other
variables held constant, would have a material effect on the Company's results
of operations, financial position or cash flows.
45
Other
The Company obtains third party letters of credit in connection with
certain insurance obligations. At December 31, 2003, the contract values of
these letters of credit and surety bonds were $10.5 million and their fair
values did not differ materially from their carrying value.
Commodity Price Risk
The Company purchases certain raw materials, such as copper, under
short-term supply contracts. The purchase prices thereunder are generally
determined based on prevailing market conditions. The Company uses commodity
derivative instruments to modify some of the commodity price risks. Assuming a
10% change in the underlying commodity price, the potential change in the fair
value of commodity derivative contracts held at June 30, 2002 would not be
material when compared to the Company's operating results and financial
position.
The foregoing market risk discussion and the estimated amounts presented
are Forward-Looking Statements that assume certain market conditions. Actual
results in the future may differ materially from these projected results due to
developments in relevant financial markets and commodity markets. The methods
used above to assess risk should not be considered projections of expected
future events or results.
46
BUSINESS
Overview
We are a leading diversified global manufacturer and marketer of a broad
range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which we sell throughout
the world predominantly to the poultry, swine and cattle markets. MFAs are used
preventively and therapeutically in animal feed to produce healthy livestock. We
believe we are the third largest manufacturer and marketer of MFAs in the world,
and we believe that certain of our MFA products have leading positions in the
marketplace. We are also a specialty chemicals manufacturer and marketer,
serving primarily the United States pressure-treated wood and chemical
industries. We have several proprietary products, and many of our products
provide critical performance attributes to our customers' products, while
representing a relatively small percentage of total end-product cost. We operate
in over 17 countries around the world and sell our animal health and nutrition
products and specialty chemicals products into over 40 countries. Approximately
71% of our fiscal 2003 net sales were from our Animal Health and Nutrition
business, and approximately 29% of our fiscal 2003 net sales were from our
Specialty Chemicals business.
Our Animal Health and Nutrition segment manufactures and markets more than
500 formulations and concentrations of medicated and nutritional feed additives,
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products, to the livestock and pet food industries. Our MFA products are
internationally recognized for quality and efficacy in the prevention and
treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in
swine and acidosis in cattle. We market our Animal Health and Nutrition products
under approximately 450 governmental product registrations, approving our MFA
products with respect to animal drug safety and effectiveness.
Our Specialty Chemicals business manufactures and markets a number of
specialty chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, aerospace and agricultural industries. We anticipate
that our proprietary manufacturing process for one of the leading new products
for manufacturing pressure-treated wood will represent our largest growth
opportunity in our Specialty Chemicals business. Over 40% of our fiscal 2003 net
sales in our Specialty Chemicals business was derived from copper-based
compounds, solutions or mixes.
We have in recent years focused our business on animal health and
nutrition products. As a result of the rapid decline of the printed circuit
board industry in the United States, we have substantially exited that business,
including our etchant recycling operations, and re-directed our productive
capacity in niche markets. We have also sold other non-strategic businesses,
such as our Agtrol copper fungicide business and Mineral Resource Technologies,
Inc. ("MRT") and closed our facility in Odda, Norway. Recently we completed the
divestiture of our subsidiary, The Prince Manufacturing Company ("PMC").
Animal Health Industry Overview
According to Wood Mackenzie Animal Health Services, the MFA industry was
approximately $1.6 billion in size in calendar year 2002. The MFA market
includes antibiotics, antibacterials, anticoccidials and anthelmintics. These
products are intended to aid in the prevention and treatment of diseases in
animals, promoting healthy development and improving food quality and safety.
According to Wood Mackenzie, the animal health market will continue to grow
modestly at 1.4% per annum through 2007.
Most MFAs are used for poultry (approximately 40%), swine (approximately
35%) and cattle (approximately 20%). The leading companies participating in the
MFA marketplace are Elanco (a division of Eli Lilly), Alpharma, Intervet (a
division of Akzo Nobel) and ourselves.
The Asian and American markets, which have the world's largest livestock
populations (see the table below indicating 1998 numbers, prepared by FAO), are
expected to enjoy continued growth. We believe this increase is based upon a
growing world population, increasing global demand for meat protein, especially
in developing countries, and growing consumer focus on food quality and safety.
47
Poultry Swine
Country (production) Country (production)
- ------- ------------ --------- ------------
US..................... 8.1 billion China.................... 472 million
China.................. 5.7 billion US....................... 100 million
Brazil................. 3.3 billion Germany.................. 41 million
France................. 2.0 billion Spain.................... 32 million
Mexico................. 0.9 billion France................... 27 million
Source: 1998 FAO Livestock Slaughter Numbers
Given the large and growing demand for livestock and the widespread
adoption of modern production techniques -- characterized by growing a large
number of livestock in confined areas -- we believe the use of medicated and
nutritional supplements will continue to be necessary to ensure animal health
and the economic viability of such livestock production. The most efficient and
cost effective method to get medicated and nutritional products to such vast
number of animals is through feed additives.
Business Strengths
Top Three MFA Provider in the World. We believe we are the world's third
largest manufacturer and marketer of medicated feed additives in the poultry and
swine markets. We manufacture and market over 200 MFA formulations and
concentrations. We believe our MFAs rank first in sales in Brazil, and third in
the United States. Our Animal Health and Nutrition business serves our customers
in over 40 countries from 17 facilities. Many of our MFA products have been
marketed for over 20 years.
Significant Barriers to Entry. Medicated feed additives cannot be
manufactured or marketed without governmental product registrations that are
specific to each country -- the FDA for example, in the United States, Health
Canada in Canada, EU/EMEA authorities in Europe. Before a product registration
is granted, the applicant must show the regulatory authority that the product
and its proposed use are both effective and safe for the specified species and
application. Obtaining an MFA product registration is comparable in cost and
difficulty with obtaining approval for drugs used to treat humans. In addition
to approval of formulation and labeling, regulatory authorities typically
require approval and periodic inspection of the manufacturing facilities.
Because of the costs and difficulties associated with obtaining MFA product
registrations, there have been few new medicated feed additives developed and
marketed over the last decade. The only two new MFA compounds approved for use
in the last 10 years were semduramycin, one of our products, and ractopamine.
Because of the inherent difficulties and high costs of obtaining major product
registrations and their absolute necessity to operate in this business, our
existing broad portfolio of product registrations provides us strength in the
marketplace.
Strong Brand Name Recognition of Our Medicated Feed Additives. We enjoy
strong brand name recognition with our medicated feed additives for the
prevention and control of diseases in poultry, swine and cattle. In particular,
virginiamycin, an antibiotic marketed under the Stafac(R), Eskalin(R) and
V-Max(R) brand names, is a popular and efficacious choice of medicated feed
additive in the poultry, swine and cattle industry. Semduramycin, sold under the
brand name, Aviax(R), and salinomycin, sold under the brand name Coxistac(R),
are also leading poultry anticoccidials. In fiscal 2003, branded MFAs accounted
for approximately 56% of our total Animal Health and Nutrition sales.
Established Global Network and Customer Base. From our 20 facilities in 17
countries, we manufacture and market our products, which are sold through
multiple distribution channels to over 2,700 customers in a wide variety of end
use markets. We sell our products through an established global sales, marketing
and distribution network to customers in over 40 countries. In fiscal 2003, no
single customer accounted for more than 5% of total revenues and our top 10
customers accounted for less than 23% of total revenues. In fiscal 2003,
approximately 36% of our net sales were made outside the United States, with 11%
of sales to Europe, 9% of sales to Latin America, 8% of sales to the Middle
East, and 8% of sales to Asia and Australia.
Extensive Technical Support for Customers. We employ over 60 chemists,
technicians, PhDs and veterinarians (DVMs) at our various facilities involved in
providing technical services to customers. Our technical service group and sales
personnel are able to work directly with commercial feed manufacturers and
integrated poultry, swine and cattle producers to promote animal health. We are
able to offer our customers
48
products targeted to local markets, allowing us to serve those local markets
more effectively. Our MFA field personnel are skilled in the area of product
differentiation and have extensive applications knowledge so as to be able to
work closely with customers in determining optimum benefits from usage of our
products. As agricultural food production will continue to intensify and will
adopt evolving technologies, our MFA personnel are constantly working with
customers to better understand their needs in order to best utilize the products
existing within our MFA portfolio. This commercial knowledge also plays a
pivotal role within the R&D function to ensure that research results are
applicable to customer needs and concerns.
Manufacturing Expertise. Our manufacturing expertise and know-how in
antibiotic manufacturing process and organic synthesis has given us unique
positions in the marketplace. We believe that we are the only manufacturer of
amprolium, virginiamycin and semduramycin in the world. Our blending,
compounding and formulation expertise is recognized by our customers in the
animal health and nutrition market. In addition, in our Specialty Chemicals
business, based on our more than 50 years of expertise in the metal chemical
area, we have become a leading supplier of the new copper-containing compound to
the pressure-treated wood industry. We also believe we hold leading positions in
agricultural and other industrial applications for copper-containing compounds.
Proven Management Team. We have assembled a strong and experienced
management team at both the corporate and operating levels. Our top operating
managers have an average of over 30 years of experience in the animal health and
nutrition and specialty chemicals industries. With our expanded management team,
we have added significant operational and international experience to our
businesses. Our founding family owns 100% of our common stock.
Business Strategy
Expand Applications for Animal Health and Nutrition Product Offerings to
Our Primary Markets. We seek to increase our product lines through expanding the
scope of our animal health and nutrition product registrations, through both
extending the use claims and formulations and the geographic areas of such
registrations. In the United States, in fiscal 2003, we obtained from the FDA a
zero-day withdrawal registration for the use of our oxytetracycline product in
cattle. We are actively working with the FDA and other regulators to obtain
additional registrations, as well as additional cross-clearances so that our MFA
products can continue to be used in situations where another MFA is also in use.
In fiscal 2003, we obtained approval for Aviax(R) in the EU, and are pursuing a
modification of our Aviax(R) registration in the United States allowing for site
change of the active ingredient. We believe that our receipt of FDA approval of
Aviax(R) together with our EU approval of Aviax(R), and our other registration
efforts, has the potential to increase our sales by $7-10 million over the next
two to three years. By leveraging our global reach and our position as the only
leading animal health company dedicated to MFAs and NFAs, we are natural
partners for small players in the industry, who approach us to help them license
or distribute new products they have developed, because we do not compete with
their other products.
Expand Our Customer Base. We intend to expand and strengthen our customer
base by (i) focusing on relationships with key accounts, (ii) continuing to
incentivize our sales force to concentrate on fast-growing, high-margin areas
within existing product groups, and (iii) pursuing growth opportunities for our
existing products in new markets. As certain of our MFA products are used in
rotation by our customers, we seek to supply all or substantially all of the
various MFA products which our customers may want to use. Our MFA business has
historically been strongest in the poultry market, and we are seeking to develop
it further in the swine and cattle markets. In fiscal year 2003, we increased
our sales force and technical professionals in the swine market for our MFAs,
increasing net sales by approximately $5 million. We expect to continue to
enhance our sales force in the swine market, and believe that there are further
growth opportunities from doing so. In addition, we believe the under-penetrated
Chinese and Latin American markets offer growth opportunities. In China, we are
seeking to partner with local distributors to leverage our existing local sales
force.
Capture Market Share in New Pressure-Treated Wood Business. We seek to
become the leading supplier of the active ingredient copper solution expected to
replace the standard chromated-copper-arsenic solution, which was banned by the
EPA in the residential and recreational pressure-treated wood markets, effective
December 31, 2003. We currently estimate that the total potential size of this
copper solution to the pressure-treated wood market will be approximately $120
million annually. We have already signed a multi-year, take-or-pay contract with
a major chemicals supplier to the pressure-treated wood industry to provide it
with this new solution,
49
which we estimate will increase our sales by approximately $9 million in fiscal
2004 and by approximately $30 million over the life of the contract, based on
existing forecasts. We have applied for a patent with respect to the
manufacturing process of our solution, and the claims in our patent application
were recently allowed by the United States Patent and Trademark Office. We
believe that our manufacturing process allows us to operate in this market with
a lower cost of capital and higher factory through-put than our competition. In
addition, we have filed a provisional patent for a new, large molecule copper
compound product. We believe that this new product may be the next generation in
copper-based wood treatment products, with the potential to substantially
increase the duration of protection for treated wood.
Continued Rationalization of Operations. We have taken significant steps
to refocus on our core business and to rationalize our operations by
implementing cost-saving and productivity-enhancing programs and yield
improvement programs. Since June 2002, we reduced our employee headcount from
approximately 1,250 to approximately 1,050 employees. We intend to restructure
manufacturing capacity to improve production efficiency. We are analyzing
additional opportunities to increase operating efficiencies and profitability.
We continue to evaluate our specialty chemicals businesses for adequate returns
and will continue to restructure, discontinue or sell those businesses that are
dilutive to earnings. To that end, since May 2001, we sold our Agtrol copper
fungicide business, our fresh ammoniacal etchant and spent cupric chloride
printed circuit board etchant businesses associated with our east coast and
midwestern plants, closed our facility in Odda, Norway, sold Carbide Industries
and MRT, and completed the divestiture of substantially all of the assets of
PMC. See "Prospectus Summary -- Recent Developments." In addition, we have
reached an agreement to sell, subject to the satisfaction of certain closing
conditions, our ferric chloride business associated with one of our midwestern
plants.
Our Animal Health and Nutrition Business -- Medicated Feed Additives
We manufacture and market a broad range of medicated feed additive
products to the global livestock industry, either directly to large integrated
producers or through a network of independent distributors. Feed additives
provide both therapeutic benefits and increased conversion efficiency -- key
drivers of profitability for livestock producers.
Our MFA products can be grouped into five principal categories:
antibiotics, antibacterials, anticoccidials, anthelmintics and other medicated
feed additives. In fiscal 2003, antibiotics and antibacterials generated sales
for us of approximately $80 million, anticoccidials generated sales for us of
approximately $53 million, and anthelmintics and other medicated feed additives
generated sales for us of approximately $7 million.
Our core MFA products are listed in the table below:
Brand Active/Antigen Market Entry Comment
- ----------------------- ----------------- ------------ -------------------------------
Terramycin(R)/Neo- oxytetracycline, 1951 Antibiotic with multiple
Terramycin(R)/Neo-TM(R) neomycin applications for a wide
number of species
CLTC(R) chlortetracycline 1954 Antibiotic with multiple
applications for a wide
number of species
Nicarb(R) nicarbazin 1955 Anticoccidial for poultry
Amprol(R) amprolium 1960 Anticoccidial for poultry
and cattle
Bloatguard(R) poloxalene 1966 Anti-bloat treatment for cattle
Banminth(R) pyrantel tartrate 1969 Anthelmintic for livestock
Mecadox(R) carbadox 1971 Antibacterial used in swine
feeds to control
salmonellosis and dysentery
Stafac(R)/Eskalin(R)/V-Max(R) virginiamycin 1972 Antibiotic with multiple
applications for a wide
number of species
Coxistac(R)/Posistac(R) salinomycin 1979 Anticoccidial for poultry;
disease preventative in swine
Rumatel(R) morantel tartrate 1981 Anthelmintic for livestock
Oxibendazole(R) oxibendazole 1982 Anthelmintic for livestock
Aviax(R) semduramycin 1995 Anticoccidial for poultry
50
Antibiotics
Antibiotics are natural products produced by fermentation and are used to
treat or to prevent diseases, thereby promoting more efficient growth. Several
factors contribute to limit the efficiency, the weight gain and feed conversions
of livestock production, including poor nutrition, environmental and management
problems, heat stress and subclinical disease.
Virginiamycin. Virginiamycin is an antibiotic marketed under our brand
names Stafac(R) for treating swine, cows, broilers and turkeys, Eskalin(R) for
dairy cows and V-Max(R) for feed lot cattle. We formulate virginiamycin to
improve health in poultry, swine and cattle and prevent necrotic enteritis in
poultry, dysentery in swine and liver abscesses in cattle. The product is sold
to large poultry and swine producers and feed companies in North America, Latin
America and Asia.
First discovered in Belgium in 1954, virginiamycin is an antimicrobial
produced from the streptomyces virginiae fungus. The antibiotic inhibits the
bacterial destruction and degradation of nutrients such as carbohydrates and
amino acids, resulting in more energy and nutrients and less production of
harmful waste products such as lactic acid, volatile fatty acids and ammonia.
Virginiamycin has been successful due to a number of strong product
features. For example, no withdrawal period is required since it is virtually
unabsorbed from the digestive tract. It is excreted in very low concentrations
and rapidly degraded. And it alleviates some of the effects of heat stress and
crowding on performance and improves nutrient utilization. To date, no generic
competition has been introduced due to our proprietary virginiamycin
manufacturing technology.
Terramycin and Neo-Terramycin. Terramycin(R) and Neo-Terramycin(R), which
are derived from the active ingredient oxytetracycline, are effective against a
range of diseases including:
o fowl cholera in chickens,
o airsacculitis in turkeys,
o pneumonia and enteritis in swine, and
o pneumonia, enteritis and liver abscesses in cattle.
We sell Terramycin(R) and Neo-Terramycin(R) feed additive products in
various concentrations. Terramycin(R) is approved for use for poultry, swine,
cattle and sheep. Neo-Terramycin(R) combines the active ingredients
oxytetracycline and neomycin to prevent and treat a wide range of diseases
caused by gram positive and gram negative organisms, including bacterial
enteritis in chickens and turkeys, baby pig diarrhea in swine and calf diarrhea.
These terramycin products are sold mostly in the United States to livestock
producers, feed companies and distributors. Limited quantities are sold in
selected countries in Latin America and Asia.
Antibacterials
Antibacterials are produced through chemistry and are used to treat and
prevent diseases.
Carbadox. We market carbadox under the brand name Mecadox(R). Carbadox is
an antibacterial compound recommended for use in swine feeds to promote and to
control swine salmonellosis and swine dysentry. In swine production, the primary
objective of producers is the rapid and efficient development of swine at
minimal cost. Since 1970, Mecadox(R) has been a leader in reducing livestock
production costs through meaningful performance enhancement. Mecadox(R) is a
leading product for starter/grower swine in the United States. In addition to
its antimicrobial properties, it also improves nitrogen retention and increases
the efficiency of amino acid metabolism, two critical factors in the development
of young swine. Mecadox(R) is chemically unrelated to any other antibacterial
that is used in animals or humans. Mecadox(R) is sold primarily in North America
to feed companies and large integrated swine producers.
Anticoccidials
Anticoccidials are produced through fermentation and chemistry, and are
primarily used to prevent and control the disease coccidiosis in poultry and in
cattle. Coccidiosis is a disease of the digestive tract that is of great concern
to animal producers. Caused by protozoan parasites such as Eimeria spp.,
coccidiosis is one of the
51
most destructive diseases facing the world's poultry producers. Common effects
of this disease (such as weight loss, wet droppings, poor feed utilization and
higher mortality rates) rapidly affect an entire flock of poultry, resulting in
annual losses of hundreds of millions of dollars for the poultry industry.
Modern, large scale poultry production is based on intensive animal
management practices. This type of animal production requires routine preventive
medications in order to prevent health problems. Coccidiosis is one of the
critical disease challenges which poultry producers face globally. We sell our
anticoccidials globally, primarily to integrated poultry producers and feed
companies in North America, the Middle East, Latin America and Asia, and to
international animal health companies.
Nicarbazin and Amprolium. We produce nicarbazin and amprolium for
distribution to the world-wide poultry industry through major multinational life
science and veterinary companies. Nicarbazin is a broad-spectrum anticoccidial
which works by interfering with mitochondrial metabolism. It is classified as an
oxidative phosphorylation uncoupler and is used for coccidiosis prevention in
broiler chickens.
We believe that we are the sole world-wide producer of amprolium, and the
largest volume world-wide producer of nicarbazin. We are also the sole Latin
American producer of nicarbazin. Nicarbazin and amprolium, along with
salinomycin and semduramycin, are among the most effective medications for the
prevention of coccidiosis in chickens when used in rotation with other
anticoccidials. In the United States, we market nicarbazin under the trademark
Nicarb(R) and amprolium under the trademark Amprol(R).
Other Anticoccidials. From a class of compounds known as ionophores, we
developed Aviax(R) and Coxistac(R) to combat coccidiosis. These two products
have demonstrated increased feed efficiency, the ability to suppress coccidial
lesions, and provide reliable reserve potency with minimal side-effects. Through
a third product, Posistac(R), we have extended the application of the active
ingredient in Coxistac(R) to swine.
Aviax(R) contains the ionophore semduramycin which provides protection for
poultry against all major coccidial parasites. The product can be incorporated
into virtually any type of feed, and provided to broilers of any production
stage. Commercial studies to date show that Aviax(R) significantly improves feed
conversion. We have received regulatory approval to sell Aviax(R) in the EU and
have applied in the United States for the sale of Aviax(R) in crystaline dosage
form. This dosage form is significantly more cost-effective and may improve
profitability significantly. Regulatory approvals are expected in the United
States in the last quarter of fiscal 2004.
Coxistac(R) contains the ionophore salinomycin. The product acts early in
the coccidial life cycle by killing sporozoites, trophozoites and early
developing schizonts before poultry can be severely damaged. Coxistac(R) has
proven to be effective and safe with minimal resistance development evident in
commercial studies. The recommended dosage provides a high level of protection
against coccidiosis even through temporary periods of low feed intake caused by
disease or adverse climatic conditions. No withdrawal period is required for
poultry before slaughter. Coxistac(R) is a leading anticoccidial in Asia, Latin
America, the Middle East and Canada.
Posistac(R) contains salinomycin which acts as a productivity enhancer for
grower/finisher swine. The compound increases the utilization and digestion of
feed ingredients by mature swine thereby allowing swine to reach market weight
earlier and at less cost than swine fed conventional feed additives. Posistac(R)
can be used up to the slaughter phase without the need for withdrawal and can be
tolerated at levels up to six times the recommended use level without adverse
effects on swine performance.
Anthelmintics
Anthelmintics protect against internal parasites. Our anthelmintic
products are marketed under the Rumatel(R) and Banminth(R) brand names.
Rumatel(R). Rumatel(R) is a potent broad-spectrum anthelmintic that
effectively eliminates the major internal nematode parasites in cattle. Unlike
other single-dose dewormers, Rumatel(R) may be administered to lactating dairy
cattle with no milk withdrawal. Dairy cattle may be treated with Rumatel(R) at
any time during their production cycle, whether dry, pregnant or lactating.
52
Banminth(R). Banminth(R) is an anthelmintic compound, a member of the
class of synthetic compounds called tetra-hydropyrimidines. Banminth(R) has a
mode of action that works effectively in protecting swine against the two major
internal parasites, large roundworms (Ascaris suum) and nodular worms
(Oesophagostomum spp.). Banminth(R) kills adult parasites and prevents roundworm
larval migration, preventing damage to the liver and lungs of swine. When used
continuously in feeds, Banminth(R) prevents re-infection of swine raised on
dirt.
Other Medicated Feed Additives
Our other medicated feed additives include a range of products sold under
the Bloat Guard(R) brand name. Bloat Guard(R) controls legume or wheat pasture
bloat in cattle. The products control bloat for at least 12 hours after a single
dose with no adverse effect on reproduction, rumen function or milk production.
We manufacture bulk active ingredients for our MFA products primarily in
four modern facilities located in:
o Guarulhos, Brazil (salinomycin and semduramycin),
o Rixensart, Belgium (virginiamycin and semduramycin),
o Ramat Hovav, Israel (nicarbazin and amprolium), and
o Braganca Paulista, Brazil (nicarbazin).
Active ingredients are further processed in our facilities and in contract
premix facilities located in each major region of the world.
We have established sales and technical offices for our MFA products in 15
countries including: the United States, Canada, Mexico, Venezuela, Brazil,
Argentina, Chile, Australia, Japan, China, Thailand, Malaysia, South Africa,
Belgium and Israel. The business is not dependent on any one customer.
The use of MFAs is controlled by regulatory authorities that are specific
to each country (e.g., the Food and Drug Administration ("FDA") in the United
States, Health Canada in Canada, EU/EMEA authorities in Europe, etc.),
responsible for the safety and wholesomeness of the human food supply, including
feed additives for animals from which human foods are derived. Each product is
registered separately in each country where it is sold. The appropriate
registration files pertaining to such regulations and approvals are continuously
monitored, maintained and updated by us. In certain countries where we are
working with a third party distributor, local regulatory requirements may
require registration in the name of such distributor. In most countries, our MFA
registrations have already been transferred from Pfizer to us, however transfers
are continuing in several countries and under our purchase agreement with
Pfizer, Pfizer agreed to continue to support the registration transfer effort.
Currently, our new MFA product development is focused on geographical
expansion of the present product line, new label claims and applications for
existing active ingredients and new formulations. This effort is coordinated by
product development personnel located in Belgium, Brazil, and the United States.
We also have an active program to identify and license new products and new
technologies.
Animal Health and Nutrition -- Nutritional Feed Additives
We manufacture and market trace minerals, trace mineral premixes, vitamins
and other nutritional ingredients to the livestock feed and pet food industries,
predominantly in the United States and Israel. These products generally fortify,
enhance or make more nutritious or palatable the livestock feeds and pet foods
with which they are mixed. The majority of the other ingredients that we sell
are nutrients that are used as supplements for animal feed. We serve customers
in major feed segments, including swine, dairy, poultry and beef. We customize
trace mineral premixes at our blending facilities in Marion, Iowa, Bremen,
Indiana, Bowmanstown, Pennsylvania and Petach Tikva, Israel, and market a
diverse line of other trace minerals and macro-minerals. Our major customers for
these products are medium-to-large feed companies, co-ops, blenders, integrated
poultry operations and pet food companies. We sell other ingredients, such as
buffers, yeast, palatants, vitamin K and amino acids, including lysine,
tryptophan and threonine. We also market copper sulfate as an animal feed
supplement.
53
Our Specialty Chemicals Business
We manufacture and market a number of specialty chemicals for use in the
wood treatment, chemical catalyst, brick, semiconductor, automotive, aerospace,
glass and agricultural industries. Our manufacturing customers incorporate our
specialty chemicals products into their finished products in various industrial
markets. We seek to take advantage of opportunistic niche markets where we
believe that our expertise and capabilities can be leveraged.
Copper Wood Treatment Products
For many years, we were a major supplier of an important ingredient
(copper oxide) used in the manufacture of CCA (chromated-copper-arsenic) wood
treating solutions for the pressure-treated wood industry. The United States
Environmental Protection Agency ("EPA") ruled that, effective December 31, 2003,
all pressure-treated wood for the residential and recreational markets could no
longer be treated using the standard chromated-copper-arsenic (CCA) solution. A
leading replacement solution for CCA pressure-treated wood is a copper carbonate
compound. We currently estimate that the total potential size of this copper
solution to the pressure-treated wood market is approximately $120 million
annually. We have already signed a multi-year, take-or-pay contract with a major
chemicals supplier to the pressure-treated wood industry to provide it with this
new product, which we estimate will increase our sales by approximately $9
million in fiscal 2004 and by approximately $30 million over the life of the
contract, based on existing forecasts. We have applied for a patent with respect
to the manufacturing process of our solution, and the claims in our patent
application were recently allowed by the United States Patent and Trademark
Office. We believe that our manufacturing process allows us to operate in this
market with a lower cost of capital and higher factory through-put than our
competition. To take advantage of this potential new market, we have constructed
and are operating commercially a production facility in Sumter, South Carolina
which is supplying this market, and we have begun construction on a similar
plant in Joliet, Illinois. In addition, we have filed a provisional patent for a
new, large molecule pressure-treated wood copper compound product. We believe
that this new product may be the next generation in copper-based wood treatment
products, with the potential to substantially increase the duration of
protection for treated wood.
Other Copper Products
We manufacture on a contract basis copper compounds for use primarily in
agricultural fungicides from our Sumter, South Carolina and Bordeaux, France
facilities. These contracts were part of the sale by us of our Agtrol business,
consisting of inventory of and intangible assets related to, copper fungicides
and other crop protection products, to Nufarm, Inc. in the fourth quarter of
fiscal 2001. Utilizing our over fifty-year history in producing copper
chemicals, we supply various metal-based chemicals to the catalyst and
electronics industries. We also manufacture copper compounds for a broad variety
of industrial customers.
Other Specialty Chemicals Products
We market and distribute fine and specialty chemicals to manufacturers of
health and personal care products and chemical coating products to customers in
the automotive, metal finishing and chemical intermediate markets. Among our
products for such applications are sodium fluoride and stannous fluoride, DL
Panthenol and selenium disulfide. Sodium fluoride is the active anti-cavity
ingredient in fluoride toothpaste, powders and mouthwashes. Selenium disulfide
is used as a dandricide in shampoo and hair care preparations.
Sales, Marketing and Distribution
We have approximately 2,700 customers. Sales to our top ten customers
represented approximately 23% of our fiscal 2003 net sales and no single
customer represented more than 5% of our fiscal 2003 net sales.
Our world-wide sales and marketing network consists of approximately 126
employees, 3 independent agents and 134 distributors who specialize in
particular markets.
Our products are often critical to the performance of our customers'
products, while representing a relatively small percentage of the total
end-product cost. We believe the three key factors to marketing our products
successfully are high quality products, a highly trained and technical sales
force, and customer service.
54
Most of our plants have chemists and technicians on staff involved in
product development, quality assurance, quality control and also providing
technical services to customers. Technical assurance is an important aspect of
our overall sales effort. We field approximately 50 Animal Health and Nutrition
technical service people throughout the world, with capabilities to interface
with all key customers on a marketing, sales training and technical (product)
basis, and who work directly with commercial feed manufacturers and integrated
poultry, swine and cattle producers to promote animal health. Our MFA and NFA
field personnel are skilled in the area of product differentiation and have
extensive application knowledge so as to work closely with customers in
determining optimum benefits from product usage. As agricultural food production
will continue to intensify and will adopt evolving technologies, our MFA and NFA
personnel are constantly working with customers to better understand their needs
in order to best utilize the products existing within our portfolio. This
commercial knowledge also plays a pivotal role within the research and
development function to ensure that research results are applicable to customer
needs and concerns.
Product Registrations, Patents and Trademarks
We own certain product registrations, patents, tradenames and trademarks,
and use know-how, trade secrets, formulae and manufacturing techniques which
assist in maintaining the competitive positions of certain of our products.
Product registrations are required to manufacture and sell medicated feed
additives. Formulae and know-how are of particular importance in the manufacture
of a number of the products sold in our specialty chemicals business. We believe
that no single patent or trademark is of material importance to our business
and, accordingly, that the expiration or termination thereof would not
materially affect our business. See "Government Regulation."
Properties
We maintain our principal executive offices and a sales office in 23,500
square feet of leased space in Fort Lee, New Jersey. We operate company-owned
manufacturing facilities and utilize third party toll manufacturers. The chart
below sets forth the locations and sizes of the principal manufacturing and
other facilities operated by us and uses of such facilities, all of which are
owned, except as noted.
Approximate
Location Square Footage Uses
- ---------------------------------------- -------------- --------------------------------------------------
Animal Health and Nutrition
Bangkok, Thailand(a)................... 500 Sales
Braganca Paulista, Brazil.............. 35,000 Sales, Manufacturing and Administrative
Bremen, Indiana........................ 50,000 Premixing and Warehouse
Buenos Aires, Argentina(a)............. 900 Sales and Administrative
Fairfield, New Jersey(a)............... 9,600 Administrative
Guarulhos, Brazil(b)................... 1,234,000 Sales, Premixing, Manufacturing and Administrative
Hong Kong, China(a).................... 750 Sales and Administrative
Kuala Lumpur, Malaysia(a).............. 7,300 Sales, Premixing and Warehouse
Ladora, Iowa........................... 9,500 Warehouse
Lee's Summit, Missouri(a).............. 1,500 Sales
Marion, Iowa........................... 32,500 Premixing and Warehouse
Petach Tikva, Israel................... 60,000 Sales, Premixing, Warehouse and Administrative
Pretoria, South Africa(a).............. 3,200 Sales and Administrative
Quincy, Illinois(c).................... 50,000 Sales, Warehouse, Research and Administrative
Rixensart, Belgium(d).................. 865,000 Sales, Manufacturing, Research and Administrative
Ramat Hovav, Israel.................... 140,000 Manufacturing and Research
Regina, Canada(a)...................... 1,000 Sales
Queretaro, Mexico(a)................... 3,500 Sales
Santiago, Chile(a)..................... 6,500 Sales and Administrative
55
Approximate
Location Square Footage Uses
- ---------------------------------------- -------------- ---------------------------------------
Sydney, Australia(a)................... 3,500 Sales
Tokyo, Japan(a)........................ 2,100 Sales and Administrative
Valencia, Venezuela(a)................. 1,100 Sales and Administrative
Specialty Chemicals
Bordeaux, France....................... 141,000 Sales, Manufacturing and Administrative
Garland, Texas......................... 20,000 Manufacturing
Joliet, Illinois....................... 34,500 Manufacturing
Reading, United Kingdom(a)............. 3,100 Sales and Administrative
Santa Fe Springs, California(e)........ 90,000 Manufacturing
Stradishall, United Kingdom............ 20,000 Sales, Manufacturing and Administrative
Sumter, South Carolina................. 123,000 Manufacturing and Research
- ----------
(a) This facility is leased. Our leases expire through 2027. For information
concerning our rental obligations, see Note 14 to our Consolidated
Financial Statements included herein.
(b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the
active ingredients semduramycin-mycelial and salinomycin. The plant also
produces Aviax(R), Terramycin(R), and Stafac(R) formulations as well as
the new Coxistac(R) Granular product. The plant is cGMP compliant and is
in the process of obtaining an FDA approval.
(c) Comprises two facilities, including a warehouse and an office/laboratory
facility.
(d) Our Rixensart, Belgium plant utilizes fermentation processes to produce
the active ingredients semduramycin-crystalline and virginiamycin. The
plant also produces Stafac(R) formulations and is responsible for all of
our fermentation development activities. The plant has been approved by
the FDA and is cGMP compliant.
(e) We lease the land under this facility from a partnership owned by Jack
Bendheim, Marvin Sussman and James Herlands. See "Certain Relationships
and Related Transactions."
Our subsidiary, CP Chemicals, Inc., leases portions of a previously owned
inactive, former manufacturing facility in Sewaren, New Jersey, and another of
our subsidiaries owns inactive, former manufacturing facilities in Powder
Springs, Georgia, Union, Illinois, Union City, California and Wilmington,
Illinois.
We believe that our existing and planned facilities are and will be
adequate for the conduct of our business as currently conducted and as currently
contemplated to be conducted.
We and our subsidiaries are subject to extensive regulation by numerous
governmental authorities, including the FDA and corresponding state and foreign
agencies, and to various domestic and foreign safety standards. Our
manufacturing facilities in Ramat Hovav and Brazil manufacture products that
conform to the FDA's cGMP regulations. Three domestic facilities involved with
recycling have final RCRA Part B hazardous waste storage and treatment permits.
Our regulatory compliance programs include plans to achieve compliance with
international quality standards known as ISO 9000 standards, which became
mandatory in Europe in 1999 and environmental standards known as ISO 14000. The
FDA is in the process of adopting the ISO 9000 standards as regulatory standards
for the United States, and it is anticipated that these standards will be phased
in for U.S. manufacturers over a period of time. Our plant in Petach Tikva,
Israel has achieved ISO 9000 certification. We do not believe that adoption of
the ISO 9000 standards by the FDA will have a material effect on our financial
condition, results of operations or cash flows.
Raw Materials
The raw materials used in our business include certain active drug
ingredients, a wide variety of chemicals, mineral ores and copper metal that are
purchased from manufacturers and suppliers in the United States, Europe and
Asia. In fiscal 2003, no single raw material accounted for more than 5% of our
cost of goods sold. Total raw materials cost was approximately $116 million or
35% of net sales in fiscal 2003. We believe that for most of our raw materials,
alternate sources of supply are available to us at competitive prices.
Research and Development
Research, development and technical service efforts are conducted by 65
chemists and technicians at our various facilities. We operate research and
development facilities in Rixensart, Belgium, Sumter, South Carolina, Ramat
Hovav, Israel and at Stradishall, England. These facilities provide research and
development services relating to fermentation development in the areas of
micro-biological strain improvement, as well as process scale-up; wood treatment
products; and organic chemical intermediates.
56
Technology is an important component of our competitive position,
providing us unique and low cost positions enabling us to produce high quality
products. Patents protect some of our technology, but a great deal of our
competitive advantage revolves around know-how built up over many years of
commercial operation.
Customers
We do not consider our business to be dependent on a single customer or a
few customers, and the loss of any of our customers would not have a material
adverse effect on our results. No single customer accounted for more than 5% of
our fiscal 2003 net sales. We typically do not enter into long-term contracts
with our customers.
Competition
We are engaged in highly competitive industries and, with respect to all
of our major products, we face competition from a substantial number of global
and regional competitors. Some of our competitors have greater financial,
research and development, production and other resources than we do. Our
competitive position is based principally on customer service and support,
product quality, manufacturing technology, facility location and price. We have
competitors in every market in which we participate. Many of our products face
competition from products that may be used as an alternative or substitute.
Employees
As of December 31, 2003, we had approximately 1,050 employees worldwide.
Of these, 198 employees were in management and administration, 138 were in sales
and marketing, 65 were chemists or technicians, and 649 were in production.
Certain employees are covered by individual employment agreements. Our Israeli
operations continue to operate under the terms of Israel's national collective
bargaining agreement, portions of which expired in 1994. We consider our
relations with both our union and non-union employees to be good.
Environmental Matters
We and our subsidiaries are subject to a wide variety of complex and
stringent federal, state, local and foreign environmental laws and regulations,
including those governing the use, storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials and wastes, the
manufacture, sale and use of pesticides and the health and safety of employees.
Pursuant to environmental laws, our subsidiaries are required to obtain and
retain numerous governmental permits and approvals to conduct various aspects of
their operations, any of which may be subject to revocation, modification or
denial under certain circumstances. Under certain circumstances, we or any of
our subsidiaries might be required to curtail operations until a particular
problem is remedied. Known costs and expenses under environmental laws
incidental to ongoing operations are generally included within operating
budgets. Potential costs and expenses may also be incurred in connection with
the repair or upgrade of facilities to meet existing or new requirements under
environmental laws or to investigate or remediate potential or actual
contamination and from time to time we establish reserves for such contemplated
investigation and remediation costs. In many instances, the ultimate costs under
environmental laws and the time period during which such costs are likely to be
incurred are difficult to predict.
Our subsidiaries have, from time to time, implemented procedures at their
facilities designed to respond to obligations to comply with environmental laws.
We believe that our operations are currently in material compliance with such
environmental laws, although at various sites our subsidiaries are engaged in
continuing investigation, remediation and/or monitoring efforts to address
contamination associated with their historic operations. As many environmental
laws impose a strict liability standard, however, we can provide no assurance
that future environmental liability will not arise.
In addition, we cannot predict the extent to which any future
environmental laws may affect any market for our products or services or our
costs of doing business. Alternatively, changes in environmental laws might
increase the cost of our products and services by imposing additional
requirements on us. States that have received authorization to administer their
own hazardous waste management programs may also amend their applicable statutes
or regulations, and may impose requirements which are stricter than those
imposed by the EPA. We can provide no assurance that such changes will not
adversely affect our ability to provide products and services at competitive
prices and thereby reduce the market for our products and services.
57
The nature of our and our subsidiaries' current and former operations
exposes us and our subsidiaries to the risk of claims with respect to
environmental matters and we can provide no assurance that we will not incur
material costs and liabilities in connection with such claims. Based upon our
experience to date, we believe that the future cost of compliance with existing
environmental laws, and liability for known environmental claims pursuant to
such environmental laws, will not have a material adverse effect on us. Based
upon information available, we estimate the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, (including the litigation referred to under
"-- Legal Proceedings") to be approximately $2.2 million, which is included in
current and long-term liabilities in our December 31, 2003 condensed
consolidated balance sheet. However, future events, such as new information,
changes in existing environmental laws or their interpretation, and more
vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material. For all purposes
of the discussion under this caption, under "Legal Proceedings" and elsewhere in
this prospectus, it should be noted that we take and have taken the position
that neither Phibro Animal Health Corporation, nor any of our subsidiaries is
liable for environmental or other claims made against one or more of our other
subsidiaries or for which any of such other subsidiaries may ultimately be
responsible.
Federal Regulation
The following summarizes the principal federal environmental laws
affecting our business:
Resource Conservation and Recovery Act of 1976, as amended ("RCRA").
Congress enacted RCRA to regulate, among other things, the generation,
transportation, treatment, storage and disposal of solid and hazardous wastes.
RCRA required the EPA to promulgate regulations governing the management of
hazardous wastes, and to allow individual states to administer and enforce their
own hazardous waste management programs as long as such programs were equivalent
to and no less stringent than the federal program. Such facilities are also
subject to closure and post-closure requirements.
The EPA's regulations, and most state regulations in authorized states,
establish categories of regulated entities and set standards and procedures
those entities must follow in their handling of hazardous wastes. The three
general categories of waste handlers governed by the regulations are hazardous
waste generators, hazardous waste transporters, and owners and operators of
hazardous waste treatment, storage and/or disposal facilities. Generators are
required, among other things, to obtain identification numbers and to arrange
for the proper treatment and/or disposal of their wastes by licensed or
permitted operators and all three categories of waste handlers are required to
utilize a document tracking system to maintain records of their activities.
Transporters must obtain permits, transport hazardous waste only to properly
permitted treatment, storage or disposal facilities, and maintain required
records of their activities. Treatment, storage and disposal facilities are
subject to extensive regulations concerning their location, design and
construction, as well as the operating methods, techniques and practices they
may use. Such facilities are also required to demonstrate their financial
responsibility with respect to compliance with RCRA, including closure and
post-closure requirements.
The Federal Water Pollution Control Act, as amended (the "Clean Water
Act"). The Clean Water Act prohibits the discharge of pollutants to the waters
of the United States without governmental authorization. Like RCRA, the Clean
Water Act provides that states with programs approved by the EPA may administer
and enforce their own water pollution control programs. Pursuant to the mandate
of the Clean Water Act, the EPA has promulgated "pre-treatment" regulations,
which establish standards and limitations for the introduction of pollutants
into publicly-owned treatment works. The EPA has also established stormwater
pollution prevention regulations, which establish standards and limitations for
the collection, treatment and disposal of stormwater from industrial facilities.
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws,
we and our subsidiaries may have strict and, under certain circumstances, joint
and several liability for the investigation and remediation of environmental
pollution and natural resource damages associated with real property currently
and formerly-owned or operated by us or a subsidiary and at third-party sites at
which our subsidiaries disposed of or treated, or arranged for the disposal of
or treatment of, hazardous substances.
Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA").
FIFRA governs the manufacture, sale and use of pesticides, including the
copper-based fungicides sold by us. FIFRA requires such products and the
facilities at which they are formulated to be registered with the EPA before
they may be sold.
58
If the product in question is generic in nature (i.e., chemically identical or
substantially similar to a previously registered product), the new applicant for
registration is entitled to cite and rely on the test data supporting the
original registrant's product in lieu of submitting data of its own. Should the
generic applicant choose this citation option, it must offer to pay monetary
compensation to the original registrant and must agree to binding arbitration if
the parties are unable to agree on the terms and amount of compensation. We have
elected this citation option in the past and may use the citation option in the
future should we conclude it is, in some instances, economically desirable to do
so. While there are cost savings associated with the opportunity to avoid one's
own testing and demonstration to the EPA of test data, there is, in each
instance, a risk that the level of compensation ultimately required to be paid
to the original registrant will be substantial.
Under FIFRA, the EPA also has the right to "call in" additional data from
existing registrants of a pesticide, should the EPA determine, for example, that
the data already in the file need to be updated or that a specific issue or
concern needs to be addressed. The existing registrants have the option of
submitting data separately or by joint agreement. Alternatively, if one
registrant agrees to generate and submit the data, the other(s) may meet their
obligations under the statute by making a statutory offer to jointly develop or
share in the costs of developing the data. In that event, the offering party
must, again, agree to binding arbitration to resolve any dispute as to the terms
of the data development arrangement.
The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and
amendments to the Clean Air Act, and corresponding state laws regulate the
emissions of materials into the air. Such laws affect the coal industry both
directly and indirectly and, therefore, the operations of MRT, to be sold as
part of the Transaction. Phibro-Tech is also impacted by the Clean Air Act and
has various air quality permits, including a Title V operating air permit at its
Sumter, South Carolina facility.
State and Local Regulation
In addition to those federal programs described above, a number of states
and some local governments have also enacted laws and regulations similar to the
federal laws described above governing hazardous waste generation, handling and
disposal, emissions to the water and air and the design, operation and
maintenance of recycling facilities.
Foreign Regulation
Our foreign subsidiaries are subject to a variety of foreign environmental
laws relating to pollution and protection of the environment, including the
generation, handling, storage, management, transportation, treatment and
disposal of solid and hazardous materials and wastes, the manufacture and
processing of pesticides and animal feed additives, emissions to the air,
discharges to land, surface water and subsurface water, human exposure to
hazardous and toxic materials and the remediation of environmental pollution
relating to their past and present properties and operations.
Regulation of Recycling Activities
We have substantially reduced our recycling activities at our Joliet,
Illinois; Garland, Texas; Sumter, South Carolina; and Sewaren, New Jersey sites.
Our recycling activities may be broken down into the following segments for
purposes of regulation under RCRA or equivalent state programs: (i) transport of
wastes to our facilities; (ii) storage of wastes prior to processing; (iii)
treatment and/or recycling of wastes; (iv) corrective action at our RCRA
facilities; and (v) management of wastes and residues from the recycling
process. Although all aspects of the treatment and recycling of waste at our
recycling facilities are not currently the subject of federal RCRA regulation,
our subsidiaries decided to permit our recycling facilities as RCRA regulated
facilities. Final RCRA "Part B" permits to operate as hazardous waste treatment
and storage facilities have been issued at our facilities in Santa Fe Springs,
California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina; and
Sewaren, New Jersey (expired August 2003). Part B renewal applications have been
submitted for the Santa Fe Springs, Garland and Joliet sites. The applications
are being reviewed.
In connection with RCRA Part B permits for the waste storage and treatment
units of various facilities, our subsidiaries have been required to perform
extensive site investigations at such facilities to identify possible
contamination and to provide regulatory authorities with plans and schedules for
remediation. Soil and groundwater contamination has been identified at several
plant sites and has required and will continue to
59
require corrective action and monitoring over future years. In order to maintain
compliance with RCRA Part B permits, which are subject to suspension,
revocation, modification or denial under certain circumstances, we have been,
and in the future may be, required to undertake additional capital improvements
or corrective action.
Our subsidiaries involved in recycling activities are required by the RCRA
and their Part B permits to develop and incorporate in their Part B permits
estimates of the cost of closure and post-closure monitoring for their operating
facilities. In general, in order to close a facility which has been the subject
of a RCRA Part B permit, a RCRA Part B closure permit is required which approves
the investigation, remediation and monitoring closure plan, and requires
post-closure monitoring and maintenance for up to 30 years. Accordingly, we
incur additional costs in connection with any such closure. These cost estimates
are updated annually for inflation, developments in available technology and
corrective actions already undertaken. We have, in most instances, chosen to
provide the regulatory guarantees required in connection with these matters by
means of our coverage under an environmental impairment liability insurance
policy. We can provide no assurance that such policy will continue to be
available in the future at economically acceptable rates, in which event other
methods of financial assurance will be necessary.
In addition to certain operating facilities, we or our subsidiaries have
been and will be required to investigate and remediate certain environmental
contamination at shutdown plant sites. We or our subsidiaries are also required
to monitor such sites and continue to develop controls to manage these sites
within the requirements of RCRA corrective action programs.
Waste Byproducts
In connection with our subsidiaries' production of finished chemical
products, limited quantities of waste by-products are generated. Depending on
the composition of the by-product, our subsidiaries either sell it, send it to
smelters for metal recovery or send it for treatment or disposal to regulated
facilities.
Particular Facilities
The following is a description of certain environmental matters relating
to certain facilities of certain of our subsidiaries. References to "we" or "us"
throughout this section is intended to refer only to the applicable subsidiary
unless the context otherwise requires. These matters should be read in
conjunction with the description of Legal Proceedings below, certain of which
involve such facilities, and Note 14 to our Consolidated Financial Statements.
In 1984, Congress enacted certain amendments to RCRA under which
facilities with RCRA permits were required to have RCRA facility assessments
("RFA") by the EPA or the authorized state agency. Following an RFA, a RCRA
facility investigation, a corrective measures study, and corrective measure
implementation must, if warranted, be developed and implemented. As indicated
below, certain of our subsidiaries are in the process of developing or
completing various actions associated with these regulatory phases at certain of
their facilities.
Sumter, SC. In 2003, the South Carolina Department of Health and
Environmental Control ("DHEC") ordered Phibro-Tech, Inc., a subsidiary
("Phibro-Tech"), to prepare a RCRA Facility Investigation ("RFI") and to prepare
and propose Corrective Action Plans. Phibro-Tech has done so, and such proposed
investigatory activities and Corrective Action Plans are being reviewed by the
State. Additional Corrective Action is also being undertaken by Phibro-Tech
pursuant to prior agreements with DHEC to remedy certain deficiencies in the
plant's hazardous waste closure, storage and management system.
Santa Fe Springs, CA. Phibro-Tech submitted an application for renewal of
the Part B Permit for the Santa Fe Springs, California facility. Such
application is presently under review by the State of California and may require
certain corrective actions including, but not limited to, a pump and treat
system utilizing existing water treatment facilities and a soil vapor extraction
system. Phibro-Tech has submitted a report to the State recommending that soil
be remediated instead of groundwater. This recommendation is also under review
by the State.
Joliet, IL. Phibro-Tech has submitted an application for renewal of the
Part B Permit for the Joliet, Illinois facility. In connection with this
application, Phibro-Tech completed an initial investigation and determined that
certain minor corrective action was required. The application for renewal is
presently pending and the corrective action is being done.
60
Garland, TX. The renewal application for the Part B Permit at the Garland,
Texas facility has been submitted to the State and is pending. As part of an
earlier site investigation, certain corrective action was required including
upgrading of pollution control equipment and additional site characterization.
Both of these are presently underway.
Powder Springs, Georgia. Phibro-Tech's facility in Powder Springs, Georgia
has been operationally closed since 1985. Phibro-Tech retains environmental
compliance responsibility for this facility and has effected a RCRA closure of
the regulated surface impoundment. Post-closure monitoring and corrective action
are required pursuant to a state-issued permit. As required by the permit,
corrective action for groundwater has begun, and Phibro-Tech has submitted and
received approval from the state for a remedial investigation plan for the
facility.
Sewaren, NJ. Operations at the Sewaren facility were curtailed on or about
September 30, 1999. In June, 2000, CP Chemicals, Inc., a subsidiary ("CP"),
transferred title to the Sewaren property to Woodbridge Township while, at the
same time, entering into a 10-year lease with the Township providing for lease
payments aggregating $2 million, and covering certain areas of the property,
including those areas of the property relating to the existing hazardous waste
storage, treatment and transfer permit, loading docks and pads, and a building,
as well as access, parking, scale use and office space.
The property is the subject of an Administrative Consent Order executed in
March 1991 between the New Jersey Department of Environmental Protection and CP.
CP has ongoing obligations under that Administrative Consent Order. CP is
required to complete the implementation of the Remedial Action Work Plan
approved by the Department of Environmental Protection. Although some of the
obligations have been assumed by the Township under the Lease, for example, the
maintenance of the groundwater recovery system, CP remains responsible to the
Department of Environmental Protection under the Administrative Consent Order.
CP has posted financial assurance, based on the estimated costs of
implementation, under the Administrative Consent Order.
The property is also regulated under the Corrective Action Program
administered by the United States Environmental Protection Agency pursuant to
the Resource Conservation and Recovery Act. The property has been designated as
a RCRA facility for which achieving the Environmental Indicators is a priority.
Currently, CP is interfacing with the Department of Environmental Protection and
the Environmental Protection Agency to coordinate its efforts under this program
and the Administrative Consent Order discussed above. Much of the effort
required by CP in this program is already being conducted as part of the
requirements of the Administrative Consent Order discussed above.
The hazardous waste facility permit issued to CP for this facility expired
in August 2003. CP has commenced the implementation of its approved closure
plan. Based on a formula established by the Department of Environmental
Protection, those closure costs were estimated at $0.3 million and submitted to
the Department in April 2003. CP has also advised the New Jersey Division of Law
of its intent to withdraw from the licensing program governing facilities.
Union City, CA. The closure plan for the Union City, California facility
was approved by the State of California and closure activities have been
substantially completed. Certain additional soil sampling is being conducted and
the Company does not expect any material additional work to be required at this
site.
Union, IL. The facility in Union, Illinois, has been closed since 1986. A
revised remedial action plan ("RAP") has been submitted to the Illinois
Environmental Protection Agency (the "IEPA") and is presently under review. The
work contemplated in the RAP is the result of negotiations between the IEPA and
Phibro-Tech as part of a resolution of Phibro-Tech's appeal of the IEPA's
initial closure requirements. That appeal is currently pending before the
Illinois Pollution Control Board.
Ramat Hovav, Israel. Koffolk Israel's Ramat Hovav plant produces a wide
range of organic chemical intermediates for the animal health, chemical,
pharmaceutical and veterinary industries. Israeli legislation enacted in 1997
amended certain environmental laws by authorizing the relevant administrative
and regulatory agencies to impose certain sanctions, including issuing an order
against any person that violates such environmental laws to remove the
environmental hazard. In addition, this legislation imposes criminal liability
on the officers and directors of a corporation that violates such environmental
laws, and increases the monetary
61
sanctions that such officers, directors and corporations may be ordered to pay
as a result of such violations. The Ramat Hovav plant operates under the
regulation of the Ministry of Environment of the State of Israel. The sewage
system of the plant is connected to the Ramat Hovav Local Industrial Council's
central installation, where Koffolk Israel's sewage is treated together with
sewage of other local plants. Owners of the plants in the area, including
Koffolk Israel, have been required by the Israeli Ministry of Environment to
build facilities for pre-treatment and biological treatment of their sewage.
Government Regulation
Most of our Animal Health and Nutrition Group products require licensing
by a governmental agency before marketing. In the United States, governmental
oversight of animal nutrition and health products is shared primarily by the
United States Department of Agriculture ("USDA") and the Food and Drug
Administration. A third agency, the Environmental Protection Agency, has
jurisdiction over certain products applied topically to animals or to premises
to control external parasites.
The issue of the potential for increased bacterial resistance to certain
antibiotics used in certain food producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotics in these food producing animals. The sale
of feed additives containing antibiotics is a material portion of our business.
Should regulatory or other developments result in restrictions on the sale of
such products, it could have a material adverse impact on our financial
position, results of operations and cash flows.
The FDA is responsible for the safety and wholesomeness of the human food
supply. It regulates foods intended for human consumption and, through The
Center for Veterinary Medicine, regulates the manufacture and distribution of
animal drugs, including feed additives and drugs that will be given to animals
from which human foods are derived, as well as feed additives and drugs for pet
(or companion) animals.
To protect the food and drug supply for animals, the FDA develops
technical standards for animal drug safety and effectiveness and evaluates data
bases necessary to support approvals of veterinary drugs. The USDA monitors the
food supply for animal drug residues.
FDA approval is based on satisfactory demonstration of safety and
efficacy. Efficacy requirements are based on the desired label claim and
encompass all species for which label indication is desired. Safety requirements
include target animal safety and, in the case of food animals, drug residues and
the safety of those residues must be considered. In addition to the safety and
efficacy requirements for animal drugs used in food producing animals, the
environmental impact must be determined. Depending on the compound, the
environmental studies may be quite extensive and expensive. In many instances
the regulatory hurdles for a drug which will be used in food producing animals
are at least as stringent if not more so than those required for a drug used in
humans. For FDA approval of a new animal drug it is estimated the cost is $100
million to $150 million and time for approval could be 8 to 10 years.
The Office of New Animal Drug Evaluation ("NADE") is responsible for
reviewing information submitted by drug sponsors who wish to obtain approval to
manufacture and sell animal drugs. A new animal drug is deemed unsafe unless
there is an approved new animal drug application ("NADA"). Virtually all animal
drugs are "new animal drugs" within the meaning of the term in the Federal Food,
Drug, and Cosmetic Act. Although the procedures for licensing products by the
FDA are formalized, the acceptance standards of performance for any product are
agreed upon between the manufacturer and the NADE. A NADA in animal health is
analogous to a New Drug Application ("NDA") in human pharmaceuticals. Both are
administered by the FDA. The drug development process for human therapeutics can
be more involved than that for animal drugs. However, for food-producing
animals, food safety residue levels are an issue, making the approval process
longer than for animal drugs for non-food producing animals, such as pets.
The FDA may deny a NADA if applicable regulatory criteria are not
satisfied, require additional testing or information, or require postmarketing
testing and surveillance to monitor the safety or efficacy of a product. There
can be no assurances that FDA approval of any NADA will be granted on a timely
basis or at all. Moreover, if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Among the conditions for NADA
62
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to cGMP. The plant must be inspected
biannually by the FDA for determination of compliance with cGMP after an initial
preapproval inspection. After FDA approval, any manufacturing changes that may
have an impact on the safety and/or efficacy must be approved by the FDA prior
to implementation. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to ensure compliance.
For clinical investigation and marketing outside the United States, we are
also subject to foreign regulatory requirements governing investigation,
clinical trials and marketing approval for animal drugs. The foreign regulatory
approval process includes all of the risks associated with FDA approval set
forth above. Currently, in the EU, feed additives which are successfully
sponsored by a manufacturer are assigned to an Annex. Initially, they are
assigned to Annex II. During this period, member states may approve the feed
additive for local use. After five years or earlier, the product passes to Annex
I if no adverse reactions or trends develop over the probationary period.
The EU is in the process of centralizing the regulatory process for animal
drugs for member states. In 1997, the EU drafted new regulations requiring the
re-registration of feed additives, including coccidiostats. Part of these
regulations include a provision for manufacturers to submit quality data for
their own formulation, in effect adopting a Product License procedure similar to
that of the FDA. The provision is known as Brand Specific Approval ("BSA"), and
provides manufacturers with the opportunity to register their own unique brands,
instead of simply the generic compound. The BSA process is being implemented
over time. The new system is more like the U.S. system, where regulatory
approval is for the formulated product or "brand." A number of manufacturers,
including us, have completed dossiers in order to re-register various
anticoccidials for the purpose of obtaining regulatory approval from the
European Commission. As a result of its review of said dossiers, the Commission
withdrew marketing authorization of a number of anticoccidials, including
nicarbazin, as the Commission did not consider the submissions to be in full
compliance with its new regulations. We have subsequently completed the
necessary data and resubmitted its nicarbazin dossier. Feasibility and timetable
for new registration will depend on the nature of demands and remarks from the
Commission. Notwithstanding the Commission's actions with respect to our
nicarbazin dossier, we are able to sell, and do sell, nicarbazin as an active
ingredient for another MFA marketer's product which has obtained a BSA and is
sold in the EU.
Legal Proceedings
Reference is made to the discussion above under "Environmental Matters"
for information as to various environmental investigation and remediation
obligations of our subsidiaries associated principally with their recycling and
production facilities and to certain legal proceedings associated with such
facilities.
In addition to such matters, we or certain of our subsidiaries are subject
to certain litigation described below.
On or about April 17, 1997, CP and we 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 we, as the parent
of CP, are also responsible to Chevron. In July 2002, a phased settlement
agreement was reached and a Consent Order entered by the Court. That settlement
is in the process of being implemented. Our portion of the settlement for past
costs and expenses through the entry of the Consent Order was $495,000 and is
included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income. Such amount was paid in July
2002. The Consent Order then provides for a period of due diligence
investigation of the property owned by Chevron. The investigation has been
conducted and the results are under review. The investigation costs are being
split with one other defendant, Vulcan Materials Company. Upon completion of the
review of the results of the investigation, a decision will be made whether to
opt out of the settlement or proceed. If no party opts out of the settlement,
Phibro Animal Health Corporation and CP will take title to the adjoining Chevron
property, probably through the use of a three-member New Jersey limited
liability company. In preparation to move forward, a limited liability company
has been formed, with Vulcan Materials Company as the third member. We also have
commenced negotiations with Chevron regarding its allocation of responsibility
and associated costs under the Consent Order. While the costs cannot be
estimated with any degree of certainty at this time, we believe that insurance
recoveries will be available to offset some of those costs.
63
Our Phibro-Tech subsidiary was named in 1993 as a potentially responsible
party ("PRP") in connection with an action commenced under CERCLA by the EPA,
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which we have agreed to contribute
up to $900,000 of which $634,596 has been paid as of June 30, 2003. Some
recovery from insurance and other sources is expected. We have also accrued our
best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substance Control ("DTSC") and has
reached an agreement to pay $425,000 over six (6) years as a result. The annual
payments required under this agreement are not expected to have any material
adverse impact on us.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposed of at a licensed Casmalia, California disposal site,
including a business, assets of which were originally acquired by a subsidiary
of ours in 1984. A settlement has been reached in this matter and we have paid
$171,103 of the settlement amount.
We and our subsidiaries are party to a number of claims and lawsuits
arising out of the normal course of business including product liabilities and
governmental regulation. Certain of these actions seek damages in various
amounts. In most cases, such claims are covered by insurance. We believe that
none of the claims or pending lawsuits, either individually or in the aggregate,
will have a material adverse effect on our financial position or results of
operations.
64
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that
could affect our Israeli subsidiary, Koffolk Israel. As of June 30, 2003 and for
the year then ended, Israeli operations (excluding Koffolk Israel's non-Israeli
subsidiaries) accounted for approximately 14% of our consolidated assets and
approximately 13% of our consolidated net sales. We are, therefore, directly
affected by the political, military and economic conditions in Israel.
Political and Military Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with certain Arab countries and the Palestinian Authority,
since October 2000 there has been a significant increase in violence and
terrorist activity in Israel. In April 2002, and from time to time thereafter,
Israel undertook military operations in several Palestinian cities and towns. We
cannot predict whether the current violence and unrest will continue and to what
extent it will have an adverse impact on Israel's economic development or on
Koffolk Israel's or our results of operations. We also cannot predict whether or
not any further hostilities will erupt in Israel and the Middle East and to what
extent such hostilities, if they do occur, will have an adverse impact on
Israel's economic development or on Koffolk Israel's or our results of
operations.
Certain countries, companies and organizations continue to participate in
a boycott of Israeli firms and other companies doing business in Israel or with
Israel companies. We do not believe that the boycott has had a material adverse
effect on us, but we can not provide assurance that restrictive laws, policies
or practices directed toward Israel or Israeli businesses will not have an
adverse impact on our operations or expansion of the our business.
Generally, male adult citizens who are permanent residents of Israel under
the age of 45 are, unless exempt, obligated to perform certain military duty
annually. Additionally, all such residents are subject to being called to active
duty at any time under emergency circumstances and since April 2002 some
reservists have been called to active duty. Some of the employees of Koffolk
Israel currently are obligated to perform annual reserve duty. While Koffolk
Israel has operated effectively under these and similar requirements in the
past, we cannot assess the full impact of such requirements on Koffolk Israel
and us in the future, particularly if emergency circumstances occur and
employees of Koffolk Israel are called to active duty.
Economic Conditions
Israel is currently experiencing the longest recession since the
establishment of Israel in 1948. Factors affecting Israel's economy include the
Intifada, which began in September 2000, the slowdown in world trade and the
global slump in the high-tech industry. In addition, Israel's economy has been
subject to numerous destabilizing factors, including a period of rampant
inflation in the early to mid-1980's, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and security
incidents. Further disruptions to the Israeli economy as a result of these or
other factors could have a material adverse affect on Koffolk Israel's and our
results of operations.
Koffolk Israel receives a portion of its revenues in U.S. dollars while
its expenses are principally payable in New Israeli Shekels. Dramatic changes in
the currency rates could have an adverse effect on Koffolk Israel's results of
operations.
Investment Incentives
Certain of our Israeli production facilities have been granted Approved
Enterprise status pursuant to the Law for the Encouragement of Capital
Investments, 1959, and consequently may enjoy certain tax benefits and
investment grants. Taxable income of Koffolk Israel derived from these
production facilities is subject to a lower rate of company tax than the normal
rate applicable in Israel. Dividends distributed by Koffolk Israel out of the
same income are subject to lower rates of withholding tax than the rate normally
applicable to dividends distributed by an Israeli company to a non-resident
corporate shareholder. The grant available to newly Approved Enterprises was
decreased throughout recent years. Certain of our Israeli production facilities
further enjoyed accelerated depreciation under regulation extended from time to
time and other deductions. We cannot provide assurance that we will, in the
future, be eligible for or receive such or similar grants.
65
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive
officers and directors:
Name Age Position
- ------------------------------- ----- ------------------------------------
Jack C. Bendheim............... 57 Chairman of the Board of Directors;
President
Gerald K. Carlson.............. 60 Chief Executive Officer
Marvin S. Sussman.............. 56 Vice Chairman of the Board of
Directors and President, Prince Agri
James O. Herlands.............. 61 Director and Executive Vice President
Peter A. Joseph................ 51 Director
Sam Gejdenson.................. 55 Director, Noteholder Representative
Richard G. Johnson............. 54 Chief Financial Officer
Steven L. Cohen................ 59 Vice President, General Counsel and
Assistant Secretary
David G. McBeath............... 57 President, Animal Health Group
William A. Mathison............ 63 President, Specialty Chemicals Group
Jack C. Bendheim Chairman of the Board of Directors and President. Mr.
Bendheim has been President since 1988. He was Chief Operating Officer from 1988
to 1998, and was Chief Executive Officer from 1998 to May 2002. He has been a
director since 1984. Mr. Bendheim joined us in 1969 and served as Executive Vice
President and Treasurer from 1983 to 1988 and as Vice President and Treasurer
from 1975 to 1983. Mr. Bendheim is also a director of The Berkshire Bank in New
York, New York, and Empire Resources, Inc., a metals trading company in Fort
Lee, New Jersey.
Gerald K. Carlson Chief Executive Officer. Mr. Carlson joined us in May
2002 and has served as our Chief Executive Officer since then. Prior to joining
us, Mr. Carlson served as the Commissioner of Trade and Development for the
State of Minnesota from January 1999 to March 2001. Mr. Carlson served as Senior
Vice President-- Corporate Planning and Development from June 1996 to his
retirement in October 1998 from Ecolab, Inc. During his thirty-two year career
at Ecolab, Mr. Carlson also served as Senior Vice President of International as
well as Senior Vice President and General Manager -- Institutional North
America.
Marvin S. Sussman Vice Chairman of the Board of Directors and President of
our Prince Agri subsidiary. He has been a director since 1988 and was Chief
Operating Officer from 1998 to 2002. Mr. Sussman joined us in 1971. Since then,
he has served in various executive positions with us and at PMC. Mr. Sussman was
President of our Prince Group from 1988 to 2002. Mr. Sussman is the
brother-in-law of Jack Bendheim.
James O. Herlands Director; Executive Vice President. Mr. Herlands joined
us in 1964. Since then, he has served in various capacities in sales/marketing
and purchasing. He has been a director since 1988 and served as President of our
CP/PhibroChem division since 1992. In addition, Mr. Herlands has served as our
Executive Vice President since 1988. Mr. Herlands is a first cousin of Jack
Bendheim.
Peter A. Joseph Director. Mr. Joseph has served as one of our Directors
since February 2001. From 1998 to present, he has been a member of Palladium
Equity Partners, LLC. From 1986 to 1997, Mr. Joseph was a general partner of
Joseph Littlejohn & Levy.
Sam Gejdenson Director, Noteholder Representative. In January, 2004, Mr.
Gejdenson was elected to serve on our Board of Directors as the designated
Noteholder Representative as required by the Indenture for our 13% Senior
Secured Notes due 2007. Mr. Gejdenson is involved in international trade in his
own company, Sam Gejdenson International. From 1981 to 2000, he served as a
Congressman representing eastern Connecticut in the United States House of
Representatives. While in Congress, he served on the House International
Relations Committee.
Richard G. Johnson Chief Financial Officer. Mr. Johnson joined us in
September 2002 and has served as our Chief Financial Officer since then. Prior
to joining us, Mr. Johnson served as Director of Financial Management for
Laserdyne Prima, Inc. from 2001 to 2002 and as Vice President-- Planning and
Control, Latin America for Ecolab, Inc. from 1992 to 1999. In addition, Mr.
Johnson served in various senior financial positions at Ecolab over a fifteen
year period.
66
Steven L. Cohen Vice President and General Counsel. Mr. Cohen joined us in
October 2000 and has served as our Vice President-- Regulatory and General
Counsel since then. Prior to joining us, Mr. Cohen was, from 1997 to 2000,
General Counsel of Troy Corporation, a multi-national chemical company. From
1994 to 1997, Mr. Cohen was in the private practice of law.
David G. McBeath President Animal Health Group. Mr. McBeath joined us on
August 1, 2003. Prior to joining us, he was CEO of Scottish Health Innovations
Ltd., a company created to identify and exploit intellectual property arising
from research carried out within the National Health Service in Scotland. From
March 2001 to December 2002, he served on the Management Committee of Merial as
Head of the Production Animal business; and prior to this was on the Board of
Hoechst Roussel Vet GmbH, with direct responsibility for R&D and Regulatory
Affairs.
William A. Mathison President, Specialty Chemicals Group. Mr. Mathison
joined us in June 2002 as President, Specialty Chemicals Group. Prior to joining
us, Mr. Mathison served as Senior Vice President, Global Industrial Accounts for
Ecolab Inc. from 2000 until his retirement in March 2002. From 1991 to 2000, Mr.
Mathison served as Vice President and General Manager of the North American Food
and Beverage Division of Ecolab Inc.
Board Composition
Our entire Board of Directors consists of 7 members, of whom five are
currently designated and serving as directors. Our board of directors is elected
annually, and our directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. Each officer
serves at the discretion of the board of directors.
Compensation of Directors
Except for the payment of $50,000 annually to the director serving as the
Noteholder Representative, our directors do not receive any cash compensation
for service on our board of directors. Directors may be reimbursed for certain
expenses in connection with attendance at board meetings, however. We have
entered into certain transactions with certain of the directors. See "Certain
Relationships and Related Transactions."
Committees of the Board of Directors
Our Board of Directors has not created any committees other than the
compensation committee established in connection with the offering of the old
units.
The duties of the Compensation Committee are to recommend to the Board of
Directors a compensation program, including incentives, for the Chief Executive
Officer and other senior officers of the Company, for approval by the full Board
of Directors and to propose to the full Board of Directors the compensation of
directors.
The current members of the Compensation Committee are Mr. Bendheim, Mr.
Joseph and Mr. Gejdenson.
67
Executive Compensation
The following table sets forth the cash compensation paid by us and our
subsidiaries for services during fiscal 2003, 2002, and 2001 to each of our five
most highly compensated executive officers:
Annual Compensation
----------------------------------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation(1)
- -------------------------------------- ----- ------------- ---------- -------------- ---------------
Jack C. Bendheim....................... 2003 $1,650,000 $ -- $150,000(2) $ 6,500
Chairman of the Board; President..... 2002 1,500,000 265,000 -- 6,000
2001 1,640,000 600,000 -- 5,300
Gerald K. Carlson(3)................... 2003 500,000 -- 24,000 --
Chief Executive Officer.............. 2002 49,350 -- -- --
Marvin S. Sussman(4)................... 2003 1,000,000 -- -- 24,500(6)
Vice Chairman of the Board;.......... 2002 1,000,000 -- -- 6,000
President of Prince Agri............. 2001 733,500 710,000 -- 5,300
James O. Herlands...................... 2003 400,000 150,000 -- 6,500
Executive Vice President............. 2002 400,000 150,000 -- 6,000
2001 395,000 382,500 -- 5,300
William A. Mathison(5)................. 2003 235,000 -- 50,000 --
President, Specialty Chemicals
- ----------
(1) Represents contributions by us under our 401(k) Retirement and Savings
Plan. See "Compensation Pursuant to Plans."
(2) In fiscal 2003, Mr. Bendheim was paid $150,000 for temporary deferral of
fiscal 2002 compensation.
(3) 2002 salary is for a partial year commencing May 2002. In fiscal 2003, Mr.
Carlson received $24,000 for relocation and housing assistance.
(4) Pursuant to a Stockholders Agreement between us and Mr. Sussman, we are
required to purchase, at book value, all shares of our Class B Common
Stock owned by Mr. Sussman in the event of his retirement, death,
disability or the termination of his employment by us. Should Mr. Sussman
elect to sell his shares, we have a right of first offer and an option to
purchase the shares. See "Certain Relationships and Related Transactions."
As a result, each year, we are required to record as compensation expense
(income) in our results of operations the change in our book value
attributable to Mr. Sussman's shares. For 2003, 2002 and 2001, the expense
(income) attributable to Mr. Sussman's shares was $0, ($378,000) and
($3,135,000), respectively. No distributions have been made to Mr. Sussman
under this agreement.
(5) Salary is since date of employment for 2003. Mr. Mathison also received
$50,000 as a signing bonus and relocation allowance.
(6) Of such amount, $18,000 represents the cost of the term portion of a life
insurance policy purchased by the Company in the face amount of $10
million on the life of Mr. Sussman, with a required premium of $252,000
per year. The policy commenced in April 2002.
In fiscal 2003, we granted no options to the named executive officers and
no options were held or exercised by any of the named executive officers.
Employment and Severance Agreements
We entered into an employment agreement with Gerald K. Carlson in May
2002, whereby Mr. Carlson will serve as our Chief Executive Officer. The
agreement provides for a base salary of $500,000 during the first year of its
term. Mr. Carlson is eligible to receive an annual bonus of up to 150% of his
base salary based on our achievement of certain specified EBITDA growth targets.
If Mr. Carlson is terminated without Cause (as defined) or he voluntarily
terminates the agreement with Good Reason (as defined), he is entitled to
receive the accrued portion of the target annual bonus, as well as an amount
ranging from two to eight months of base salary depending on when such
termination occurs. If, within six months after a Change of Control (as
defined), Mr. Carlson is terminated without cause or he voluntarily terminates
the agreement with Good Reason, he will be entitled to receive a lump sum
payment equal to the amount of annual target bonus accrued to the date of
termination, plus 100% of base salary and 50% of annual target bonus. We are
obligated under the agreement to provide separate indemnification insurance to
Mr. Carlson in the amount of the current coverage provided to our current board
of directors.
We entered into an employment agreement with Marvin S. Sussman in December
1987. The term of employment is from year-to-year, unless terminated by us at
any time or by his death or permanent disability.
68
Our UK subsidiary, PAH Management Company Ltd., entered into an employment
agreement with David McBeath in May 2003, commencing August 1, 2003, whereby Mr.
McBeath will serve as President of our Animal Health Group. The agreement
provides for a base salary of $250,000. The agreement also provides for
additional payments to Mr. McBeath of $100,000 upon commencement of his
employment and $130,000 upon completion of his term of employment (the
"Completion Fee"). If Mr. McBeath dies during the term of the agreement or the
agreement is terminated because of his disability or Mr. McBeath is terminated
other than for cause, he, or his estate, as the case may be, would be entitled
to receive, in lieu of severance, a prorated portion of the Completion Fee.
In 1995, James O. Herlands purchased stock in Phibro-Tech. In connection
therewith, we entered into a severance agreement with him. The agreement
provides that, upon his Actual or Constructive Termination or a Change in
Control Event (as such terms are defined), he is entitled to receive a cash
Severance Amount (as defined therein), based upon a multiple of Phibro-Tech's
pre-tax earnings (as defined therein). In addition, if an Extraordinary Event
(as defined) occurs within 12 months after the occurrence of an Actual or
Constructive Termination, the executive is entitled to receive an additional
Catch-up Payment (as defined). At June 30, 2003, no severance payments would
have been due to Mr. Herlands if he were terminated. See "Certain Relationships
and Related Transactions."
Compensation Pursuant to Plans
401(k) Plan. We maintain for the benefit of our employees a 401(k)
Retirement and Savings Plan (the "Plan"), which is a defined contribution,
profit sharing plan qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code"). Our employees are eligible for participation
in the Plan once they have attained age 21 and completed a year of service (in
which the employee completed 1,000 hours of service). Up to $200,000 (indexed
for inflation) of an employee's base salary may be taken into account for Plan
purposes. Under the Plan, employees may make pre-tax contributions of up to 60%
of such employee's base salary, and we will make non-matching contributions
equal to 1% of an employee's base salary and matching contribution equal to 50%
of an employee's pre-tax contribution up to 3% of such employee's base salary
and 25% of such employee's pre-tax contribution from 3% to 6% of base salary.
Participants are vested in employer contributions in 20% increments beginning
after completion of the second year of service and become fully vested after
five years of service. Distributions are generally payable in a lump sum after
termination of employment, retirement, death, disability, plan termination,
attainment of age 591/2, disposition of substantially all of our assets or upon
financial hardship. The Plan also provides for Plan loans to participants.
The accounts of Messrs. Bendheim, Carlson, Sussman, Herlands, and Mathison
were credited with employer contributions of $6,500, $0, $6,500, $6,500, and $0,
respectively, for fiscal 2003.
Retirement Plan. We have adopted The Retirement Plan of Philipp Brothers
Chemicals Inc. and Subsidiaries and Affiliates, which is a defined benefit
pension plan (the "Retirement Plan"). Our employees are eligible for
participation in the Retirement Plan once they have attained age 21 and
completed a year of service (which is a Plan Year in which the employee
completes 1,000 hours of service). The Retirement Plan provides benefits equal
to the sum of (a) 1% of an employee's "average salary" plus 0.5% of the
employee's "average salary" in excess of the average of the employee's social
security taxable wage base, times years of service after July 1, 1989, plus (b)
the employee's frozen accrued benefit, if any, as of June 30, 1989 calculated
under the Retirement Plan formula in effect at that time. For purposes of
calculating the portion of the benefit based on "average salary" in excess of
the average wage base, years of service shall not exceed 35. "Average salary"
for these purposes means the employee's salary over the consecutive five year
period in the last ten years preceding retirement or other termination of
employment which produces the highest average; or, if an employee has fewer than
five years of service, all such years of service. An employee becomes vested in
his plan benefit once he completes five years of service with us. In general,
benefits are payable after retirement or disability in the form of a 50%, 75% or
100% joint or survivor annuity, life annuity or life annuity with a five or ten
year term. In some cases benefits may also be payable under the Retirement Plan
in the event of an employee's death.
69
The following table shows estimated annual benefits payable upon
retirement in specified compensation and years of service classifications,
assuming a life annuity with a ten year term.
Years of Service
-------------------------------------------------------
Average Compensation 15 20 25 30 35
- ---------------------- -------- -------- --------- --------- --------
$25,000................ $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
$50,000................ $ 7,500 $10,000 $12,500 $15,000 $17,500
$75,000................ $11,590 $15,000 $18,750 $22,500 $26,250
$100,000............... $17,220 $22,230 $27,270 $32,320 $37,640
$150,000............... $28,470 $37,230 $46,020 $54,820 $63,890
$200,000............... $39,720 $52,230 $64,770 $77,320 $90,140
As of June 30, 2003, Messrs. Bendheim, Carlson, Sussman, Herlands, and
Mathison had 34, 1, 32, 39 and 1 estimated credited years of service,
respectively, under the Retirement Plan. The compensation covered by the
Retirement Plan for each of these officers as of June 30, 2003 is $200,000. Such
individuals, at normal retirement age 65, will have 43, 6, 41, 43 and 6 credited
years of service, respectively. The annual expected benefit after normal
retirement at age 65 for each of these individuals, based on the compensation
taken into account as of June 30, 2003, is $118,250, $16,590, $134,170,
$129,260, and $16,550, respectively.
Most of our foreign subsidiaries have retirement plans covering
substantially all employees. Contributions to these plans are generally
deposited under fiduciary-type arrangements. Benefits under these plans are
primarily based on levels of compensation. Funding policies are based on
applicable legal requirements and local practices.
Deferred Compensation Plan. In 1994, we adopted a non-qualified Deferred
Compensation Plan and Trust, as an incentive for certain executives. The plan
provides for (i) a Retirement Income Benefit (as defined), (ii) a Survivor's
Income Benefit (as defined), and (iii) Deferred Compensation Benefit (as
defined). Three employees currently participate in this plan. A trust has been
established to provide the benefits described above.
The following table shows the estimated benefits from this plan as of June
30, 2003.
Annual Survivor's Deferred
Retirement Income Compensation
Income Benefit Benefit Benefit
-------------- ------------ -------------
Jack C. Bendheim............ $27,101 $1,500,000 $315,229
Marvin S. Sussman........... $27,101 $1,500,000 $110,953
James O. Herlands........... $27,101 $ 780,000 $278,999
We determine the Retirement Income Benefit based upon the employee's
salary, years of service and age at retirement. At present, it is contemplated
that a benefit of 1% of each participant's eligible compensation will be accrued
each year. The benefit is payable upon retirement (after age 65 with at least 10
years of service) in monthly installments over a 15 year period to the
participant or his named beneficiary. The Survivor's Income Benefit for the
current participants is two times annualized compensation at the time of death,
capped at $1,500,000, payable in 24 equal monthly installments. The Deferred
Compensation Benefit is substantially funded by compensation deferred by the
participants. Such benefit is based upon a participant making an election to
defer no less than $3,000 and no more than $20,000 of his compensation in excess
of $150,000, payable in a lump sum or in monthly installments for up to 15
years. We make a matching contribution of $3,000. Participants have no claim
against us other than as unsecured creditors. We intend to fund the payments
using the cash value or the death benefit from the life insurance policies
insuring each Executive's life.
Executive Income Program. On March 1, 1990, we entered into an Executive
Income Program to provide a pre-retirement death benefit and a retirement
benefit to certain of our executives. The Program consists of a Split-Dollar
Agreement and a Deferred Compensation Agreement with Jack Bendheim, Marvin S.
Sussman and James O. Herlands (the "Executives"). The Split Dollar Agreement
provides for us to own a whole life insurance policy in the amount of $1,000,000
(plus additions) on the life of each Executive.
Each policy also contains additional paid-up insurance and extended term
insurance. On the death of the Executive prior to his 60th birthday or his
actual retirement date, whichever is later: (i) the first $1,000,000 of the
death benefit is payable to the Executive's spouse, or issue; (ii) the excess is
payable to us up to the aggregate amount of premiums paid by us; and (iii) any
balance is payable to the Executive's spouse or issue.
70
The Split-Dollar Agreement terminates and no benefit is payable if the Executive
dies after his retirement. The Deferred Compensation Agreement provides that
upon the Executive's retirement, at or after attaining age 65, we will make
retirement payments to the Executive during his life for 10 years or until he or
his beneficiaries have received a total of 120 monthly payments. Participants
have no claim against us other than as unsecured creditors. We intend to fund
the payments using the cash value or the death benefit from the life insurance
policies insuring each Executive's life. The annual retirement benefits are as
follows: Jack Bendheim $30,000; Marvin S. Sussman $30,000; and James O. Herlands
$20,000.
1993 Split Dollar Agreement. On August 12, 1993, we entered into a Split
Dollar Agreement with David Butler and Gail Bendheim, as trustees under an
Indenture of Trust dated August 12, 1993 (the "Trust"). This Agreement provides
for the Trust to purchase and own life insurance policies on the life of Jack C.
Bendheim in the aggregate face amount of $5,000,000 (plus additions). The
premiums for such insurance are paid in part by the Trust (to the extent of the
lesser of the P.S. 58 rates, or the insurers' current published premium rate for
annually renewable term insurance for standard risks) and in part by us (we pay
the balance of the premiums not paid by the Trust). Upon the death of Jack C.
Bendheim or upon the cancellation of the policies or the termination of the
Agreement, we have the right to be repaid the total amount we advanced toward
payment of premiums. To secure our right to be repaid, the Trust has assigned
each policy to us as collateral. After repayment of the amount due to us, the
remaining cash surrender value or the remaining death benefit is payable to the
Trust, the beneficiaries of which are the wife and issue of Jack C. Bendheim.
71
PRINCIPAL STOCKHOLDERS
The table sets forth certain information as of June 30, 2003 regarding
beneficial ownership of our capital stock by each of our directors and named
executive officers, each beneficial owner of 5% or more of the outstanding
shares of capital stock and all directors and officers as a group.
Number of Common Shares
(Percentage of Class)
---------------------------------------
Name Class A Voting(1) Class B Voting(2)
- ---------------------------------------- ---------------- -----------------
Jack Bendheim(3)........................ 12,600 10,699.65(90%)(4)
(100%)
Marvin S. Sussman....................... -- 1,188.85(10%)
All other officers and directors(5)..... -- --
All officers and directors as a group... 12,600 11,888.50(100%)
(100%)
- ----------
(1) The entire voting power is exercised by the holders of Class A Common
Stock, except that the holders of Class A Common Stock currently are
entitled to elect all but three of the directors. The holders of Class B
Common Stock are entitled to elect one and the holders of Series C
Preferred Stock are entitled to elect two directors but do not vote on any
other matters. In addition, the holders of the units of senior secured
notes have the right to designate one member of the Board of Directors.
See "Description of Capital Stock."
(2) Class B Common shareholders will receive the entire equity upon our
liquidation, after payment of preferences to holders of all classes of
preferred stock and Class A Common Stock.
(3) Jack Bendheim also owns 5,207 (100%) shares of Series A Preferred Stock.
(4) Includes 4,414.886 shares owned by trusts for the benefit of Jack
Bendheim, his spouse, his children and their spouses and his
grandchildren.
(5) Peter A. Joseph has been designated as director of the Company by
Palladium Equity Partners II, LP ("Palladium") which beneficially owns
10,591 shares of our Series C Preferred Stock. Palladium has the right to
designate two directors to the Board of Directors. See "Certain
Relationships and Related Transactions."
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 30,300 shares of Common Stock,
allocated as follows: 16,200 shares of Class A Common Stock, par value $0.10 per
share, and 14,100 shares of Class B Common Stock, par value $0.10 per share, and
155,750 shares of Preferred Stock, par value $100 per share, of which the
following series have been established: 5,207 shares of Series A Preferred Stock
and 20,000 shares of Series C Redeemable Participating Preferred Stock ("Series
C Preferred Stock").
At the date of this prospectus, there are issued and outstanding 12,600
shares of Class A Common Stock, 11,888.50 shares of Class B Common Stock, 5,207
shares of Series A Preferred Stock and 10,591 shares of Series C Preferred
Stock.
The following description of the terms of all classes and series of our
common and preferred stock is not complete and is subject to and qualified in
its entirety by reference to our amended certificate of incorporation (the
"Certificate of Incorporation").
The entire voting power is vested in the holders of Class A Common Stock,
except that the holders of shares of Class A Common Stock are entitled to elect
all but four of the directors. The holders of Class B Common Stock are entitled
to elect one director and holders of the Series C Preferred Stock are entitled
by contract to elect two directors and are not entitled to vote on any other
corporate action except as required by applicable law. In addition, under the
indenture one member of the Board of Directors is designated on behalf of the
holders of the units of senior secured notes. Holders of units are not entitled
to vote on any other corporate action. The holders of shares of Class A Common
Stock are entitled to one vote per share upon all matters submitted for a vote
of the shareholders. The Certificate of Incorporation does not provide for
cumulative voting. The holders of Common Stock are entitled to preemptive
rights.
No dividends may be paid to holders of Common Stock until all dividends
have been paid to holders of Preferred Stock. The holders of Series C Preferred
Stock are entitled to cumulative cash dividends, payable semi-annually, at 15%
per annum of the liquidation value. The liquidation value of the Series C
Preferred Stock is an amount equal to $1,000 per share plus all accrued and
unpaid dividends (the "Liquidation Value"), plus a percentage of our equity
value, as defined in the Certificate of Incorporation. The equity value is
calculated as a multiple of the earnings before interest, tax, depreciation and
amortization of our business ("Equity Value"). In connection with the PMC
transaction, the definition of Equity Value in the Company's Certificate of
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5.
Directors elected by the holders of Class A Common Stock have the exclusive
right and power to cause us to declare and pay other dividends. Non-cumulative
dividends are payable on the outstanding Series A Preferred Stock and Common
Stock, in the following order only when and as declared by the Board: each share
of Series A Preferred Stock -- $1.00 per year; each share of Class A Common
Stock -- $0.0055 per year; and each share of Class B Common Stock, as determined
by the Board.
Beginning November 30, 2003, and on each anniversary thereafter, we may
redeem, for cash only, in whole the Series C Preferred Stock, at the Liquidation
Value plus the Equity Value payment. At any time after the redemption of the
Senior Subordinated Notes due 2008, Palladium has the right to require us to
redeem, for cash, the Series C Preferred Stock at the Liquidation Value plus the
Equity Value payment. In connection with the Palladium repurchase and
divestiture of PMC, all of the shares of Series B Preferred Stock were
repurchased and all of the shares of Series C Preferred Stock other than shares
having a value as of December 26, 2003, the date of repurchase, of $16.5 million
were repurchased. See "Certain Relationships and Related Transactions."
The shares of Series A Preferred Stock are redeemable at our option, in
whole or part, at any time or from time to time, for a redemption price equal to
the par value thereof plus any declared but unpaid dividends.
In the event of any complete liquidation, dissolution or winding up of the
business, or sale of all of our assets, after redemption of the Series C
Preferred Stock, each share of Series A Preferred Stock is entitled to a
distribution equal to the par value thereof and any declared but unpaid
dividends. Thereafter, our remaining assets shall be distributed, first to the
holders of Class A Common Stock in an amount equal to $0.10 per share, and then
to the holders of Class B Common Stock. In the event that no shares of Class B
Common Stock are then outstanding, all remaining assets will be paid to the
holders of Class A Common Stock.
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The Board of Directors is authorized to issue shares of Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of us without further action by the stockholders. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. At present, we have no plans to issue any shares of Preferred
Stock.
The authorized share capital of the Dutch issuer is Euro 90,000, divided
into 900 ordinary shares with a nominal value of Euro 100 each, of which 180
fully paid shares have been issued.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Phibro-Tech subsidiary leases the property underlying its Santa Fe
Springs, California facility from First Dice Road Company, a California limited
partnership ("First Dice"), in which Jack Bendheim, our President and principal
stockholder, Marvin S. Sussman and James O. Herlands, directors, own 39%, 40%
and 20% limited partnership interests, respectively. The general partner, having
a 1% interest in the partnership, is Western Magnesium Corp., a wholly-owned
subsidiary of ours, of which Jack Bendheim is the president. The lease expires
on June 30, 2008. The annual rent is $250,000. Phibro-Tech is also required to
pay all real property taxes, personal property taxes and liability and property
insurance premiums. In June 2001, Jack Bendheim entered into a secured $1.4
million revolving credit arrangement with First Union National Bank, which
replaced a prior loan from Fleet Bank. Mr. Bendheim reloans borrowings under the
First Union credit line to First Dice on the same terms as his borrowing from
First Union. We believe that the terms of such lease and loan are on terms no
less favorable to Phibro-Tech than those that reasonably could be obtained at
such time in a comparable arm's-length transaction from an unrelated
third-party.
Pursuant to a Shareholders Agreement dated December 29, 1987 between
Marvin S. Sussman and us, we are required to purchase, at book value, all shares
of our Class B Common Stock owned by Mr. Sussman, in the event of his
retirement, death, permanent disability or the termination of his employment by
us. Should Mr. Sussman elect to sell his shares, we have a right of first offer
and an option to purchase the shares.
A Shareholders Agreement initially entered into by Phibro-Tech and three
executives of Phibro-Tech, including James O. Herlands (the "Executives")
provides, among other things, for restrictions on their shares as to voting,
dividends, liquidation and transfer rights. The Shareholders Agreement also
provides that upon the death of an Executive or termination of an Executive's
employment, Phibro-Tech must purchase the Executive's shares at their fair
market value, as determined by a qualified appraiser. In the event of a Change
of Control (as defined), the Executive has the option to sell his shares to
Phibro-Tech at such value. The Shareholders Agreement provides, that, upon the
consent of Phibro-Tech, the Executives and us, the Executives' shares of
Phibro-Tech Common Stock may be exchanged for a number of shares of our Common
Stock, which may be non-voting Common Stock, having an equivalent value, and
upon any such exchange such shares of our Common Stock will become subject to
the Shareholders Agreement. We and Phibro-Tech also entered into Severance
Agreements with the Executives which provide, among other things, for certain
severance payments. See "Management -- Executive Compensation -- Employment and
Severance Agreements."
In connection with the retirement of Nathan Z. Bistricer from us and
Phibro-Tech in January, 2001, pursuant to the Shareholders Agreement among the
executives and Phibro-Tech, we paid $855,000 in connection with the repurchase
of 71.67 shares of his Class B Common Stock of Phibro-Tech. In addition, in
satisfaction of Phibro Tech's severance obligation under a Severance Agreement
between Phibro Tech and Mr. Bistricer, we agreed to pay $516,070 in twenty-four
(24) equal monthly installments to Mr. Bistricer. We also agreed to provide
certain unspecific out-placement services to Mr. Bistricer not to exceed $15,000
in total costs and fees.
We have advanced $200,000 to Marvin Sussman and his wife pursuant to a
secured promissory note that is payable on demand and bears interest at the
annual rate of 9%.
Certain relatives of Jack Bendheim, other than certain of the executive
officers named above, provide services to us, in one case through a consulting
firm controlled by him, and in other cases as employees, including one of our
Vice Presidents, and received directly or through such consulting firm annual
aggregate payments of approximately $400,000 for the fiscal year ended June 30,
2003.
On January 5, 2000, the United States Bankruptcy Court for the Eastern
District of New York confirmed a Plan of Reorganization for Penick Corporation
and Penick Pharmaceutical, Inc. (collectively, "Penick") which prior to such
confirmation were debtors in proceedings in such Court for reorganization under
Chapter 11 of the Bankruptcy Code, and awarded Penick to Penick Holding Company
("PHC"). PHC is a corporation formed to effect such acquisition by the Company,
PBCI LLC, a limited liability company controlled by Mr. Bendheim, and several
other investors. Pursuant to a Shareholders' Agreement among the shareholders of
PHC, Mr. Bendheim has been designated as one of three directors of PHC, and Mr.
Katzenstein, our Secretary, has been
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designated as Secretary and Treasurer of PHC. The Company has invested $1.98
million for shares of Series A Preferred Stock of PHC bearing an 8.5% annual
cumulative dividend, and PBCI LLC invested approximately $20,000 for 20% of the
Common Stock of PHC.
In connection with the sale of our Series B and Series C Preferred Stock
to the Palladium Investors, we and Jack Bendheim entered into a Stockholders
Agreement (the "Palladium Stockholders Agreement") dated November 30, 2000 with
the Palladium Investors. The Palladium Stockholders Agreement provides that at
least two of the members of our Board be designees of the Palladium Investors.
Peter A. Joseph is currently the sole designee of the Palladium Investors
serving as a director. The Palladium Investors are in discussions with us
regarding filling the currently vacant directorship entitled to be designated by
the Palladium Investors. If and for so long as we fail to redeem any share of
Series C Preferred Stock requested for redemption by a Palladium Investor after
the earliest to occur of June 1, 2008 (the maturity date of our 97?8% Senior
Subordinated Notes due 2008), the redemption of such Notes in full prior thereto
or a change in control of us, then (x) the Palladium Investors may take control
of our Board of Directors, and (y) Jack C. Bendheim has agreed to cause all
equity securities owned by him to be voted in the manner directed by the
Palladium Investors; provided, that, we must pay Jack Bendheim and Marvin
Sussman, whether or not employed by us, an amount not less than their respective
annual base salaries in effect immediately prior to such assumption of control,
until the earlier to occur of the expiration of control by the Palladium
Investors and the fifth anniversary of their assumption of control.
The Palladium Stockholders Agreement contains covenants which restrict,
without the consent of at least one director designated by the Palladium
Investors (or, if no such director is then serving on the Board, at least one
Palladium Investor), among other things, certain (a) issuances of any equity
securities, unless the purchaser agrees to be bound by the Palladium
Stockholders Agreement, (b) sales of assets in excess of $10 million, (c)
purchases of businesses and other investments in excess of $10 million, (d) the
incurrence of indebtedness for borrowed money, including guarantees, in excess
of $12.5 million, (e) redemptions, acquisitions or other purchases of equity
securities, (f) transactions with officers, directors, stockholders or employees
or any family member or affiliate thereof in excess of $0.5 million, (g)
compensation and benefits of certain officers, and (h) transactions involving a
change of control. The Palladium Stockholders Agreement also provides that we
shall furnish the Palladium Investors certain financial reporting and
environmental information each year and grant to the Palladium Investors
registration rights comparable to any such rights granted to any third party,
and requires us to maintain certain key man life insurance on Jack C. Bendheim
for the benefit of the Palladium Investors. The Palladium Stockholders Agreement
provides certain limitations on the ability of Jack C. Bendheim to transfer
voting shares, and certain limitations on the ability of the Palladium Investors
to transfer their shares, including a right of first refusal in favor of us and
Mr. Bendheim.
Pursuant to the Management and Advisory Services Agreement dated November
30, 2000 between us and the Palladium Investors, we agreed to pay, on a
quarterly basis, the Palladium Investors an annual management advisory fee of
$2.25 million until such time as all shares of Series B and Series C Preferred
Stock are redeemed. Pursuant to the divestiture of PMC to Palladium described
below, the obligation of PAHC for this fee has been terminated.
Effective December 26, 2003, the Company completed the divestiture of
substantially all of the business and assets of its subsidiary, The Prince
Manufacturing Company ("PMC"), to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "PMC transactions"). Pursuant to definitive purchase
and other agreements executed on and effective as of such date, the Prince
Transactions included the following elements: (i) the transfer of substantially
all of the business and assets of PMC to Buyer; (ii) the reduction of the value
of the Company's Preferred Stock owned by the Palladium Investors from $72.2
million to $16.5 million (accreted through the closing date) by means of the
redemption of all of its shares of Series B Preferred Stock and a portion of its
Series C Preferred Stock; (iii) the termination of $2.25 million in annual
management advisory fees payable by the Company to Palladium; (iv) a cash
payment of $10 million to the Palladium Investors in respect of the portion of
the Company's Preferred Stock not exchanged in consideration of the business and
assets of PMC; (v) the agreement of the Buyer to pay the Company for advisory
fees for the next three years of $1.0 million, $0.5 million and $0.2 million,
respectively (which were pre-paid at closing by the Buyer and satisfied for $1.3
million, the net present value of such
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payments); and (vi) the Buyer agreed to supply manganous oxide and red iron
oxide products and to provide certain mineral blending services to the Company's
Prince Agriproducts ("Prince Agri") subsidiary. Prince Agri agreed to continue
to provide the Buyer with certain laboratory, MIS and telephone services, all on
terms substantially consistent with the historic relationship between Prince
Agri and PMC, and to lease to Buyer certain office space used by PMC in Quincy,
Illinois.
Pursuant to definitive agreements, the Company made customary
representations, warranties and environmental and other indemnities, agreed to a
post-closing working capital adjustment, paid $3.958 million in full
satisfaction of all intercompany debt owed to PMC, paid a closing fee to
Palladium of $0.5 million, made certain capital expenditure adjustments included
as part of the intercompany settlement amount, and agreed to pay for certain
out-of-pocket transaction expenses. PMC retained $0.4 million of its accounts
receivable.
The Company established a $1 million letter of credit escrow for two years
to secure its working capital adjustment and certain indemnification
obligations. The Company agreed to indemnify the Palladium Investors for a
portion, at the rate of $0.65 for every dollar, of the amount they receive in
respect of the disposition of Buyer for less than $21 million, up to a maximum
payment by the Company of $4 million (the "Backstop Indemnification Amount").
The Backstop Indemnification Amount would be payable on the earlier to occur of
July 1, 2008 or six months after the redemption date of all of the Company's
Senior Secured Notes due 2007 if such a disposition closes prior to such
redemption and six months after the closing of any such disposition if the
disposition closes after any such redemption. The Company's obligations with
respect to the Backstop Indemnification Amount will cease if the Palladium
Investors do not close the disposition of Buyer by January 1, 2009.
The definition of "Equity Value" in the Company's Certificate of
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5. The
amount of consideration paid and payable in connection with the PMC transactions
and all matters in connection therewith was determined pursuant to arm's length
negotiations. The Company has entered into an agreement to receive certain
treasury advisory services from Palladium for $0.1 million per year.
Our policy with respect to the sale, lease or purchase of assets or
property of any related party is that such transaction should be on terms that
are no less favorable to us or our subsidiary, as the case may be, than those
that could reasonably be obtainable at such time in a comparable arm's length
transaction from an unrelated third party, on the same basis as the Indenture
for the Senior Subordinated Notes. The indenture and the senior credit facility
both include a similar restriction on us and our domestic subsidiaries with
respect to the sale, purchase, exchange or lease of assets, property or
services, subject to certain limitations as to the applicability thereof.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of certain of our indebtedness. To the extent
such summary contains descriptions of the credit agreements and other loan
documents, such descriptions do not purport to be complete and are qualified in
their entirety by reference to such documents, which are available at or through
the SEC or upon request from us.
Senior Credit Facility
Substantially simultaneously with the completion of the offering of the
old units, on October 21, 2003, we entered into a new replacement domestic
senior credit facility with Wells Fargo Foothill, Inc., providing for a working
capital facility plus a letter of credit facility. The aggregate amount of
borrowings under such working capital and letter of credit facilities may not
exceed $25.0 million, and the aggregate amount of borrowings under the working
capital facility may not exceed $15.0 million.
Borrowings under the senior credit facility are subject to a borrowing
base formula based on percentages of eligible domestic receivables and domestic
inventory. Under the replacement credit facility, we may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of our assets
and assets of substantially all of our domestic subsidiaries. We are required to
pay an unused line fee of 0.375% on the unused portion of the senior credit
facility, a monthly servicing fee and standard letter of credit fees to issuing
banks. Borrowings under the senior credit facility are available until, and are
repayable no later than, October 31, 2007, although borrowings must be repaid by
June 30, 2007 if the maturity of the Senior Secured Notes has not been extended,
as required by the senior credit facility, by that date. Pursuant to the terms
of an intercreditor agreement, the security interest securing the Senior Secured
Notes and the guarantees made by our domestic restricted subsidiaries is
subordinated to a lien securing the senior credit facility.
The senior credit facility also contains various covenants which restrict
us and our subsidiaries with respect to, among other things, incurring
indebtedness, entering into merger or consolidation transactions, disposing of
assets (other than in the ordinary course of business), acquiring assets (with
permitted exceptions), making certain restricted payments, making optional
redemptions of, or excess cash flow offers for the notes, repaying our Senior
Subordinated Notes not purchased by us with the proceeds of the offering of old
notes, creating any liens on our assets, making investments, creating guarantee
obligations and entering into sale and leaseback transactions and transactions
with affiliates. In the event our total availability under our senior credit
facility falls below specified levels, the facility will require that we comply
with various financial covenants, including meeting a minimum EBITDA requirement
and limitations on capital expenditures. The senior credit facility agreement
provides for certain events of default, including default upon the nonpayment of
principal, interest, fees or other amounts, a cross default with respect to
other obligations of ours and our subsidiaries, failure to comply with certain
covenants, conditions or provisions under the senior credit facility, the
existence of certain unstayed or undischarged judgments, the invalidity or
unenforceability of the relevant security documents, the making of materially
false or misleading representations or warranties, commencement of
reorganization, bankruptcy, insolvency or similar proceedings and the occurrence
of certain ERISA events. Upon the occurrence of an event of default under the
senior credit facility, the lenders may declare all obligations thereunder to be
immediately due and payable.
We may from time to time, prior to the maturity date of the new notes,
refinance, replace, restructure, substitute for, amend or supplement the senior
credit facility. The actual terms of any new or modified credit facility which
replaces the senior credit facility could differ substantially from the facility
summarized above.
Other Indebtedness and Credit Facilities
In June 1998, we issued $100 million aggregate principal amount of 97?8%
Senior Subordinated Notes due 2008. Proceeds of the offering of the old units
issued on October 21, 2003 were used to complete the repurchase of $51,971,000
of our 97?8% Senior Subordinated Notes at a price equal to 60% of the principal
amount thereof plus accrued and unpaid interest. The Senior Subordinated Notes
are general unsecured obligations and are subordinated in right of payment to
all existing and future senior debt (as defined in the
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indenture), including the new notes, and rank pari passu in right of payment
with all other existing and future senior subordinated indebtedness. The Senior
Subordinated Notes are unconditionally guaranteed on a senior subordinated basis
by our domestic subsidiaries. The restrictive covenants in the indenture for the
Senior Subordinated Notes were amended in certain respects.
Certain of our foreign subsidiaries, including subsidiaries in Israel,
France and the United Kingdom, have existing local credit arrangements which
will continue in effect after the exchange offer.
Our subsidiary in Israel, Koffolk Israel, has a $10.5 million working
capital facility with Israeli banks for loans in various currencies, including
dollars, euros and shekels. Borrowings under such facility bear interest at the
LIBOR rate as defined plus 2.25%. Such facility matures every twelve months,
subject to renewal, and is secured by a general floating lien over the accounts
receivables and inventories of Koffolk Israel and its Israeli subsidiaries.
Our French subsidiary, La Cornubia, has several short-term credit
facilities totalling 2.255 million Euros which are secured by French and export
receivables. Interest rates for borrowings against local receivables are at
either an average monthly money market rate (T4M) plus 2.5% or the two month
EURIBOR rate plus 0.8%. Interest rates on borrowings against export receivables
are indexed to various internal bank or money market rates. At December 31,
2003, T4M was 1.96% and EURIBOR was 2.11%. Each of these credit facilities is
subject to annual renewal and to termination with no less than 3 months notice.
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THE EXCHANGE OFFER
Simultaneously with the sale of the old units, the US issuer, the Dutch
issuer and the guarantors entered into a registration rights agreement with
Jefferies & Company, Inc., the initial purchaser of the old units. We are
conducting the exchange offer to satisfy our obligations under the registration
rights agreement.
The form and terms of the new units are identical in all material respects
to the form and terms of the old units, except that the new units will be
registered under the Securities Act; will not bear restrictive legends
restricting their transfer under the Securities Act; will not be entitled to the
registration rights that apply to the old units; and will not contain provisions
relating to increased interest rates in connection with the old units under
circumstances related to the timing of the exchange offer.
The new units will evidence the same debt as the old units. The new units
will be issued under and entitled to the benefits of the same indenture that
authorized the issuance of the old units. Consequently, both the old units and
the new units will be treated as a single series of debt securities under the
indenture. For a description of the indenture, see "Description of the New
Notes."
The exchange offer is not extended to, nor will we accept tenders for
exchange from, old unit holders in any jurisdiction where the exchange offer
does not comply with the securities or blue sky laws of that jurisdiction.
Terms of the Exchange Offer
We are offering to exchange an aggregate number of up to 105,000 units,
each unit consisting of:
o $809.5238 principal amount of 13% Senior Secured Notes due 2007 of
the US issuer; and
o $190.4762 principal amount of 13% Senior Secured Notes due 2007 of
the Dutch issuer.
Holders may only exchange old units for new units. The old units must be
tendered properly in accordance with the conditions set forth in this prospectus
and the accompanying letter of transmittal on or prior to the expiration date
and not withdrawn as permitted below. The exchange offer is not conditioned upon
holders tendering a minimum number of old units. As of the date of this
prospectus, all of the old units are outstanding.
Only whole units will be accepted in the exchange offer; no fractions of
old units will be accepted.
Holders of the old units do not have any appraisal or dissenters' rights
in connection with the exchange offer. If you do not tender your old units or if
you tender old units that we do not accept, your old units will remain
outstanding and continue to accrue interest and you will be entitled to the
rights and benefits holders have under the indenture relating to the old units
and the new units. Existing transfer restrictions would continue to apply to
such old units. See "Risk Factors -- If you fail to exchange your old units for
new units, your old units will continue to be subject to restrictions on
transfer" for more information regarding old units outstanding after the
exchange offer.
None of the US issuer, the Dutch issuer or the guarantors, or our
respective boards of directors or management, recommends that you tender or not
tender old units in the exchange offer or has authorized anyone to make any
recommendation. You must decide whether to tender in the exchange offer and, if
you decide to tender, the aggregate number of old units to tender.
The expiration date is 5:00 p.m., New York City time, on , 2004, or such
later date and time to which the exchange offer is extended.
We have the right, in accordance with applicable law, at any time:
o to delay the acceptance of the old units;
o to terminate the exchange offer and not accept any old units for
exchange if we determine that any of the conditions to the exchange
offer have not occurred or have not been satisfied;
o to extend the expiration date of the exchange offer and retain all
old units tendered in the exchange offer other than those units
properly withdrawn; and
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o to waive any condition or amend the terms of the exchange offer in
any manner.
If we materially amend the exchange offer, we will as promptly as
practicable distribute a prospectus supplement to the holders of the old units
disclosing the change and extend the exchange offer for a period of five to ten
business days, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the exchange offer would otherwise
expire during the five to ten business day period.
If we exercise any of the rights listed above, we will as promptly as
practicable give oral notice, promptly confirmed in writing, to the exchange
agent and will make a public announcement of such action. In the case of an
extension, an announcement will be made no later than 9:00 a.m., New York City
time on the next business day after the previously scheduled expiration date.
Without limiting the manner in which we may choose to make public announcements
of any delay in acceptance, extension, termination or amendment of the exchange
offer, we will have no obligation to publish, advertise, or otherwise
communicate any public announcement, other than by making a timely release to a
financial news service.
During an extension, all old units previously tendered will remain subject
to the exchange offer and may be accepted for exchange by us. Any old units not
accepted for exchange for any reason will be returned without cost to the holder
that tendered them promptly after the expiration or termination of the exchange
offer.
We will accept all old units validly tendered and not withdrawn. Promptly
after the expiration date, we will issue new units registered under the
Securities Act and deliver them to the exchange agent.
The exchange agent might not deliver the new units to all tendering
holders at the same time. The timing of delivery depends upon when the exchange
agent receives and, after the expiration date, processes the required documents.
We will be deemed to have exchanged old units validly tendered and not
withdrawn when we give oral notice, promptly confirmed in writing, to the
exchange agent of our acceptance of the tendered old units. The exchange agent
is our agent for receiving tenders of old units, letters of transmittal and
related documents.
In tendering old units, you must warrant in the letter of transmittal or
in an agent's message (described below) that:
o you have full power and authority to tender, exchange, sell, assign
and transfer old units;
o we will acquire good, marketable and unencumbered title to the
tendered old units, free and clear of all liens, restrictions,
charges and other encumbrances; and
o the old units tendered for exchange are not subject to any adverse
claims or proxies.
You also must warrant and agree that you will, upon request, execute and
deliver any additional documents requested by us or the exchange agent to
complete the exchange, sale, assignment and transfer of the old units.
Procedures for Tendering Old Units
Valid Tender
We have forwarded to you, along with this prospectus, a letter of
transmittal relating to this exchange offer. The letter of transmittal is to be
completed by a holder of old units either if (1) a tender of old units is to be
made by delivering physical certificates for such old units to the exchange
agent, (2) a tender of old units is to be made by book-entry transfer to the
account of the exchange agent for the exchange offer at DTC, as the case may be,
pursuant to the procedures set forth below or (3) a tender of old units is to be
made according to the guaranteed delivery procedures set forth below.
Only a holder of record of old units may tender old units in the exchange
offer. To tender in the exchange offer, a holder must comply with the procedures
of DTC and either:
o complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal; have the signature on the letter of
transmittal guaranteed if the letter of transmittal so requires; and
deliver the letter of transmittal or facsimile to the exchange agent
prior to the expiration date; or
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o in lieu of delivering a letter of transmittal, instruct DTC to
transmit on behalf of the holder a computer-generated message to the
exchange agent in which the holder of the old units acknowledges and
agrees to be bound by the terms of, and to make all of the
representations contained in, the letter of transmittal, which
agent's message (as defined below) shall be received by the exchange
agent prior to 5:00 p.m., New York City time, on the expiration
date.
In addition, either:
o the exchange agent must receive old units along with the letter of
transmittal; or
o the exchange agent must receive, before expiration of the exchange
offer, timely confirmation of book-entry transfer of such old units
into the exchange agent's account at DTC, according to the procedure
for book-entry transfer described below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under the caption "-- Exchange Agent" before expiration
of the exchange offer. To receive confirmation of valid tender of old units, a
holder should contact the exchange agent at the telephone number listed under
the caption "-- Exchange Agent."
The tender by a holder that is not withdrawn before expiration of the
exchange offer will constitute a binding agreement between that holder and us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal. Only a registered holder of old
units may tender the old units in the exchange offer. If you tender fewer than
all of your old units, you should fill in the amount of units tendered in the
appropriate box on the letter of transmittal. The amount of old units delivered
to the exchange agent will be deemed to have been tendered unless otherwise
indicated.
The method of delivery of the certificates for the old units, the letter
of transmittal and all other required documents is at the election and sole risk
of the holders. If delivery is by mail, we recommend registered mail with return
receipt requested, properly insured, or overnight delivery service. In all
cases, you should allow sufficient time to assure timely delivery. No letters of
transmittal or old units should be sent directly to PAH or PB Netherlands.
Delivery is complete when the exchange agent actually receives the items to be
delivered. Delivery of documents to DTC in accordance with its procedures does
not constitute delivery to the exchange agent.
If you beneficially own old units and those units are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian and you wish to tender your old units in the exchange offer, you
should contact the registered holder as soon as possible and instruct it to
tender the old units on your behalf and comply with the instructions set forth
in this prospectus and the letter of transmittal.
If the applicable letter of transmittal is signed by the record holder(s)
of the old units tendered, the signature must correspond with the name(s)
written on the face of the old unit without alteration, enlargement or any
change whatsoever. If the applicable letter of transmittal is signed by a
participant in DTC, the signature must correspond with the name as it appears on
the security position listing as the holder of the old units.
If any letter of transmittal, endorsement, bond power, power of attorney,
or any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person must indicate such capacity when signing. In addition, unless waived
by us, the person must submit proper evidence satisfactory to us, in our sole
discretion, of his or her authority to so act.
Holders should receive copies of the letter of transmittal with the
prospectus. A holder may obtain additional copies of the letter of transmittal
for the old units from the exchange agent at its offices listed under the
caption "-- Exchange Agent."
Signature Guarantees
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution unless the old units
surrendered for exchange are tendered:
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o by a registered holder of old units who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
o for the account of an eligible institution.
An "eligible institution" is a firm or other entity which is identified as
an "Eligible Guarantor Institution" in Rule 17Ad-15 under the Exchange Act,
including:
o a bank;
o a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer;
o a credit union;
o a national securities exchange, registered securities association or
clearing agency; or
o a savings association.
If old units are registered in the name of a person other than the signer
of the letter of transmittal, the old units surrendered for exchange must be
endorsed or accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by us in our sole discretion, duly
executed by the registered holder with the holder's signature guaranteed by an
eligible institution.
DTC Book-Entry Transfers
For tenders by book-entry transfer of old units cleared through DTC, the
exchange agent will make a request to establish an account at DTC for purposes
of the exchange offer. Any financial institution that is a DTC participant may
make book-entry delivery of old units by causing DTC to transfer the old units
into the exchange agent's account at DTC in accordance with DTC's procedures for
transfer. The exchange agent and DTC have confirmed that any financial
institution that is a participant in DTC may use the Automated Tender Offer
Program, or ATOP, procedures to tender old units. Accordingly, any participant
in DTC may make book-entry delivery of old units by causing DTC to transfer
those old units into the exchange agent's account in accordance with its ATOP
procedures for transfer.
Notwithstanding the ability of holders of old units to effect delivery of
old units through book-entry transfer at DTC, the letter of transmittal or a
facsimile thereof, or an agent's message in lieu of the letter of transmittal,
with any required signature guarantees and any other required documents must be
transmitted to and received by the exchange agent prior to the expiration date
at the address given below under "-- Exchange Agent." In this context, the term
"agent's message" means a message, transmitted by DTC and received by the
exchange agent and forming part of a book-entry confirmation, which states that
DTC has received an express acknowledgment from a participant tendering old
units that are the subject of the book-entry confirmation that the participant
has received and agrees to be bound by the terms of the letter of transmittal,
and that we may enforce that agreement against the participant.
Guaranteed Delivery Procedures
If a registered holder of the old units desires to tender the old units
and the old units are not immediately available, or time will not permit the
holder's old units or other required documents to reach the exchange agent
before the expiration date of the exchange offer, or the procedure for
book-entry transfer or a confirmation of blocking instructions cannot be
completed on a timely basis, a tender may nonetheless be effected if:
o the tender is made through a firm which is a member of a registered
national securities exchange or a member of the National Association
of Securities Dealers, Inc. or a commercial bank or trust company
having an office or correspondent in the United States;
o prior to the expiration date of the exchange offer, the exchange
agent received from the firm which is a member of a registered
national securities exchange or a member of the National Association
of Securities Dealers, Inc. or commercial bank or trust company
having an office or correspondent in the United States a properly
completed and duly executed Letter of Transmittal (or a facsimile of
the Letter of Transmittal) and Notice of Guaranteed Delivery,
substantially in the form provided by us (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the
holder of old
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units and the amount of old units tendered, stating that the tender
is being made and guaranteeing that within five New York Stock
Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered
old units, in proper form for transfer, or a confirmation of a
book-entry transfer or a confirmation of blocking instructions, as
the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the firm which is a member of a
registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or commercial bank or trust
company having an office or correspondent in the United States with
the exchange agent; and
o the certificates for all physically tendered old units, in proper
form for transfer, or a confirmation of a book-entry transfer or a
confirmation of blocking instructions, as the case may be, and all
other documents required by the Letter of Transmittal are received
by the exchange agent within five New York Stock Exchange trading
days after the date of execution of the Notice of Guaranteed
Delivery.
Determination of Validity
We, in our sole discretion, will resolve all questions regarding the form
of documents, validity, eligibility, including time of receipt, and acceptance
for exchange and withdrawal of any tendered old units. Our determination of
these questions as well as our interpretation of the terms and conditions of the
exchange offer, including the letter of transmittal, will be final and binding
on all parties. A tender of old units is invalid until all defects and
irregularities have been cured or waived. Holders must cure any defects and
irregularities in connection with tenders of old units for exchange within such
reasonable period of time as we will determine, unless we waive the defects or
irregularities. Neither we, any of our affiliates or assigns, the exchange agent
nor any other person is under any obligation to give notice of any defects or
irregularities in tenders nor will we or they be liable for failing to give any
such notice.
We reserve the absolute right, in our sole and absolute discretion:
o to reject any tenders determined to be in improper form or unlawful;
o to waive any of the conditions of the exchange offer; and
o to waive any condition or irregularity in the tender of old units by
any holder.
Any waiver to the exchange offer will apply to all old units tendered.
Withdrawal Rights
You can withdraw tenders of old units at any time prior to 5:00 p.m., New
York City time, on the expiration date.
For a withdrawal to be effective, you must deliver a written notice of
withdrawal to the exchange agent. The notice of withdrawal must:
o specify the name of the person tendering the old units to be
withdrawn;
o identify the old units to be withdrawn, including the total
principal amount of old units to be withdrawn; and
o where certificates for old units are transmitted, the name of the
registered holder of the old units if different from the person
withdrawing the old units.
If you delivered or otherwise identified old units to the exchange agent,
you must submit the serial numbers of the old units to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an eligible
institution, except in the case of old units tendered for the account of an
eligible institution. If you tendered old units as a book-entry transfer or
through the blocking procedures described above, the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawn old units and you must deliver the notice of withdrawal to the
exchange agent and otherwise comply with the procedures of the facility. You may
not rescind withdrawals of tender; however, properly withdrawn old units may
again be tendered by following one of the procedures described under "--
Procedures for Tendering Old Units" above at any time prior to 5:00 p.m., New
York City time, on the expiration date.
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We will determine all questions regarding the form of withdrawal,
validity, eligibility, including time of receipt, and acceptance of withdrawal
notices. Our determination of these questions as well as our interpretation of
the terms and conditions of the exchange offer (including the letter of
transmittal) will be final and binding on all parties. Neither we, any of our
affiliates or assigns, the exchange agent nor any other person is under any
obligation to give notice of any irregularities in any notice of withdrawal, nor
will we be liable for failing to give any such notice.
Withdrawn old units will be returned to the holder after withdrawal. In
the case of old units tendered by book-entry transfer through DTC, the old units
withdrawn or not exchanged will be credited to an account maintained with DTC.
The old units will be returned or credited to the account maintained with DTC
promptly after withdrawal, rejection of tender or termination of the exchange
offer. Any old units which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost to
the holder.
Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, we are not
required to accept for exchange, or to issue new units in exchange for, any old
units, and we may terminate or amend the exchange offer, if at any time prior to
5:00 p.m., New York City time, on the expiration date, we determine that:
o the new units to be received will not be tradable by the holder,
without restriction under the Securities Act and the Exchange Act
and without material restrictions under the blue sky or securities
laws of substantially all of the states of the United States;
o we have not received all applicable governmental approvals;
o the exchange offer, or the making of any exchange by a holder of old
units, would violate applicable law or any applicable interpretation
or policy of the staff of the SEC; or
o any action or proceeding has been instituted or threatened in any
court or by or before any governmental agency with respect to the
exchange offer that would reasonably be expected to impair our
ability to proceed with the exchange offer.
The foregoing conditions are for our sole benefit, and we may assert them
regardless of the circumstances giving rise to any such condition, or we may
waive the conditions, completely or partially, whenever or as many times as we
choose, in our reasonable discretion. The foregoing rights are not deemed waived
because we fail to exercise them, but continue in effect, and we may still
assert them whenever or as many times as we choose. However, any such waiver,
other than a waiver involving governmental approval, must be satisfied or waived
before the expiration of the offer. If we determine that a waiver of conditions
materially changes the exchange offer, the prospectus will be amended or
supplemented, and the exchange offer extended, if appropriate, as described
under "-- Terms of the Exchange Offer."
In addition, at a time when any stop order is threatened or in effect with
respect to the registration statement of which this prospectus constitutes a
part or with respect to the qualification of the indenture under the Trust
Indenture Act of 1939, as amended, we will not accept for exchange any old units
tendered, and no new units will be issued in exchange for any such old units.
If we terminate or suspend the exchange offer based on a determination
that the exchange offer violates applicable law or SEC policy, the registration
rights agreement requires that we, as soon as practicable after such
determination, use all commercially reasonable efforts to cause a shelf
registration statement covering the resale of the old units to be filed and
declared effective by the SEC. See "-- Registration Rights and Additional
Interest on the Old Units."
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Exchange Agent
We appointed HSBC Bank USA as exchange agent for the exchange offer. You
should direct questions and requests for assistance, requests for additional
copies of this prospectus, the Letter of Transmittal or the Notice of Guaranteed
Delivery to the exchange agent at the address and phone number as follows:
HSBC Bank USA
452 Fifth Avenue
Issuer Services
New York, NY 10018
Attention: Gloria Alli
By facsimile (for eligible institutions only): (212) 525-1300
Confirm facsimile by telephone ONLY: (212) 525-1404
If you deliver letters of transmittal and any other required documents to
an address or facsimile number other than those listed above, your tender is
invalid.
Fees and Expenses
The registration rights agreement provides that we will bear all expenses
in connection with the performance of our obligations relating to the
registration of the new units and the conduct of the exchange offer. These
expenses include registration and filing fees, accounting and legal fees and
printing costs, among others. We will pay the exchange agent reasonable and
customary fees for its services and reasonable out-of-pocket expenses. We will
also reimburse brokerage houses and other custodians, nominees and fiduciaries
for customary mailing and handling expenses incurred by them in forwarding this
prospectus and related documents to their clients that are holders of old units
and for handling or tendering for such clients.
We have not retained any dealer-manager in connection with the exchange
offer and will not pay any fee or commission to any broker, dealer, nominee or
other person, other than the exchange agent, for soliciting tenders of old units
pursuant to the exchange offer.
Transfer Taxes
Holders who tender their old units for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. If, however, new units
issued in the exchange offer are to be delivered to, or are to be issued in the
name of, any person other than the holder of the old units tendered, or if a
transfer tax is imposed for any reason other than the exchange of old units in
connection with the exchange offer, then the holder must pay any such transfer
taxes, whether imposed on the registered holder or on any other person. If
satisfactory evidence of payment of, or exemption from, such taxes is not
submitted with the letter of transmittal, the amount of such transfer taxes will
be billed directly to the tendering holder.
Accounting Treatment
The new units will be recorded at the same carrying value as the old
units. Accordingly, PAH will not recognize any gain or loss for accounting
purposes. PAH intends to amortize the expenses of the exchange offer and
issuance of the old units over the term of the new units.
Registration Rights and Additional Interest on the Old Units
In the event that applicable interpretations of the Staff do not permit
the issuers and the guarantors to effect the exchange offer or if for any other
reason the exchange offer is not consummated by the 210th day following the
Issue Date, or if the initial purchaser so requests with respect to the units
not eligible to be exchanged for exchange units in the exchange offer or if any
holder of units is prohibited by law or Commission policy from participating in
the exchange offer or does not receive freely tradeable exchange units in the
exchange offer, the issuers and the guarantors will, at their expense, (a)
promptly file the Shelf Registration Statement permitting resales from time to
time of the units, (b) use our best efforts to cause the Shelf Registration
Statement to become effective and (c) use our best efforts to keep the Shelf
Registration Statement current and effective until two years from the Issue Date
or such shorter period that will terminate when all the units covered by the
Shelf Registration Statement have been sold pursuant thereto. The issuers and
the guarantors, at their expense, will
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provide to each holder of the units copies of the prospectus, which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the units from time to time. A
holder of units who sells such units pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder in
the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
In the event that:
(i) the Exchange Offer Registration Statement is not filed with the
Commission on or prior to the 120th day after the Issue Date or
declared effective on or prior to the 180th day after the Issue
Date,
(ii) the Exchange Offer is not consummated on or prior to the 30th day
following the effectiveness of the Exchange Offer Registration
Statement,
(iii) the Shelf Registration Statement is not filed or declared effective
within the required time periods or
(iv) the Exchange Offer Registration Statement or the Shelf Registration
Statement is declared effective but thereafter ceases to be
effective (except as specifically permitted therein) for a period of
15 consecutive days without being succeeded immediately by an
additional Exchange Offer Registration Statement or Shelf
Registration Statement, as the case may be, filed and declared
effective (each such event, a "Registration Default"),
then, the interest rate borne by the notes shall be increased by 0.25% per annum
for the 90-day period following such Registration Default. Such interest rate
will increase by an additional 0.25% per annum at the beginning of each
subsequent 90-day period following such Registration Default, up to a maximum
aggregate increase of 1.0% per annum. From and after the date that all
Registration Defaults have been cured, the notes will bear interest at the rate
set forth on the cover page of this prospectus. Following the cure of all
Registration Defaults, the accrual of such increased interest rate will cease.
Resales of New Units
Based on existing SEC interpretations issued to third parties in unrelated
transactions, we believe that the new units will be freely transferable by
holders other than affiliates of us after the registered exchange offer without
further registration under the Securities Act if the holder of the new units is
acquiring the new units in the ordinary course of its business, has no
arrangement or understanding with any person to participate in the distribution
of the new units and is not an affiliate of us, as such terms are interpreted by
the SEC; provided that broker-dealers receiving new units in the exchange offer
will have a prospectus delivery requirement with respect to resales of such new
units. While the SEC has not taken a position with respect to this particular
transaction, under existing SEC interpretations relating to transactions
structured substantially like the exchange offer, participating broker-dealers
may fulfill their prospectus delivery requirements with respect to the new units
(other than a resale of an unsold allotment of the units) with the prospectus
contained in the exchange offer registration statement. We will not seek our own
interpretive letter. As a result, we cannot assure you that the staff will take
the same position on this exchange offer as it did in interpretive letters to
other parties in similar transactions.
By tendering old units, the holder, other than participating
broker-dealers, as defined below, of those old units will represent to us that,
among other things:
o the new units acquired in the exchange offer are being obtained in
the ordinary course of business of the person receiving the new
units, whether or not that person is the holder;
o neither the holder nor any other person receiving the new units is
engaged in, intends to engage in or has an arrangement or
understanding with any person to participate in a "distribution" (as
defined under the Securities Act) of the new units; and
o neither the holder nor any other person receiving the new units is
an "affiliate" (as defined under the Securities Act) of us.
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If any holder or any such other person is an "affiliate" of us or is
engaged in, intends to engage in or has an arrangement or understanding with any
person to participate in a "distribution" of the new units, such holder or other
person:
o may not rely on the applicable interpretations of the staff of the
SEC referred to above; and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction.
Each broker-dealer that receives new units for its own account in exchange
for old units must represent that the old units to be exchanged for the new
units were acquired by it as a result of market-making activities or other
trading activities and acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any offer to resell,
resale or other retransfer of the new units. Any such broker-dealer is referred
to as a participating broker-dealer. However, by so acknowledging and by
delivering a prospectus, the participating broker-dealer will not be deemed to
admit that it is an "underwriter" (as defined under the Securities Act). If a
broker-dealer acquired old units as a result of market-making or other trading
activities, it may use this prospectus, as amended or supplemented, in
connection with offers to resell, resales or retransfers of new units received
in exchange for the old units pursuant to the exchange offer. We have agreed
that, for a period of 90 days after the effective date of the registration
statement of which this prospectus is a part, we will make this prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution" for a discussion of the exchange and resale obligations
of broker-dealers in connection with the exchange offer.
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DESCRIPTION OF THE NEW UNITS
We are offering 105,000 new units (the "New Units"), consisting of $85.0
million 13% senior secured notes due 2007 (the "U.S. Notes") of Phibro Animal
Health Corporation (the "U.S. Issuer") and $20.0 million 13% senior secured
notes due 2007 (the "Dutch Notes" and, together with the U.S. Notes, the "New
Notes") of Philipp Brothers Netherlands III B.V. (the "Dutch Issuer" and,
together with the U.S. Issuer, the "Issuers"). The New Notes of each Issuer that
comprise the New Units will not trade separately unless (i) an event of default
under the indenture has occurred, (ii) a tax redemption of the New Notes issued
by Dutch Issuer related to certain changes affecting withholding taxes has
occurred or (iii) there has been a change of control of the Dutch Issuer. See
"Description of the New Notes" for further information concerning the New Notes.
DESCRIPTION OF THE NEW NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." For purposes of this description:
o the words "we" and "us" refer only to the Issuers and not to any of
their respective subsidiaries;
o the word "Company" refers only to Phibro Animal Health Corporation
and not to any of its subsidiaries;
o the new notes are collectively referred to as the "New Notes";
o the new units are collectively referred to as the "New Units"
o the new U.S. Notes are referred to as the "U.S. Notes";
o the new Dutch notes are referred to as the "Dutch Notes";
o the new note guarantees are referred to as the "Guarantees";
o the new units and the old units are collectively referred to as the
"Units"; and
o the new notes and the old notes are collectively referred to as the
"Notes."
We issued the old notes and will issue the New Notes under an indenture
(the "Indenture"), dated as of October 21, 2003, among us, the Guarantors and
HSBC Bank USA, as trustee (the "Trustee"). The terms of the New Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Collateral
Agreements referred to herein under the subcaption "Security" contains the terms
of the security interests that will secure the Notes.
The following description is a summary of the material provisions of the
Indenture and the Collateral Agreements. It does not restate those agreements in
their entirety. We urge you to read the Indenture and the Collateral Agreements
because they, and not this description, define your rights. Copies of the
Indenture and the Collateral Agreements are available from the Company.
The terms of the new notes are the same as the terms of the old notes,
except that:
o the new notes will be registered under the Securities Act of 1933,
as amended;
o the new notes will not bear restrictive legends restricting their
transfer under the Securities Act;
o the holder of the new notes are not entitled to certain rights under
the registration rights agreement; and
o the new notes will not contain provisions relating to increased
interest rates in connection with the old notes under circumstances
related to the timing of the exchange offer.
Brief Description of the New Notes and the Guarantees
The New Notes Generally. The U.S. Notes will be the several obligations of
the U.S. Issuer and the Dutch Notes will be the several obligations of the Dutch
Issuer, and statements herein to the effect of "we will pay all principal,
interest and premiums and Additional Interest, if any, on the Notes" or of
similar import should be
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interpreted as the several payment by the U.S. Issuer of all principal, interest
and premiums and Additional Interest, if any, on the U.S. Notes and the Dutch
Issuer of all principal, interest and premiums and Additional Interest, if any,
on the Dutch Notes.
The Notes of each Issuer will not trade separately unless (i) an Event of
Default has occurred, (ii) a redemption of the Dutch Notes as described under
"-- Taxation; Redemption For Taxation Reasons" has occurred (a "Tax Redemption")
or (iii) a Change of Control of the Dutch Issuer has occurred (each, a
"Separation Event").
The U.S. Notes. The U.S. Notes:
o will be the general obligations of the U.S. Issuer;
o will rank equally in right of payment with all other senior
obligations of the U.S. Issuer;
o will rank senior in right of payment to all Indebtedness of the U.S.
Issuer which by its terms is subordinated to the U.S. Notes;
o will be secured by security interests in substantially all assets of
the U.S. Issuer and the current and future Domestic Restricted
Subsidiaries of the U.S. Issuer (other than real property and
interests therein), subject to Permitted Liens;
o will be structurally subordinated to all liabilities of the Foreign
Subsidiaries and Unrestricted Subsidiaries of the U.S. Issuer; and
o will be guaranteed, jointly and severally, on a senior secured basis
by each of the current and future Domestic Restricted Subsidiaries
of the U.S. Issuer.
Pursuant to the terms of the Intercreditor Agreement, the security
interest on the assets of the U.S. Issuer and its current and future Domestic
Restricted Subsidiaries that secure the Notes, the Domestic Guarantees and the
Company Guarantee will be subordinated to a Lien securing the Credit Agreement.
In addition, such security interests will be subordinated to Permitted Liens
securing $0.4 million of other existing Indebtedness.
The Dutch Notes. The Dutch Notes:
o will be the general obligations of the Dutch Issuer;
o will rank equally in right of payment with all other senior
obligations of the Dutch Issuer;
o will rank senior in right of payment to all Indebtedness of the
Dutch Issuer which by its terms is subordinated to the Dutch Notes;
o will be secured by
o a pledge of all of the accounts receivable, a security
interest or floating charge on the inventory to the extent
permitted by applicable law and a mortgage on substantially
all real property of the Dutch Issuer and its current and
future Restricted Subsidiaries,
o a pledge of 100% of the Capital Stock of each direct
Subsidiary of the Dutch Issuer and each Restricted Subsidiary
of the Dutch Issuer, and
o a pledge of the intercompany loans made by the Dutch Issuer to
its Restricted Subsidiaries,
in each case, subject to Permitted Liens;
o will be structurally subordinated to all liabilities of the Foreign
Subsidiaries of the U.S. Issuer (other than the Dutch Issuer and its
Restricted Subsidiaries) and Unrestricted Subsidiaries of the U.S.
Issuer; and
o will be guaranteed, jointly and severally, on a senior secured basis
by the U.S. Issuer and each of the current and future Domestic
Restricted Subsidiaries of the U.S. Issuer and by each of the
current and future Restricted Subsidiaries of the Dutch Issuer.
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The Guarantees. Each Guarantee of each Guarantor:
o will be the general obligation of such Guarantor;
o will rank equally in right of payment with all other senior
obligations of such Guarantor; and
o will rank senior in right of payment to all Indebtedness of such
Guarantor which by its terms is subordinated to the Guarantees;
provided, that:
o the Guarantee of each Foreign Guarantor shall only be in respect of
the Dutch Notes and the other Obligations of the Dutch Issuer and
not in respect of the U.S. Notes or any other Obligation of the U.S.
Issuer; and
o will be secured,
o in the case where such Guarantor is a Domestic Guarantor, by
security interests in substantially all assets of such
Guarantor (other than real property and interests therein),
o in the case where such Guarantor is a Foreign Guarantor, by
security interests in all of the accounts receivable, a
security interest or floating charge on the inventory to the
extent permitted by applicable law and a mortgage on
substantially all real property of such Guarantor and a pledge
of 100% of the Capital Stock of each direct Subsidiary of such
Guarantor.
The U.S. Issuer will also guarantee the payment of the Dutch Notes and the
other Obligations of the Dutch Issuer under the Indenture. Such guarantee of the
U.S. Issuer will have the same characteristics that are described above with
respect to the Guarantee of each Domestic Guarantor in respect of the
Obligations of the Dutch Issuer that are guaranteed thereunder.
Methods of Receiving Payments on the Notes
All payments on the new notes will be made at the office or agency of the
paying agent and registrar unless we elect to make interest payments by check
mailed to the Holders at their addresses set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The Issuers will issue the New Units in fully registered form in
denominations of $1,000 and integral multiples thereof, each New Unit consisting
of $809.5238 principal amount of U.S. Notes and $190.4762 principal amount of
Dutch Notes. The Trustee will initially act as paying agent and registrar for
the New Units and New Notes. The New Units and New Notes may be presented for
registration or transfer and exchange at the offices of the registrar. No
service charge will be made for any registration of transfer or exchange or
redemption of New Units or New Notes, but the Issuers may require payment in
certain circumstances of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith. The Issuers may change any
paying agent and registrar without notice to holders of the New Notes (the
"Holders"), and we or any of our Subsidiaries may act as paying agent or
registrar.
The Issuers will pay principal (and premium, if any) on the New Notes at
the Trustee's corporate trust office in New York, New York. At the Issuers'
option, interest and Additional Interest (as defined below), if any, may be paid
at the Trustee's corporate trust office or by check mailed to the registered
address of Holders.
Transfer and Exchange
A Holder may transfer or exchange the Units and Notes in accordance with
the Indenture. The registrar and the trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents in connection
with a transfer of the Units or Notes. No service charge will be made for any
transfer, exchange or redemption of the Units or Notes. However, Holders will be
required to pay all taxes due on transfer. We are not required to transfer or
exchange any Unit or Note selected for redemption. Also, we are not required to
transfer or exchange any Unit or Note for a period of 15 days before a selection
of the Units or Notes to be redeemed.
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Principal, Maturity and Interest
The Indenture does not limit the maximum principal amount of Units and
Notes that we may issue thereunder. We will issue 105,000 Units in this offering
in an aggregate principal amount of $105.0 million which will be comprised of
U.S. Notes in an aggregate principal amount of $85.0 million and Dutch Notes in
an aggregate principal amount of $20.0 million. We may issue additional notes
("Additional Notes") in additional units ("Additional Units") from time to time,
subject to the limitations set forth under "-- Certain Covenants -- Limitation
on Incurrence of Indebtedness." The Notes and any Additional Notes will be
substantially identical other than the issuance dates and the dates from which
interest will accrue. We will issue the Units in denominations of $1,000 and
integral multiples of $1,000. The Notes will mature on December 1, 2007.
Interest on the Notes will accrue at the rate of 13% per annum and will be
payable semi-annually in arrears on June 1 and December 1 in each year,
commencing on December 1, 2003, to Holders of record on the immediately
preceding May 15 and November 15, respectively. Interest on the Notes will
accrue from the date it was most recently paid or, if no interest has been paid,
from October 21, 2003 (the "Issue Date"). We will pay interest on overdue
principal at 1% per annum in excess of the above rate and we will pay interest
on overdue installments of interest at such higher rate to the extent lawful.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Any Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
Because, however, any Additional Notes may not be fungible with the Notes for
federal income tax purposes, they may have a different CUSIP number or numbers,
be represented by a different Global Note or Notes, and otherwise be treated as
a separate class or classes of Notes for other purposes.
Security
Pursuant to the terms of the Domestic Collateral Agreements, the Notes,
the Company Guarantee and the Domestic Guarantees of the current and future
Domestic Guarantors will be secured by substantially all of the assets of the
U.S. Issuer and such Domestic Guarantors (other than real property and interests
therein), including a pledge of the Capital Stock owned directly by the U.S.
Issuer and such Domestic Guarantors. However, no such pledge will include more
than 65% of the Voting Stock of our Foreign Subsidiaries directly owned by the
U.S. Issuer or any such Domestic Guarantor.
In addition, to the arrangements described in the immediately preceding
sentence, the Dutch Notes and the Foreign Guarantees of the Foreign Guarantors
will be secured, pursuant to the Foreign Collateral Agreements, by a pledge of
all of the accounts receivable, a security interest or floating charge on the
inventory to the extent permitted by applicable law and a mortgage on
substantially all real property of the Dutch Issuer and the Foreign Guarantors,
a pledge of 100% of the Capital Stock of each direct Subsidiary of the Dutch
Issuer and each Foreign Guarantor and a pledge of the intercompany loans made by
the Dutch Issuer to its Restricted Subsidiaries.
The Domestic Collateral securing the Notes, the Company Guarantee and the
Guarantees will also serve as collateral to secure the obligations under the
Credit Agreement. The U.S. Issuer, the Domestic Guarantors and the Collateral
Agent, on behalf of itself, the Trustee and the Holders, and the Administrative
Agent, on behalf of the Lenders, entered into the Intercreditor Agreement. The
Intercreditor Agreement provides, among other things, that (1) Liens in the
Domestic Collateral securing the Notes will be junior to the security interests
in favor of the Administrative Agent under the Credit Agreement, and
consequently, the Lenders will be entitled to receive proceeds from the
foreclosure of any Domestic Collateral prior to the Holders, (2) during any
insolvency proceedings, the Administrative Agent and the Collateral Agent will
coordinate their efforts to give effect to the relative priority of their
security interests in such assets and (3) the Administrative Agent will,
following the occurrence and during the continuance of an Event of Default or an
event of default under the Credit Agreement, have the sole and exclusive right
to make all decisions with respect to the foreclosure of any such Domestic
Collateral, including the timing and method of any disposition thereof. The
Intercreditor Agreement also provides that the Collateral Agent and the
Administrative Agent will provide notices to each other with respect to the
occurrence of events of default and the acceleration of the Notes or the
Indebtedness outstanding under the Credit Agreement, as the case may be.
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The security interests granted by the U.S. Issuer and the Domestic
Guarantors that secure the Notes, the Company Guarantee and the Guarantees of
the current and future Domestic Guarantors will also be junior to Permitted
Liens securing $0.4 million of other existing Indebtedness. Subject to the
restrictions on incurring Indebtedness in the Indenture, we and our Restricted
Subsidiaries will also have the right to grant Liens securing Capital Lease
Obligations and Purchase Money Obligations constituting Permitted Indebtedness
and to acquire any such assets subject to such Liens.
Upon the occurrence of an Event of Default, the proceeds from the sale of
Collateral securing the Notes will likely be insufficient to satisfy our
obligations under the Notes. No appraisals of any of the Collateral have been
prepared in connection with the Offering. Moreover, the amount to be received
upon such a sale would be dependent upon numerous factors, including the
condition, age and useful life of the Collateral at the time of such sale, as
well as the timing and manner of such sale. By its nature, all or some of the
Collateral will be illiquid and may have no readily ascertainable market value.
Accordingly, there can be no assurance that the Collateral, if saleable, can be
sold in a short period of time.
To the extent third parties hold Permitted Liens, such third parties may
have rights and remedies with respect to the property subject to such Liens
that, if exercised, could adversely affect the value of the Collateral. Given
the intangible nature of certain of the Collateral, any such sale of such
Collateral separately from the Company as a whole may not be feasible.
Additionally, the inclusion of the fixtures of the U.S. Issuer of the current
and future Domestic Guarantors in the Collateral securing the Notes will be
limited by the extent to which (a) such fixtures are deemed not to be personal
property, and (b) any applicable state laws would, for purposes of perfecting
security interests with respect thereto, require that the Collateral Agent
effectuate certain filings in applicable real estate land records. Our ability
to grant a security interest in certain Collateral may be limited by legal or
other logistical considerations. The ability of the Holders to realize upon the
Collateral may be subject to certain bankruptcy law limitations in the event of
a bankruptcy. See "-- Certain Bankruptcy and Other Limitations."
The U.S. Issuer is permitted to form new Domestic Restricted Subsidiaries
and to transfer all or a portion of the Collateral to one or more of its
Domestic Restricted Subsidiaries. Each such new Domestic Restricted Subsidiary
will be required to execute a Guarantee in respect of our obligations under the
Notes and the Indenture and a security agreement granting to the Collateral
Agent a security interest in substantially all of the assets of such Domestic
Restricted Subsidiary (other than real property and interests therein) on the
same basis and subject to the same limitations as the currently existing
Domestic Restricted Subsidiaries of the U.S. Issuer as described above.
In addition, the Dutch Issuer is permitted to form new Restricted
Subsidiaries and to transfer all or a portion of the Foreign Collateral to the
U.S. Issuer or one or more of the Guarantors. Each such newly formed Restricted
Subsidiary will be required to execute a Foreign Guarantee in respect of the
obligations of the Dutch Issuer under the Dutch Notes and the Indenture and
Foreign Collateral Agreements granting to the Collateral Agent a pledge of all
the accounts receivable, a security interest or floating charge on the inventory
to the extent permitted by applicable law and a mortgage on substantially all
real property of such Restricted Subsidiary, as well as 100% of the Capital
Stock of each Subsidiary of each Restricted Subsidiary, on the same basis and
subject to the same limitations as our currently existing Restricted
Subsidiaries of the Dutch Issuer as described above.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture, the Domestic
Collateral Agreements and the Intercreditor Agreement, we and our Domestic
Restricted Subsidiaries will be entitled to receive all cash dividends, interest
and other payments made upon or with respect to the Capital Stock of any of our
Subsidiaries and until delivery of a written notice from the Collateral Agent,
to exercise any voting, consensual rights and other rights pertaining to such
pledged Capital Stock.
Upon the occurrence and during the continuance of an Event of Default,
subject to the terms of the Intercreditor Agreement as it relates to any
Collateral constituting Domestic Collateral, upon notice from the Collateral
Agent:
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(a) all of our rights to exercise such voting, consensual rights, or
other rights shall cease following the delivery of such written notice and
all such rights shall become vested in the Collateral Agent, which, to the
extent permitted by law, shall have the sole right to exercise such
voting, consensual rights or other rights;
(b) all of our rights to receive all cash dividends, interest and
other payments made upon or with respect to the Collateral shall cease,
and such cash dividends, interest and other payments shall be paid to the
Collateral Agent; and
(c) the Collateral Agent may sell the Collateral or any part thereof
in accordance with, and subject to the terms of, the Collateral
Agreements. All funds distributed under the Collateral Agreements and
received by the Collateral Agent for the ratable benefit of the Holders
shall be distributed by the Collateral Agent in accordance with the
provisions of the Indenture.
The collateral release provisions of the Indenture permit the release of
Collateral without substitution of collateral having at least equal value under
certain circumstances, including asset sales made in compliance with the
Indenture.
Certain Bankruptcy and Other Limitations
The right of the Collateral Agent to repossess and dispose of or otherwise
exercise remedies relating to the Collateral upon the occurrence and during the
continuance of an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or
against the Company or any of its Domestic Restricted Subsidiaries prior to the
Collateral Agent having repossessed and disposed of the Collateral or otherwise
completed the exercise of its remedies with respect to the Collateral. Under the
Bankruptcy Code, a secured creditor such as the Collateral Agent is prohibited
from repossessing its security from a debtor in a bankruptcy case, or from
disposing of security repossessed from such debtor, without bankruptcy court
approval. Moreover, the Bankruptcy Code permits the debtor to continue to retain
and to use collateral even though the debtor is in default under the applicable
debt instruments; provided that, under the Bankruptcy Code, the secured creditor
is given "adequate protection." The meaning of the term "adequate protection"
may vary according to circumstances, but it is intended in general to protect
the value of the secured creditor's interest in the collateral securing the
obligations owed to it and may include cash payments or the granting of
additional security, if and at such times as the bankruptcy court in its
discretion determines, for any diminution in the value of such collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the Notes could be delayed following commencement of a bankruptcy
case, whether or when the Collateral Agent could repossess or dispose of the
Domestic Collateral or whether or to what extent Holders would be compensated
for any delay in payment or loss of value of the Domestic Collateral through the
requirement of "adequate protection."
There are two primary insolvency regimes under Dutch law: the first,
moratorium of payment (surseance van betaling) is intended to facilitate the
reorganization of a debtor's debts and enable the debtor to continue as a going
concern. The second, bankruptcy (faillissement), is designed to liquidate and
distribute the assets of a debtor to its creditors. Under Netherlands law the
holders of the Dutch notes can in the event of bankruptcy or moratorium of
payment exercise the rights afforded to pledgees as if there were no bankruptcy
or moratorium of payment. However, bankruptcy or moratorium of payment involving
the Dutch issuer would affect the position of the holders of the Dutch notes as
pledgees in some respects, the most important of which are: (i) the right of
pledge will not extend to accounts receivable that arise under an agreement
creating continuing obligations of the Dutch issuer and become due and payable
on or after the date on which the Dutch issuer is declared bankrupt or granted a
moratorium of payments, (ii) the right of pledge will not extend to inventory
that is acquired by the Dutch issuer on or after the date on which the Dutch
issuer is declared bankrupt or granted a moratorium of payments, (iii) payments
received by the Dutch issuer from the debtors of pledged accounts receivable
after bankruptcy or moratorium of payments involving the Dutch issuer having
been declared, will be part of the bankrupt estate, although the holders of the
Dutch notes have the right to receive such amounts by preference after deduction
of certain costs, (iv) a mandatory "cooling-off" period of up to two months may
apply in case of bankruptcy or moratorium of payments involving the Dutch
issuer, which, if applicable, would
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delay the exercise of the rights of pledge on the shares of PAH Belgium and the
accounts receivable and (v) the holders of the Dutch notes may be obliged to
enforce their rights of pledge within a reasonable period as determined by the
judge-commissioner (rechter-commissaris) appointed by the court in case of
bankruptcy of the Dutch issuer.
Under Belgian insolvency law, the right of the Collateral Agent to seize
or to enforce against the Foreign Collateral provided by PAH Belgium would be
severely restricted or prohibited altogether if PAH Belgium were subject to
insolvency proceedings at the time of seizure or enforcement. In bankruptcy,
secured creditors may not proceed against assets from the declaration of
bankruptcy at least until the end of the proceeding for verification of claims.
Even thereafter, the trustee in bankruptcy may petition the court to disallow
enforcement for up to one year. In judicial composition (reorganization),
secured creditors cannot take enforcement or attachment measures during the
provisional composition (up to nine months) and may be barred for a further 18
months pursuant to the definitive plan of composition, if interest is paid.
Moreover, the Collateral Agent's ability to foreclose on the Collateral
may be subject to lack of perfection, the consent of third parties, prior liens
and practical problems associated with the realization of the Collateral Agent's
Lien on the Collateral.
In addition, because a portion of the Collateral consists of pledges of a
portion of the Capital Stock of certain of the Foreign Subsidiaries of the
Company, the validity of those pledges under applicable foreign law, and the
ability of the Collateral Agent to realize upon that Collateral under applicable
foreign law, may be limited by such law, which limitations may or may not affect
such Liens.
The Guarantees
The Guarantors will fully and unconditionally guarantee on a senior
secured basis (each a "Guarantee" and, collectively, the "Guarantees"), jointly
and severally, to each Holder, the Collateral Agent and the Trustee, the full
and prompt performance of the Issuers' Obligations under the Indenture and the
Notes; provided, that the Guarantee of each Foreign Guarantor shall only be in
respect of the Dutch Notes and the other Obligations of the Dutch Issuer and not
in respect of the U.S. Notes or any other Obligation of the U.S. Issuer.
Pursuant to the Company Guarantee, the U.S. Issuer will also fully and
unconditionally guarantee on a senior secured basis to each Holder, the
Collateral Agent and the Trustee, the full and prompt performance of the Dutch
Issuer's Obligations under the Indenture and the Dutch Notes. The Company
Guarantee and the Domestic Guarantees will be the joint and several Obligation
of the U.S. Issuer and the Domestic Guarantors. The Obligations of each
Guarantor will be limited as necessary to prevent its Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law. Each Domestic Guarantor may consolidate with or merge into or sell its
assets to the Company or any other Domestic Guarantor without limitation. Each
Foreign Guarantor may consolidate with or merge into or sell its assets to the
Dutch Issuer or any other Guarantor without limitation. See "-- Merger,
Consolidation and Sale of Assets" and "-- Certain Covenants -- Limitation on
Asset Sales."
A Guarantor will be released from its Guarantee without any action
required on the part of the Trustee or any Holder:
(1) if (a) all of the Capital Stock issued by such Guarantor or all
or substantially all of the assets of such Guarantor is sold or otherwise
disposed of (including by way of merger or consolidation) to a Person
other than us or any of our Domestic Restricted Subsidiaries or (b) such
Guarantor ceases to be a Restricted Subsidiary, and we otherwise comply,
in each case, to the extent applicable, with the provisions of the
covenant described below under the caption "-- Certain Covenants --
Limitation on Asset Sales" that are required to be satisfied thereunder
either prior to or concurrent with the consummation of the applicable
transaction;
(2) if we designate such Guarantor as an Unrestricted Subsidiary in
accordance with the covenant described below under the caption "-- Certain
Covenants -- Limitation on Restricted Payments"; or
(3) upon satisfaction and discharge of the Indenture or payment in
full of the principal of, premium, if any, accrued and unpaid interest and
Additional Interest, if any, on the Notes and all other Obligations that
are then due and payable.
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The U.S. Issuer will be released from the Company Guarantee upon
satisfaction of the condition described in clause (3) above to the extent the
Obligations described therein relate to the Dutch Notes and all other
Obligations of the Dutch Issuer.
At our request and expense, the Trustee will execute and deliver any
instrument evidencing such release. A Guarantor and the U.S. Issuer may also be
released from its obligations under its Guarantee or the Company Guarantee, as
applicable, in connection with a permitted amendment. See "-- Amendment,
Supplement and Waiver."
Redemption
Mandatory Redemption; Offers to Purchase; Open Market Purchases. The Notes
are not subject to any mandatory sinking fund redemption prior to maturity.
However, under certain circumstances, we may be required to offer to purchase
the Notes as described under the captions "-- Change of Control" and "-- Certain
Covenants -- Limitation on Asset Sales." We may at any time and from time to
time purchase Units or Notes (in the event that a Separate Event has occurred)
in the open market or otherwise.
Optional Redemptions
Optional Redemption Prior to June 1, 2005. At any time prior to June 1,
2005, the Issuers may, at their option, on one or more occasions redeem all or
part of their Notes at a redemption price equal to the greater of (1) 100% of
the aggregate principal amount of the Notes being redeemed and (2) the sum of
the present values of 114% of the aggregate principal amount of the Notes being
redeemed and scheduled payments of interest on such Notes to and including June
1, 2005 discounted to the date of redemption on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50
basis points, together with, in each case, accrued and unpaid interest, if any,
to the date of redemption. The foregoing optional redemption of the Notes prior
to June 1, 2005 shall include both U.S. Notes and Dutch Notes on a pro rata
basis based on the aggregate principal amount of the Notes outstanding at the
time of redemption, unless a Change in Control of the Dutch Issuer has occurred.
"Treasury Rate" means, with respect to any redemption date, the rate
per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such redemption period.
"Comparable Treasury Issue" means the United States Treasury
security selected by a Reference Treasury Dealer appointed by the Company
as having a maturity comparable to the remaining term of the Notes (as if
the final maturity of the Notes was June 1, 2005) that would be utilized
at the time of selection and in accordance with customary financial
practice in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the Notes (as if the final maturity of
the Notes was June 1, 2005).
"Comparable Treasury Price" means, with respect to any redemption
date, (1) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) on the third business day preceding such redemption date, as set
forth in the daily statistical release (or any successor release)
published by the Federal Reserve Bank of New York and designated
"Composite 3:30 p.m. Quotations for U.S. Government Securities" or (2) if
such release (or any successor release) is not published or does not
contain such prices on such business day, (A) the average of the Reference
Treasury Dealer Quotations (as defined below) for such redemption date,
after excluding the highest and lowest such Reference Treasury Dealer
Quotation or (B) if the Company obtains fewer than three such Reference
Treasury Dealer Quotations, the average of all such Reference Treasury
Dealer Quotations.
"Reference Treasury Dealer Quotation" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as
determined by the Company, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) quoted in writing to the Company by such Reference Treasury Dealer
at 5:00 p.m. on the third business day preceding such redemption date.
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"Reference Treasury Dealer" means any primary U.S. government
securities dealer in the City of New York selected by the Company.
Optional Redemption on or After June 1, 2005.
The Notes are redeemable at our option, in whole or in part, at any time
on or after June 1, 2005 at the redemption prices (expressed as percentages of
the principal amount of the Notes) set forth below plus in each case accrued and
unpaid interest and Additional Interest, if any, to the date of redemption, if
redeemed during the six-month period beginning on the dates indicated below:
Period Percentage
------- ----------
June 1, 2005................................. 114.0%
December 1, 2005............................. 109.0%
June 1, 2006................................. 105.0%
December 1, 2006, and thereafter............. 101.0%
In addition, at any time prior to June 1, 2005, we may, at our option,
redeem up to 35% of the sum of (i) the initial aggregate principal amount of the
Notes issued in the Offering and (ii) the respective initial aggregate principal
amount of the Notes issued under the Indenture after the Issue Date, on one or
more occasions with the net proceeds of one or more Public Equity Offerings at
113% of the principal amount thereof, plus accrued and unpaid interest and
Additional Interest, if any, to the date of redemption; provided, that
immediately after giving effect to such redemption, at least 65% of the sum of
(i) $105.0 million (the initial aggregate principal amount of the Notes issued
in the Offering) and (ii) the respective initial aggregate principal amount of
the Notes issued under the Indenture after the Issue Date remain outstanding
(other than any Notes owned by the Company or any of its Affiliates). In order
to effect the foregoing redemption with the proceeds of any Public Equity
Offering, we will make such redemption not more than 90 days after the
consummation of any such Public Equity Offering.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Disqualified Stock) of the Company pursuant to an effective
registration statement filed under the Securities Act.
The foregoing optional redemption of the Notes on or after June 1, 2005
shall include both U.S. Notes and Dutch Notes on a pro rata basis based on the
aggregate principal amount of the Notes outstanding at the time of redemption,
unless a Change of Control of the Dutch Issuer has occurred.
Selection and Notice. If less than all of the Notes are to be redeemed at
any time, selection of the Notes to be redeemed will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
securities exchange, on a pro rata basis or by lot or any other method as the
Trustee shall deem fair and appropriate; provided, that Notes redeemed in part
shall only be redeemed in integral multiples of $1,000; provided further, that
any such redemption pursuant to the provisions relating to a Public Equity
Offering shall be made on a pro rata basis or on as nearly a pro rata basis as
practicable (subject to the procedures of The Depository Trust Company or any
other depositary), unless such method is otherwise prohibited.
Notices of any optional or mandatory redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder to be redeemed at such Holder's registered address. If any Note is
to be redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed, and the
Trustee shall authenticate and mail to the Holder of the original Note a Note in
principal amount equal to the unredeemed portion of the original Note promptly
after the original Note has been canceled. On and after the redemption date,
interest and Additional Interest, if applicable, will cease to accrue on Notes
or portions thereof called for redemption.
Taxation; Redemption For Taxation Reasons
All payments by the Dutch Issuer and any Guarantor (and the U.S. Issuer
with respect to the Company Guarantee) in respect of the Dutch Notes shall be
made without withholding or deduction for or on account of any present or future
taxes, duties, assessments or other governmental charges of whatsoever nature,
including penalties, interest and any other liabilities related thereto
("Taxes"), imposed or levied by or on behalf of The Netherlands, or any other
jurisdiction in which any Guarantor (or the U.S. Issuer with respect to the
Company Guarantee) in respect of the Dutch Notes is organized or resident for
tax purposes of any such jurisdiction, as
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the case may be, or, in each case, any other relevant jurisdiction or any
political subdivision or authority of or in any such jurisdiction having power
to tax (for purposes of this "-- Taxation; Redemption For Taxation Reasons," the
"Relevant Jurisdiction"), unless the Dutch Issuer or any such Guarantor (or the
U.S. Issuer with respect to the Company Guarantee) is compelled by law to deduct
or withhold such taxes, duties, assessments or other governmental charges. In
such event, the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect
to the Company Guarantee) shall pay such additional amounts ("Additional
Amounts") as may be necessary to ensure that the net amounts received by the
holders of the Dutch Notes after such withholding or deduction shall equal the
amounts of such payments that would have been receivable in respect of the Dutch
Notes in the absence of such withholding or deduction, except that no such
Additional Amounts shall be payable in respect of any Dutch Note (i) presented
for payment of principal more than 60 days after the later of (x) the date on
which such payment first became due and (y) if the full amount payable has not
been received in New York City by the Trustee on or prior to such due date, the
date on which, the full amount having been so received, notice to that effect
shall have been given to the holders by the Trustee, except to the extent that
the holders would have been entitled to such Additional Amounts on presenting
such Dutch Note for payment on the last day of the applicable 60 day period,
(ii) if any tax, assessment or other governmental charge is imposed or withheld
by reason of the failure to comply by the holder or, if different, the
beneficial owner of the interest payable on the Dutch Note with a timely request
of the Dutch Issuer addressed to such holder or beneficial owner to complete and
return an official document concerning the nationality, residence, identity or
connection with the Netherlands or any Relevant Jurisdiction of such holder or
beneficial owner which is required or imposed by a statute, treaty, regulation
or administrative practice of the Netherlands or any Relevant Jurisdiction as a
precondition to exemption from all or part of such tax, assessment or
governmental charge and provided that the request to so comply is made in
writing and delivered to such holder or beneficial owner, as applicable, not
later than 60 days prior to the date by which the delivery of such official
document is required, (iii) held by or on behalf of a holder who is liable for
Taxes giving rise to such Additional Amounts in respect of such Dutch Note by
reason of having some connection with the Netherlands or any Relevant
Jurisdiction other than the mere purchase, holding or disposition of any Dutch
Note, or the receipt of principal or interest in respect thereof, including,
without limitation, such holder being or having been a citizen or resident
thereof or being or having been present or engaged in a trade or business
therein or having had a permanent establishment therein, (iv) where such
withholding or deduction is imposed on a payment to an individual who is
resident for tax purposes in a jurisdiction which is a member state of the
European Union (whether such payment is made through a paying agent or
otherwise) and is required to be made pursuant to European Union Directive
2003/48/EC of 3 June 2003 on the taxation of savings or any law implementing or
complying with, or introduced in order to conform to such Directive and (v) any
combination of clause (i), (ii), (iii) or (iv) above; nor shall Additional
Amounts be paid with respect to any payment of the principal of, or any interest
on, any Dutch Note to any holder who is a fiduciary or partnership or other than
the sole beneficial owner of such payment to the extent that a beneficiary or
settlor or beneficial owner would not have been entitled to any Additional
Amounts had such beneficiary or settlor or beneficial owner been the holder. The
Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company
Guarantee) will also (a) make such withholding or deduction compelled by
applicable law and (b) remit the full amount deducted or withheld to the
relevant authority in accordance with applicable law. The Dutch Issuer or such
Guarantor (or the U.S. Issuer with respect to the Company Guarantee) will
furnish copies of such receipts evidencing the payment of any Taxes so deducted
or withheld in such form as provided in the normal course by the taxing
authority imposing such Taxes and as is reasonably available to the Dutch Issuer
or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) to
the Trustee within 60 days after the date of receipt of such evidence. The
Trustee will make such evidence available to the holders of Dutch Notes upon
request.
All references herein and in the Indenture or the Dutch Notes to the
principal of or interest or other payments on, or in respect of, a Dutch Note
shall be deemed to include, without duplication, any Additional Amounts payable
in connection therewith.
The Dutch Issuer will pay any present or future stamp, court or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise in any jurisdiction from the execution, delivery or
registration of the Dutch Notes or any other document or instrument referred to
in the Indenture or Dutch Notes.
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Dutch Notes may be redeemed, at the option of the Dutch Issuer, as a
whole, but not in part (limited to Dutch Notes with respect to which an
Additional Amount (as described above) is or may be required), at any time, upon
giving notice to holders not less than 30 days nor more than 60 days prior to
the date fixed for redemption (which notice shall be irrevocable), at a
redemption price equal to 100% of the principal amount thereof, together with
interest accrued to the date fixed for redemption and any Additional Amounts
payable with respect thereto, if the Dutch Issuer determines and certifies to
the Trustee immediately prior to the giving of such notice that (i) the Dutch
Issuer or any Guarantor (or the U.S. Issuer with respect to the Company
Guarantee) in respect of the Dutch Notes has or will become obligated to pay
Additional Amounts in respect of such Dutch Notes as a result of any change in
or amendment to the laws (or any regulations or rulings promulgated thereunder)
of the Netherlands or any Relevant Jurisdiction or any political subdivision or
taxing authority thereof or therein affecting taxation, or any change in the
official position regarding the application or interpretation of such laws,
regulations or rulings (including a holding by a court of competent
jurisdiction) which change or amendment becomes effective on or after the date
of issuance of such Dutch Notes and (ii) such obligation cannot be avoided by
the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the
Company Guarantee) taking reasonable measures available to it, provided, that no
such notice of redemption shall be given earlier than 60 days prior to the
earliest date on which the Dutch Issuer or such Guarantor (or the U.S. Issuer
with respect to the Company Guarantee) would be obligated to pay such Additional
Amounts if a payment in respect of such Dutch Notes was then due. Prior to the
giving of any notice of redemption described in this paragraph, the Dutch Issuer
shall deliver to the Trustee (a) a certificate signed by two directors of the
Dutch Issuer stating that the obligation to pay Additional Amounts cannot be
avoided by the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect
to the Company Guarantee) taking reasonable measures available to them and (b) a
written opinion of independent legal counsel to the Dutch Issuer to the effect
that the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the
Company Guarantee) has become obligated to pay Additional Amounts as a result of
such a change or amendment described above and that the Dutch Issuer or such
Guarantor (or the U.S. Issuer with respect to the Company Guarantee) cannot
avoid payment of such Additional Amounts by taking reasonable measures available
to them.
Change of Control
In the event of a Change of Control of the U.S. Issuer, each Holder will
have the right, unless we have given a notice of redemption, subject to the
terms and conditions of the Indenture, to require us to offer to purchase all or
any portion (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes at a purchase price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest and Additional Interest, if
any, to the date of purchase, in accordance with the terms set forth below. Any
such repurchase of the Notes will include both U.S. Notes and Dutch Notes on a
pro rata basis based on the aggregate principal amount of the Notes outstanding
at the time of redemption, unless a Change of Control of the Dutch Issuer has
occurred.
In the event of a Change of Control of the Dutch Issuer, the Dutch Issuer
may, at its option at any time, redeem the Dutch Notes in whole, and not in
part, at the optional redemption price specified in "-- Redemption -- Optional
Redemption" with respect to the date such redemption is to be effected (such
right, a "Change of Control Redemption of Dutch Notes Right", and such
redemption, a "Change of Control Redemption of Dutch Notes"). If the Dutch
Issuer has not delivered a notice of redemption within 30 days following a
Change of Control of the Dutch Issuer, each Holder of a Dutch Note shall have
the right to require that the Dutch Issuer repurchase all or a portion of such
Holder's Dutch Notes at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest and Additional Amounts, if any,
to the date of repurchase (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), in accordance with the next paragraph; provided that at any time prior to
the consummation of the offer to purchase required by the Dutch Issuer in
accordance with the next paragraph, the Dutch Issuer may deliver an optional
redemption notice to redeem all of the Dutch Notes in lieu of completing such
offer to purchase.
We currently have no outstanding securities or liabilities that are pari
passu with the Notes and also contain mandatory Change of Control repayment
provisions; however, the Credit Agreement may contain an event of default based
upon a change of control and upon the occurrence of such event of default the
obligations thereunder may be accelerated by the requisite holders thereof. In
addition, other debt instruments of the
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Company may in the future contain a "change of control" provision that is
similar to the provision in the Indenture relating to a Change of Control, and
the occurrence of such a "change of control" could constitute a default under
such debt instruments.
If a Change of Control were to occur, there can be no assurance that we
(or the Dutch Issuer, if it were to exercise its Change of Control Redemption of
Dutch Notes Right) would have sufficient assets to satisfy our obligations under
other agreements relating to indebtedness (including the Credit Agreement) and
to purchase all of (i) the Notes that might be delivered by Holders seeking to
accept a Change of Control Offer (as defined below) or (ii) if a Change of
Control of the Dutch Issuer were to occur and the Dutch Issuer were to exercise
its Change of Control Redemption of Dutch Notes Right, all of the Dutch Notes.
In the event we are required to purchase outstanding Notes pursuant to a Change
of Control Offer or the Dutch Issuer is required to purchase the Dutch Notes in
connection with a Change of Control Redemption of Dutch Notes, we expect that we
would seek third party financing to the extent we do not have available funds to
meet our purchase obligations. However, there can be no assurance that we would
be able to obtain such financing and the terms of the Credit Agreement and/or
the Indenture may restrict the our ability to obtain such financing. See "Risk
Factors -- We may not be able to satisfy our obligations to Holders upon a
change of control."
The Indenture provides the Holders protection in the event of a highly
leveraged transaction to the extent that our ability to effect a highly
leveraged transaction, in connection with any Change of Control or otherwise, is
subject to the provisions of the Indenture described below under the caption
"-- Certain Covenants," including without limitation the provisions described
thereunder under the headings "Limitation on Incurrence of Indebtedness." The
covenant described below under the heading "Limitation on Incurrence of
Indebtedness" does not specifically limit the leverage of any particular
transaction, but requires that we have a ratio of consolidated cash flow to
interest expense above a specified level in order to incur Indebtedness, subject
to certain enumerated exceptions.
In general, the Change of Control provisions would not be triggered if
either Issuer was to recapitalize or to enter into transactions with management
or its affiliates unless at least one of the events relating to such Issuer and
specified in the definition of the term "Change of Control" were also to occur.
See "-- Certain Definitions."
Without the consent of each Holder affected, no amendment of the Indenture
or waiver of any Default or Event of Default thereunder, will, following the
occurrence of a Change of Control, amend, change or modify our obligation to
make and consummate a Change of Control Offer as a result of such a Change of
Control a Change of Control Redemption of Dutch Notes as a result of such a
Change of Control and the exercise by the Dutch Issuer of the Change of Control
Redemption of Dutch Notes Right or modify the provisions or definitions with
respect thereto in a manner adverse to the Holders with respect to such Change
of Control. See "-- Amendment, Supplement and Waiver."
On or before the 30th day following the occurrence of any Change of
Control, we will, and within 30 days following any Change of Control of the
Dutch Issuer, the Dutch Issuer will, mail an offer (each, a "Change of Control
Offer") to each Holder at such Holder's registered address a notice by
first-class mail stating: (i) that a Change of Control has occurred and that
such Holder has the right to require us or the Dutch Issuer, as the case may be,
to purchase all or a portion (equal to $1,000 or an integral multiple thereof)
of such Holder's Notes or Dutch Notes, as the case may be, at a purchase price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest and Additional Interest, if any, to the date of purchase
(the "Change of Control Purchase Date"), which shall be a business day,
specified in such notice, that is not earlier than 30 days or later than 60 days
from the date such notice is mailed, (ii) the amount of accrued and unpaid
interest and Additional Interest, if any, as of the Change of Control Purchase
Date, (iii) that any Note not tendered will continue to accrue interest and
Additional Interest, if applicable, (iv) that, unless we or the Dutch Issuer, as
the case may be, default in the payment of the purchase price for the Notes
payable pursuant to the Change of Control Offer, any Notes accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest and
Additional Interest, if applicable, on the Change of Control Purchase Date, (v)
the procedures, consistent with the Indenture, to be followed by a Holder in
order to accept a Change of Control Offer or to withdraw such acceptance, and
(vi) such other information as may be required by the Indenture and applicable
laws and regulations.
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We or the Dutch Issuer, as the case may be, will not be required to make a
Change of Control Offer upon a Change of Control if a third party makes the
Change of Control Offer in the manner, at the times and otherwise in compliance
with the requirements set forth in the Indenture applicable to a Change of
Control Offer made by us or the Dutch Issuer, as the case may be, and purchases
all Notes validly tendered and not withdrawn under such Change of Control Offer.
On the Change of Control Purchase Date, we or the Dutch Issuer, as the
case may be, will (i) accept for payment all Notes or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent the
aggregate purchase price of all Notes or portions thereof accepted for payment,
and (iii) deliver or cause to be delivered to the Trustee all Notes tendered
pursuant to the Change of Control Offer. The Paying Agent shall promptly mail to
each Holder whose Notes or portions thereof were accepted for payment an amount
equal to the purchase price for such Notes or portion thereof plus accrued and
unpaid interest and Additional Interest, if any, thereon, and the Trustee shall
promptly authenticate and mail to each Holder whose Notes or portions thereof
were accepted for payment in part a Note equal in principal amount to any
unpurchased portion of the Notes, and any Note not accepted for payment in whole
or in part shall be promptly returned to the Holder of such Note. On and after a
Change of Control Purchase Date, interest and Additional Interest, if
applicable, will cease to accrue on the Notes or portions thereof accepted for
payment, unless we or the Dutch Issuer, as the case may be, defaults in the
payment of the purchase price therefor. We will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Purchase Date.
As used in the definition of Change of Control, the phrase "all or
substantially all" of the Capital Stock or assets of the Company and its
Restricted Subsidiaries will likely be interpreted under applicable state law
and will be dependent upon particular facts and circumstances. As a result,
there may be a degree of uncertainty in ascertaining whether a sale or
disposition of "all or substantially all" of the Capital Stock or assets of the
Company and its Restricted Subsidiaries has occurred, in which case a Holder's
ability to obtain the benefit of a Change or Control Offer may be impaired.
We will comply with the applicable tender offer rules, including the
requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Change
of Control Offer and will be deemed not to be in violation of any of the
covenants under the Indenture to the extent such compliance is in conflict with
such covenants.
Excess Cash Flow Offer
Within 120 days after the end of each fiscal year of the Company
(beginning with the fiscal year ending June 30, 2005), we may, if excess cash
flow for such fiscal year was at least $250,000, be required to make an offer
(an "Excess Cash Flow Offer") to all Holders to purchase the maximum principal
amount of Notes that may be purchased with 50% of Excess Cash Flow for such
fiscal year (the "Excess Cash Flow Offer Amount"), at a purchase price in cash
equal to 102.5% of the principal amount of the Notes to be purchased, plus
accrued and unpaid interest and Additional Interest, if any, to the date of such
purchase. The Indenture will provide for each Excess Cash Flow Offer to remain
open for a period of 30 days, unless a longer period is required by law. If the
Excess Cash Flow Offer Amount exceeds the aggregate amount of Notes tendered
pursuant to any Excess Cash Flow Offer, we shall make an offer at the end of
such period to all holders of Existing Notes, to purchase the maximum principal
amount of Existing Notes that may be purchased with such excess, at a purchase
price in cash equal to 100% of the principal amount of the Existing Notes to be
purchased, plus accrued and unpaid interest thereon to the date of such
purchase. If any excess remains following such offer in respect of the Existing
Notes, we may, subject to the other provisions of the Indenture, use any such
remaining excess for general corporate purposes. Upon receiving notice of the
Excess Cash Flow Offer, Holders may elect to tender their Notes, in whole or in
part, in integral multiples of $1,000 principal amount in exchange for cash. Any
such repurchase of the Notes shall include both U.S. Notes and Dutch Notes on a
pro rata basis based upon the aggregate principal amount of the Notes
outstanding at the time of such repurchase, unless a change of control of the
Dutch Issuer has occurred. Any Excess Cash Flow Offer Amount may be reduced by
prior open market purchases of Units or Notes during such fiscal year.
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Within 30 days prior to the required purchase date, we will mail an offer
to each Holder, with a copy to the Trustee, which offer will govern the terms of
the Excess Cash Flow Offer. Such offer will state, among other things the
purchase date and price.
We will comply with the applicable tender offer rules, including the
requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Excess
Cash Flow Offer and will be deemed not to be in violation of any of the
covenants under the Indenture to the extent such compliance is in conflict with
such covenants. However, each Excess Cash Flow Offer is likely to be subject to
limitations in the Credit Agreement.
Certain Covenants
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or directly or indirectly guarantee or in any other manner become
directly or indirectly liable for ("incur") any Indebtedness (including Acquired
Debt), except that the Company and any Domestic Guarantor may incur Indebtedness
(including Acquired Debt) if, immediately after giving pro forma effect to, such
incurrence of Indebtedness, the Consolidated Cash Flow Coverage Ratio of the
Company for the most recently ended four fiscal quarters would be at least 2.25
to 1.0 if incurred during the period from the Issue Date through the second
anniversary thereof, and 2.50 to 1.0 if incurred thereafter.
The foregoing limitations do not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(i) Indebtedness of the Company and its Restricted Subsidiaries
arising under the Credit Agreement, in an aggregate principal amount not
to exceed at any time outstanding an amount equal to (x) $15.0 million
less (y) during the 30 day period preceding the date on which a scheduled
payment of interest is due on the Notes, the aggregate amount of such
interest, less (z) during the 30 day period preceding the date on which a
scheduled payment of interest is due on the Existing Notes, the aggregate
amount of such interest;
(ii) Indebtedness of the Issuers and the Guarantors represented by
the Notes issued on the Issue Date in the Offering, Exchange Notes issued
in exchange for such Notes or in exchange for Notes issued in compliance
with the first paragraph of this covenant and the related Guarantees and
the Company Guarantee;
(iii) Indebtedness of the Company or any Restricted Subsidiary in
existence, and Indebtedness pursuant to any commitment in effect under any
credit agreement or facility, in each case, on the Issue Date ("Existing
Indebtedness");
(iv) Indebtedness of a Domestic Restricted Subsidiary of the Company
to the Company or to a Restricted Subsidiary of the Company for so long as
such Indebtedness is held by the Company or a Restricted Subsidiary of the
Company or the holder of a Permitted Lien thereon of the type described in
clause (i), (vii) or (xv) of the definition thereof, in each case, subject
to no Lien held by a Person other than the Company or a Restricted
Subsidiary of the Company or the holder of a Permitted Lien of the type
described in clause (i), (vii) or (xv) of the definition thereof; provided
that (a) any such Indebtedness is subordinated, pursuant to a written
agreement by the holder thereof, to such Subsidiary's Obligations under
the Indenture and its Guarantee and (b) if as of any date any Person other
than the Company or a Restricted Subsidiary of the Company or the holder
of a Permitted Lien thereon of the type described in clause (i), (vii) or
(xv) of the definition thereof owns or holds any such Indebtedness or
holds a Lien in respect of such Indebtedness, such date shall be deemed
the incurrence of Indebtedness not constituting Permitted Indebtedness
under this clause (iv) by the issuer of such Indebtedness;
(v) Indebtedness of a Foreign Restricted Subsidiary of the Company
to the Company or to a Restricted Subsidiary of the Company for so long as
such Indebtedness is permitted to be made as a Permitted Investment under
clause (i)(B), (ix) or (x) of the definition thereof and is held by the
Company or a Restricted Subsidiary of the Company, as the case may be, or
the holder of a Permitted Lien thereon of the type described in clause
(i), (vii) or (xv) of the definition thereof, in each case, subject to no
Lien held by a Person other than the Company or a Restricted Subsidiary of
the Company, as the case may be,
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or the holder of a Permitted Lien of the type described in clause (i),
(vii) or (xv) of the definition thereof; provided that (a) if such
Indebtedness was made as a Permitted Investment under clause (i)(B) of the
definition thereof to the Dutch Issuer or any Foreign Guarantor, such
Indebtedness shall be subordinated, pursuant to a written agreement by the
holder thereof, to the Dutch Issuer's or such Foreign Guarantor's, as the
case may be, Obligations under the Indenture and the Dutch Notes or its
Foreign Guarantee, as applicable, and (b) if as of any date any Person
other than the Company or a Restricted Subsidiary of the Company, as the
case may be, or the holder of a Permitted Lien thereon of the type
described in clause (i), (vii) or (xv) of the definition thereof owns or
holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness under this clause (v) by the issuer of
such Indebtedness;
(vi) (A) Indebtedness of a Foreign Restricted Subsidiary of the
Company to a Foreign Restricted Subsidiary of the Company that is not the
Dutch Issuer or a Restricted Subsidiary thereof for so long as such
Indebtedness is held by such Foreign Restricted Subsidiary of the Company
or the holder of a Permitted Lien thereon of the type described in clause
(xv) of the definition thereof, in each case, subject to no Lien held by a
Person other than the Company or such Foreign Restricted Subsidiary of the
Company or the holder of a Permitted Lien of the type described in clause
(xv) of the definition thereof (provided that if as of any date any Person
other than such Foreign Restricted Subsidiary of the Company or the holder
of a Permitted Lien thereon of the type described in clause (xv) of the
definition thereof owns or holds any such Indebtedness or holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness under this clause
(vi) (A) by the issuer of such Indebtedness); and (B) Indebtedness of the
Dutch Issuer or any Restricted Subsidiary thereof to a Restricted
Subsidiary of the Dutch Issuer or the Dutch Issuer for so long as such
Indebtedness is held by a Restricted Subsidiary of the Dutch Issuer or the
Dutch Issuer or the holder of a Permitted Lien thereon of the type
described in clause (vii) or (xv) of the definition thereof, in each case,
subject to no Lien held by a Person other than a Restricted Subsidiary of
the Dutch Issuer or the Dutch Issuer or the holder of a Permitted Lien of
the type described in clause (vii) or (xv) of the definition thereof
(provided that (1) any such Indebtedness is subordinated, pursuant to a
written agreement by the holder thereof, to the Dutch Issuer's or such
Restricted Subsidiary's, as the case may be, Obligations under the
Indenture and the Dutch Notes or its Guarantee, as applicable, and (2) if
as of any date any Person other a Restricted Subsidiary of the Dutch
Issuer or the Dutch Issuer or the holder of a Permitted Lien thereon of
the type described in clause (vii) or (xv) of the definition thereof owns
or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness under this clause (vi)(B) by the
issuer of such Indebtedness);
(vii) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted
Subsidiary of the Company, in each case, subject to no Lien other than a
Permitted Lien of the type described in clause (i), (vii) or (xv) of the
definition thereof; provided that (a) any such Indebtedness is
subordinated, pursuant to a written agreement by the holder thereof, to
the Company's Obligations under the Indenture and the Notes and (b) if as
of any date any Person other than a Restricted Subsidiary of the Company
or the holder of a Permitted Lien of the type described in clause (i),
(vii) or (xv) of the definition thereof, owns or holds any such
Indebtedness or any Person holds a Lien in respect of such Indebtedness,
such date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness under this clause (vii) by the Company;
(viii) Indebtedness of the Company or any Restricted Subsidiary
arising with respect to (A) Interest Rate Agreement Obligations incurred
for the purpose of fixing or hedging interest rate risk or currency risk
with respect to any fixed or floating rate Indebtedness that is permitted
by the terms of the Indenture to be outstanding to the extent that the
notional amount of any such Interest Rate Agreement Obligations do not
exceed at the time of the incurrence thereof, the principal amount of
Indebtedness to which such Interest Rate Agreement Obligations relate and
(B) Currency Agreement Obligations incurred for the purpose of fixing or
hedging currency risk with respect to any receivable or liability the
payment of which is determined by reference to a foreign currency
(provided that in the case of Currency Agreement Obligations which relate
to Indebtedness, such Currency Agreement Obligations do not increase the
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Indebtedness of the Company and its Restricted Subsidiaries outstanding
other than as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities and compensation payable thereunder);
(ix) Indebtedness represented by performance, completion, guarantee,
surety and similar bonds and assurances provided by or for the Company or
any Restricted Subsidiary in the ordinary course of business;
(x) any Indebtedness incurred in connection with or given in
exchange for the renewal, extension, substitution, refunding, defeasance,
refinancing or replacement, in whole or in part (a "refinancing"), of any
Indebtedness incurred as permitted under the first paragraph of this
covenant or any Indebtedness described in any of clauses (ii) or (iii)
above, and this clause (x) ("Refinancing Indebtedness"); provided,
however, that (a) the principal amount of such Refinancing Indebtedness
shall not exceed the principal amount (or accreted amount, if less, or in
the case of a revolving credit facility the maximum amount of the
facility, if more) of the Indebtedness so refinanced (plus accrued
interest on the Indebtedness being refinanced plus the premiums, if any,
on the Indebtedness being refinanced and reasonable expenses to be paid in
connection therewith, which, with respect to such premiums, shall not
exceed the stated amount of any premium or other payment required to be
paid in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced); (b) if the Weighted Average Life to
Maturity of the Indebtedness being refinanced is equal to or greater than
the Weighted Average Life to Maturity of the Notes, the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being refinanced; (c) the final maturity of such Refinancing Indebtedness
shall not be earlier than the final maturity of the Indebtedness being
Refinanced; (d) with respect to Refinancing Indebtedness refinancing
Subordinated Indebtedness, shall be subordinated to the Notes at least to
the same extent and in the same manner as the Indebtedness being
refinanced; and (e) the obligor on such Refinancing Indebtedness shall be
the obligor on the Indebtedness being refinanced;
(xi) Indebtedness of the Company or any Restricted Subsidiary (a)
representing Capital Lease Obligations and any amendments, modifications,
renewals, refundings, replacements or refinancings thereof and/or (b) in
respect of Purchase Money Obligations for property acquired, constructed
or improved in the ordinary course of business and any refinancings
thereof, which taken together in the aggregate principal amount do not
exceed $5.0 million at any one time outstanding;
(xii) (A) commodity agreements entered into in the ordinary course
of business to protect against fluctuations in the prices of raw materials
and not for speculative purposes and (B) foreign currency forward exchange
contracts entered into in the ordinary course of business to protect
against fluctuations in the relative values of currencies that could
adversely affect our results of operations and not for speculative
purposes;
(xiii) Indebtedness incurred by the Company or any Restricted
Subsidiary constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business (A) in respect of (1)
workers' compensation claims or self-insurance or (2) other Indebtedness
with respect to reimbursement type obligations regarding workers'
compensation claims or self-insurance or (B) for regulatory or insurance
purposes;
(xiv) Indebtedness incurred in respect of letters of credit issued
for the account of the Company or any Restricted Subsidiary in an
aggregate stated amount not to exceed $5.0 million (or the foreign
currency equivalent thereof being determined as of the later of the date
of the issuance thereof or any date on which the stated amount of such
letter of credit is increased);
(xv) Indebtedness of Foreign Restricted Subsidiaries of the Company,
in an aggregate principal amount at any time outstanding not to exceed
$2.5 million, incurred to finance losses or costs relating to catastrophic
occurrences or expenses occurring outside of the ordinary course of
business; provided, that, in the case of losses or costs relating to
catastrophic occurrences, the amount of any such losses or costs shall be
deemed to be reduced by all insurance and condemnation proceeds on the
thirtieth day following the receipt thereof by the Company or any of its
Restricted Subsidiaries in connection with such catastrophic
occurrence(s);
(xvi) Any guaranty by the Company and its Restricted Subsidiaries of
each other's Indebtedness; provided that such other Indebtedness is
permitted to be incurred under the Indenture;
(xvii) Indebtedness of the Company or any Restricted Subsidiary in
addition to that described in clauses (i) through (xvi) above and clause
(xviii) below, and any amendments, modifications, renewals, refundings,
replacements or refinancings of such Indebtedness, so long as the
aggregate principal amount of all such Indebtedness incurred pursuant to
this clause (xvii) does not exceed $2.5 million at any one time
outstanding; and
(xviii) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for the guarantee, indemnification,
adjustment of purchase price or similar obligations, in each case,
incurred in connection with the disposition of any business, assets or
Subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Subsidiary for
the purpose of financing such acquisition; provided that the maximum
aggregate liability in respect of such Indebtedness shall at no time
exceed the gross proceeds or value of the consideration actually received
by the Company and its Restricted Subsidiaries in connection with such
transaction.
For purposes of determining any particular amount of Indebtedness under
this covenant, any guaranty, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included, except in the case of any such letter
of credit to the extent the stated amount thereof exceeds the principal amount
of such other Indebtedness so supported.
Indebtedness of any Person which is outstanding at the time such Person
becomes a Restricted Subsidiary or is merged with or into or consolidated with
the Company or a Restricted Subsidiary shall be deemed to have been incurred at
the time such Person becomes a Restricted Subsidiary or is merged with or into
or consolidated with the Company or a Restricted Subsidiary, and Indebtedness
which is assumed at the time of the acquisition of any asset shall be deemed to
have been incurred at the time of such acquisition.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment, unless at the time of and immediately
after giving effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be determined reasonably and in
good faith by the Board of Directors of the Company):
(i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(ii) the Company could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Certain Covenants-- Limitation on Incurrence of
Indebtedness;" and
(iii) the aggregate amount of all Restricted Payments made by the
Company and its Restricted Subsidiaries after the Issue Date shall not
exceed the sum of:
(a) an amount equal to 50% of the Company's aggregate cumulative
Consolidated Net Income accrued on a cumulative basis during the period
(treated as one accounting period) beginning on the first day of the first
calendar month after the Issue Date and ending on the date of such
proposed Restricted Payment (or, if such aggregate cumulative Consolidated
Net Income for such period shall be a deficit, minus 100% of such
deficit); plus
(b) the aggregate amount of all net cash proceeds received since the
Issue Date by the Company from the issuance and sale (other than to a
Restricted Subsidiary) of, or equity contribution with respect to, Capital
Stock (other than Disqualified Stock) and the principal amount of
Indebtedness of the Company or any Restricted Subsidiary issued or
incurred on or after the Issue Date that has been converted into or
exchanged for Capital Stock (other than Disqualified Stock), in any such
case and solely for purposes of avoiding duplication, to the extent that
such proceeds are not theretofore used (x) to redeem, repurchase, retire
or otherwise acquire Capital Stock or any Indebtedness of the Company or
any Restricted Subsidiary pursuant to clause (ii) of the next paragraph or
(y) to make any Restricted Investment pursuant to clause (iv) of the next
paragraph; plus
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(c) the amount of the net reduction in Investments in Unrestricted
Subsidiaries resulting from (x) the payment of dividends or the repayment
in cash of the principal of loans or the cash return on any Investment, in
each case to the extent received by the Company or any Restricted
Subsidiary from Unrestricted Subsidiaries, (y) the release or
extinguishment of any guaranty of Indebtedness of any Unrestricted
Subsidiary, and (z) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued as provided in the definition of the term
"Investment"), such aggregate amount of the net reduction in Investments
not to exceed in the case of any Unrestricted Subsidiary the amount of
Restricted Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, which amount was included in
the calculation of the amount of Restricted Payments; plus
(d) to the extent that any Restricted Investment that was made after
the Issue Date is sold for cash or the proceeds of such sale are converted
into cash or otherwise liquidated or repaid for cash, the amount of cash
proceeds received with respect to such Restricted Investment, net of taxes
and the cost of disposition, not to exceed the amount of Restricted
Investments made after the Issue Date.
The foregoing provisions do not prohibit, so long as no Default or Event
of Default is continuing or would occur as a consequence thereof, the following
actions (collectively, "Permitted Payments"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture (which payment shall be deemed to have
been paid on such date of declaration for purposes of clause (iii) of the
preceding paragraph);
(ii) the redemption, repurchase, retirement or other acquisition of
any Capital Stock or any Indebtedness of the Company or any Restricted
Subsidiary in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Restricted Subsidiary) of, or equity
contribution with respect to, Capital Stock of the Company (other than any
Disqualified Stock);
(iii) any purchase or defeasance of Subordinated Indebtedness to the
extent required upon a Change of Control by the Indenture or other
agreement or instrument pursuant to which such Subordinated Indebtedness
was issued or any refinancing of Subordinated Indebtedness permitted by
the Indenture or other agreement or instrument pursuant to which such
Subordinated Indebtedness was issued, but only if the Company has complied
with its obligations under the provisions described under "-- Change of
Control;"
(iv) any Restricted Investment to the extent the sole consideration
for which consists of, or is made with the proceeds of the substantially
concurrent sale (other than to a Restricted Subsidiary) of, or equity
contribution with respect to, Capital Stock of the Company (other than any
Disqualified Stock);
(v) the repurchase of Capital Stock of the Company (including
options, warrants or other rights to acquire such Capital Stock) from
departing or deceased directors, officers and employees of the Company and
its Subsidiaries pursuant to the terms of an employee benefit plan or
employee agreement in an aggregate amount that shall not exceed $500,000
since the Issue Date plus the aggregate cash proceeds from any payments on
insurance policies in which the Company or any of its Subsidiaries is the
beneficiary with respect to any directors, officers or employees of the
Company and its Subsidiaries which proceeds are used to purchase the
Capital Stock of the Company or any Restricted Subsidiary of the Company
held by any of such directors, officers or employees; and the repurchase
of Capital Stock of the Company or a Restricted Subsidiary by the Company
or such Restricted Subsidiary pursuant to the terms of any of the
Shareholders Agreements;
(vi) loans or advances to employees of the Company or any of its
Subsidiaries which loans or advances exist on the Issue Date, and other
loans or advances to employees of the Company or any Subsidiary to pay
reasonable relocation expenses or otherwise entered into in the ordinary
course of business not to exceed $500,000 in the aggregate principal
amount at any one time outstanding;
(vii) Restricted Payments in an amount such that the sum of the
aggregate amount of Restricted Payments made pursuant to this clause (vii)
after the Issue Date does not exceed $2.5 million at any one time
outstanding; and
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(viii) payments pursuant to any of the Transactions or made in a
manner consistent with the information under the caption "Use of Proceeds"
(other than general corporate purposes) in the Offering Circular pursuant
to which the Notes are offered and sold.
For purposes of clause (iii) of the first paragraph of this covenant, the
Permitted Payments referred to in clauses (i) and (v) above shall be included in
the aggregate amount of Restricted Payments made since the Issue Date, and any
other Permitted Payments described above shall be excluded.
Limitation on Asset Sales. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless:
(i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to
the Fair Market Value (as evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee)
of the assets or other property sold or disposed of in the Asset Sale; and
(ii) at least 75% of such consideration consists of either cash or
Cash Equivalents (other than in the case of an Asset Sale consummated
prior to the 180th day following the Issue Date of all or substantially
all of the Capital Stock or assets of Wychem Limited, an English company
indirectly wholly-owned by the Company).
For purposes of this covenant, "cash" shall include (x) the amount of any
Indebtedness (other than any Indebtedness that is by its terms subordinated to
the Notes and/or the Guarantees and/or the Company Guarantee), accounts payable
and accrued expenses of the Company or such Restricted Subsidiary that is
assumed by the transferee of any such assets or other property in such Asset
Sale (and excluding any liabilities that are incurred in connection with or in
anticipation of such Asset Sale), but only to the extent that such assumption of
Indebtedness is effected on a basis such that there is no further recourse to
the Company or any of the Restricted Subsidiaries with respect to such
liabilities (other than customary indemnifications to the transferee and its
Affiliates) and (y) any notes, obligations or securities received by the Company
or such Restricted Subsidiary from such transferee that are due and payable
within 60 days by the Company or such Restricted Subsidiary into cash (to the
extent of the cash received).
Within 270 days after receipt of Net Proceeds from any Asset Sale, the
Company may elect to apply the Net Proceeds from such Asset Sale:
(a)(i) to repay Indebtedness under the Credit Agreement and
permanently reduce the commitments thereunder (provided, however, that no
such Net Proceeds shall be used to repay such Indebtedness to the extent
such Net Proceeds arose from an Asset Sale of any Foreign Collateral),
(ii) in the case where the property or asset that was the subject of such
Asset Sale does not constitute Collateral, to repay Indebtedness secured
by a Lien of the type described in clause (i), (iii), (vi), (viii), (xiv)
or (xv) of the definition of the term "Permitted Lien" (provided, however,
that no such Net Proceeds shall be used to repay Indebtedness of any
Foreign Restricted Subsidiary except to the extent that such Net Proceeds
arose from an Asset Sale of the assets of a Foreign Restricted
Subsidiary), (iii) in the case where the property or asset that was the
subject of such Asset Sale is the property or asset of a Foreign
Restricted Subsidiary that does not constitute Foreign Collateral, to
repay Indebtedness of any Foreign Restricted Subsidiary or (iv) a
combination of the foregoing clauses (i), (ii) and (iii); and/or
(b) make an investment in, or acquire assets and properties that
will be used in, the business of the Company or a Restricted Subsidiary,
existing on the Issue Date or in a Related Business; provided, however,
that no such investments in or acquisitions of assets or properties that
are to be used in the business of any Foreign Restricted Subsidiary or any
Related Business thereof may be made using any such Net Proceeds except to
the extent that such Net Proceeds arose from an Asset Sale of the assets
of a Foreign Restricted Subsidiary.
Pending the final application of any such Net Proceeds, the Company or any
Restricted Subsidiary may temporarily reduce Indebtedness of the Company under
the Credit Agreement or temporarily invest such Net Proceeds in cash or Cash
Equivalents. Any Net Proceeds from an Asset Sale not applied or invested as
provided in the first sentence of this paragraph within 270 days of such Asset
Sale will be deemed to constitute "Excess Proceeds."
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Each date that the aggregate amount of Excess Proceeds in respect of which
an Asset Sale Offer (as defined below) has not been made exceeds $5.0 million
shall be deemed an "Asset Sale Offer Trigger Date." As soon as practicable, but
in no event later than 20 business days after each Asset Sale Offer Trigger
Date, the Company shall commence an offer (an "Asset Sale Offer") to purchase
the maximum principal amount of Notes that may be purchased out of the Excess
Proceeds. Any Notes to be purchased pursuant to an Asset Sale Offer shall be
purchased pro rata based on the aggregate principal amount of Notes outstanding,
and all Notes shall be purchased at an offer price in cash in an amount equal to
100% of the principal amount thereof, plus accrued and unpaid interest and
Additional Interest, if any, to the date of purchase. To the extent that any
Excess Proceeds remain after completion of an Asset Sale Offer, the Company may
use the remaining amount for general corporate purposes otherwise permitted by
the Indenture. Upon the consummation of any Asset Sale Offer, the amount of
Excess Proceeds shall be deemed to be reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not later
than the 20th business day after the related Asset Sale Offer Trigger Date to
each Holder at such Holder's registered address, stating:
(i) that an Asset Sale Offer Trigger Date has occurred and that the
Company is offering to purchase the maximum principal amount of Notes that
may be purchased out of the Excess Proceeds (to the extent provided in the
immediately preceding paragraph), at an offer price in cash in an amount
equal to 100% of the principal amount thereof, plus accrued and unpaid
interest and Additional Interest, if any, to the date of the purchase (the
"Asset Sale Offer Purchase Date"), which shall be a business day,
specified in such notice, that is not earlier than 30 days or later than
60 days from the date such notice is mailed;
(ii) the amount of accrued and unpaid interest and Additional
Interest, if any, as of the Asset Sale Offer Purchase Date;
(iii) that any Note not tendered will continue to accrue interest
and Additional Interest, if applicable;
(iv) that, unless the Company defaults in the payment of the
purchase price for the Notes payable pursuant to the Asset Sale Offer, any
Notes accepted for payment pursuant to the Asset Sale Offer shall cease to
accrue interest and Additional Interest, if applicable, after the Asset
Sale Offer Purchase Date;
(v) the procedures, consistent with the Indenture, to be followed by
a Holder in order to accept an Asset Sale Offer or to withdraw such
acceptance; and
(vi) such other information as may be required by the Indenture and
applicable laws and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale that are to be applied to an Asset Sale Offer, (ii) deposit
with the Paying Agent the aggregate purchase price of all Notes or portions
thereof accepted for payment, and (iii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Asset Sale Offer.
If less than all Notes tendered pursuant to the Asset Sale Offer are
accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Notes to be purchased by the Company shall be in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not so listed, on a
pro rata basis or by lot; provided, however, that Notes accepted for payment in
part shall only be purchased in integral multiples of $1,000. The Paying Agent
shall promptly mail to each Holder or portions thereof accepted for payment an
amount equal to the purchase price for such Notes plus accrued and unpaid
interest and Additional Interest, if any, thereon, and the Trustee shall
promptly authenticate and mail to such Holder accepted for payment in part a
Note equal in principal amount to any unpurchased portion of the Notes, and any
Note not accepted for payment in whole or in part shall be promptly returned to
the Holder of such Note. On and after an Asset Sale Offer Purchase Date,
interest and Additional Interest, if applicable, will cease to accrue on the
Notes or portions thereof accepted for payment, unless the Company defaults in
the payment of the purchase price therefor. The Company will publicly announce
the results of the Asset Sale Offer on or as soon as practicable after the Asset
Sale Offer Purchase Date.
Any repurchase of Notes pursuant to an Asset Sale Offer shall include both
U.S. Notes and Dutch Notes on a pro rata basis based upon the aggregate
principal amount of the Notes outstanding at the time of such repurchase, unless
a Change of Control of the Dutch Issuer has occurred.
108
The foregoing provisions will not apply to a transaction consummated in
compliance with the provisions of the Indenture described under "-- Merger,
Consolidation and Sale of Assets" below.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Asset
Sale Offer and will be deemed not to be in violation of any of the covenants
under the Indenture to the extent such compliance is in conflict with such
covenants.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom, or assign or convey any right to
receive income therefrom, in each case, other than Permitted Liens.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause to become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to (i) pay dividends or
make any other distributions to the Company or any other Restricted Subsidiary
on its Capital Stock or with respect to any other interest or participation in,
or measured by, its profits, or pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (ii) make loans or advances to, or issue any
guaranty for the benefit of, the Company or any other Restricted Subsidiary or
(iii) transfer any of its properties or assets to the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of
(a) the Credit Agreement as in effect on the Issue Date, and any
amendments, modifications, renewals, refundings, replacements or
refinancings thereof; provided that such amendments, modifications,
renewals, refundings, replacements or refinancings are no more restrictive
in the aggregate with respect to such dividend and other payment
restrictions than those contained in the Credit Agreement (or, if more
restrictive, than those contained in the Indenture) immediately prior to
any such amendment, restatement, renewal, replacement or refinancing;
(b) applicable law;
(c) any instrument governing Indebtedness or Capital Stock of an
Acquired Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition (except to the
extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition); provided, however, that no such
encumbrance or restriction is applicable to any Person, or the properties
or assets of any Person, other than the Acquired Person;
(d) customary non-assignment, subletting or net worth provisions in
leases or other agreements entered into the ordinary course of business;
(e) Purchase Money Obligations for property acquired in the ordinary
course of business that impose restrictions only on the property so
acquired;
(f) an agreement for the sale or disposition of assets or the
Capital Stock of a Restricted Subsidiary; provided, however, that such
restriction or encumbrance is only applicable to such Restricted
Subsidiary or assets, as applicable, and such sale or disposition
otherwise is permitted by the provisions described under "-- Certain
Covenants -- Limitation on Asset Sales;" provided further, however, that
such restriction or encumbrance shall be effective only for a period from
the execution and delivery of such agreement through a termination date
not later than 270 days after such execution and delivery;
(g) Refinancing Indebtedness permitted under the Indenture;
provided, however, that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive in the
aggregate than those contained in the agreements governing the
Indebtedness being refinanced immediately prior to such refinancing;
(h) the Indenture, the Notes, the Guarantees, the Company Guarantee
and the Collateral Agreements; and
(i) encumbrances and restrictions imposed by amendments,
restatements, renewals, replacements or refinancings of the contracts,
instruments or obligations referred to in clauses (a) through (h) above;
provided that such encumbrances and restrictions are, in the good faith
judgment of the Company's Board
109
of Directors, no more restrictive, in any material respect, than those
contained in such contracts, instruments or obligations immediately prior
to such amendment, restatement, renewal, replacement or refinancing.
Limitation on Transactions with Affiliates. The Indenture provides that
the Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate of the
Company unless (1) such transaction or series of transactions is on terms that
are no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those that could reasonably be obtainable at such time in a
comparable transaction in arm's-length dealings with an unrelated third party,
and (2) the Company delivers to the Trustee (a) with respect to any transaction
or series of transactions involving aggregate payments in excess of $250,000, an
Officer's Certificate certifying that such transaction or series of related
transactions has been approved by a majority of the members of the Board of
Directors of the Company, and (b) with respect to any transaction or series of
transactions involving aggregate payments in excess of $5.0 million, an opinion
as to the fairness of the transaction to the Company from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing.
Notwithstanding the foregoing, this covenant does not apply to:
(i) employment agreements or compensation or employee benefit
arrangements with any officer, director or employee of the Company or any
of its Restricted Subsidiaries entered into in the ordinary course of
business (including customary benefits thereunder and including
reimbursement or advancement of out-of-pocket expenses, and director's and
officer's liability insurance);
(ii) any transaction entered into by or among the Company or one of
its Restricted Subsidiaries with one or more Restricted Subsidiaries of
the Company;
(iii) any transaction permitted by the second paragraph under
"-- Certain Covenants -- Limitation on Restricted Payments," (iv)
transactions permitted by, and complying with, the provisions described
under "-- Merger, Consolidation and Sale of Assets";
(v) any Transaction or any transaction described under the caption
"Use of Proceeds" in the Offering Circular pursuant to which the Notes are
offered and sold; and
(vi) agreements to make the payments described in clause (y)(2) of
the second sentence of the definition of the term "Investment."
The Indenture provides that as of the Issue Date, the cash salary and
bonus in the aggregate payable to Jack Bendheim in respect of each fiscal year
beginning on or after July 1, 2003 (i) for which Cash Flow of the prior fiscal
year is less than $25.0 million shall be capped at $750,000, (ii) for which Cash
Flow of the prior fiscal year is greater than or equal to $25.0 million but less
than $36.0 million, shall not exceed the sum of (A) $750,000 plus (B)(I)
$900,000 times (II) a ratio, the numerator of which is Cash Flow with respect to
such prior fiscal year less $25.0 million and the denominator of which is $11.0
million and (iii) for which Cash Flow of the prior fiscal year is greater than
or equal to $36.0 million, shall be determined by the Compensation Committee of
the Board of Directors and shall not exceed $2.0 million.
Limitation on Issuances and Sales of Capital Stock of Subsidiaries. The
Company will not permit or cause any of its Restricted Subsidiaries to issue or
sell any Capital Stock except:
(1) to the Company or a Wholly-Owned Restricted Subsidiary of the
Company and so long as concurrently with the issuance thereof all steps
necessary for the Collateral Agent to have a perfected security interest
therein, subject to the Permitted Liens, shall have been taken;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of Foreign Restricted Subsidiaries to
the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect
to such issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of such
issuance or sale; or
110
(4) sales of (i) all of the Capital Stock of a Restricted Subsidiary
of the Company or (ii) Common Stock of a Foreign Subsidiary, in each case
in compliance with the provisions of the "Limitation on Asset Sales"
covenant.
Limitation on Designation of Unrestricted Subsidiaries. The Indenture
provides that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made) as an "Unrestricted Subsidiary" under the Indenture (a "Designation")
unless:
(a) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation;
(b) immediately after giving effect to such Designation, the Company
would be able to incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness;" and
(c) the Company would not be prohibited under the Indenture from
making an Investment at the time of Designation in an amount (the
"Designation Amount") equal to the greater of (x) the book value of such
Restricted Subsidiary on such date and (y) the Fair Market Value of such
Restricted Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments" for
all purposes of the Indenture in an amount equal to the Designation Amount.
The Indenture further provides that the Company will not designate an
Unrestricted Subsidiary as a Restricted Subsidiary (a "Redesignation"), unless:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Redesignation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Redesignation shall be deemed to
have been incurred at such time and shall have been permitted to be
incurred for all purposes of the Indenture.
PMC, MRT Holdings, LLC and Prince MFG, LLC shall be deemed to be
redesignated as a Restricted Subsidiaries on January 1, 2004 if the PMC Sale
Transactions have not been consummated on or prior to such date.
An Unrestricted Subsidiary shall be deemed to be redesignated as a
Restricted Subsidiary at any time if (a) the Company or any other Restricted
Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness
of such Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (ii) is directly or indirectly
liable for any Indebtedness of such Unrestricted Subsidiary or (b) a default
with respect to any Indebtedness of such Unrestricted Subsidiary (including any
right which the holders thereof may have to take enforcement action against it)
would permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity, except in the case of clause (a)
to the extent permitted under the covenant described above under the caption
"-- Certain Covenants -- Limitation on Restricted Payments."
If any Unrestricted Subsidiary is (or is deemed to have been) redesignated
as a Restricted Subsidiary, each Subsidiary of the Company that owns all or any
portion of the Capital Stock of such Unrestricted Subsidiary shall be deemed to
have been redesignated as a Restricted Subsidiary as well.
MRT Holdings, LLC and Prince MFG, LLC and its direct wholly-owned
subsidiary, PMC, will be the only Unrestricted Subsidiaries as of the Issue
Date. All Designations and Redesignations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Subsidiaries that are not designated by the Board of Directors as Restricted or
Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries. The
Designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be
deemed a Designation of all of the Subsidiaries of such Unrestricted Subsidiary
as Unrestricted Subsidiaries.
111
Noteholder Representative. From and after the Issue Date until the date on
which all principal and interest (including any Additional Interest) on all of
the outstanding Units (and the underlying Notes) have been paid in full as
provided in the Indenture, the Company will take such action as shall be
necessary in accordance with applicable law and its certificate of incorporation
and by-laws so that the Board of Directors of the Company may include one
Noteholder Representative.
The Noteholder Representative shall be designated mutually by Jefferies &
Company, Inc. ("Jefferies") and the Company. If Jefferies and the Company cannot
agree on a mutually acceptable candidate within 60 days after the Issue Date (or
the date of any subsequent vacancy), each of Jefferies and the Company shall
nominate a candidate meeting the criteria below and the Company shall mail a
ballot to the Holders within 90 days of the Issue Date (or the date of any
subsequent vacancy). The ballot may include biographical and other information
with respect to each candidate under Regulation 14A of the Securities Exchange
Act of 1934, as amended. The Noteholder Representative will be selected by
Holders of a majority in aggregate principal amount of the Notes who complete
and submit to the Company a ballot.
Each candidate submitted by Jefferies and the Company for election as the
Noteholder Representative shall be a person who is not an executive officer or
director of (i) a significant supplier of the Company or any Subsidiary or
Affiliate thereof or (ii) any competitor of the Company or any Subsidiary or
Affiliate thereof, unless otherwise agreed by the Company.
If a Noteholder Representative resigns, dies or becomes incapacitated, or
such position is otherwise vacant, no action requiring the affirmative vote of
the Noteholder Representative shall be taken until the earlier of (i) the
expiration of 45 days after the mailing of such ballot and (ii) the designation
of a successor Noteholder Representative by the Holders and approval of such
action by the successor Noteholder Representative.
The Noteholder Representative shall be a member of the Compensation
Committee and, except as provided above, all decisions of the Compensation
Committee shall require the consent of the Noteholder Representative.
Business Activities. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, engage in any business
other than such business as conducted by it on the Issue Date and any Related
Business. The Indenture also provides that for so long as any of MRT Holdings,
LLC, Prince MFG, LLC or PMC shall be an Unrestricted Subsidiary of the Company
or the PMC Sale Transactions shall not have been consummated, no such entity
shall engage in any activities other than those currently conducted by such
entity or those necessary or incidental to consummating the PMC Sale
Transactions; provided, however, that notwithstanding the foregoing, no such
entity shall incur any Indebtedness, make any Investments, or pay the
obligations of any other person or entity, in an aggregate amount exceeding
$25,000 or dispose of any of its assets other than in the ordinary course of
business, if such entity is an Unrestricted Subsidiary of the Company other than
as necessary or incidental to consummate the PMC Sale Transactions.
Impairment of Security Interest. No Issuer nor any Guarantor may take or
knowingly omit to take any action which would materially impair the Liens in
favor of the Collateral Agent, on behalf of itself, the Trustee and the Holders,
with respect to any material portion of the Collateral securing the Notes or any
Guarantee either the U.S. Notes, the Domestic Guarantees and the Company
Guarantee or the Dutch Notes and the Foreign Guarantees. No Issuer nor any
Guarantor may grant to any Person (other than the Collateral Agent), or permit
any Person (other than the Collateral Agent) to retain any interest whatsoever
in the Collateral other than Permitted Liens or as otherwise permitted by the
Indenture. No Issuer nor any Guarantor may enter into any agreement that
requires the proceeds received from any sale of Collateral to be applied to
repay, redeem, defease or otherwise acquire or retire any Indebtedness of any
Person, other than as permitted by the Indenture, the Notes and the Collateral
Agreements, subject to the terms of the Intercreditor Agreement (as it relates
to the Domestic Collateral). Each Issuer and each Guarantor will, at its sole
cost and expense, execute and deliver all such agreements and instruments as the
Collateral Agent or the Trustee shall reasonably request to more fully or
accurately describe the property intended to be Collateral or the obligations
intended to be secured by the Collateral Agreements. Each Issuer and each
Guarantor will, at its sole cost and expense, file any such notice filings or
other agreements or instruments as may be required under applicable law to
perfect the Liens created by the Collateral Agreements, subject to Permitted
Liens.
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Landlord, Bailee and Consignee Waivers. Each of the Company, the Dutch
Issuer, each Domestic Restricted Subsidiary of the Company and each Restricted
Subsidiary of the Dutch Issuer that is a lessee of, or becomes a lessee of, real
property (whether used for manufacturing purposes or otherwise) on or in which
it will maintain, store, hold or locate all or any of its assets having an
aggregate fair market value of at least $50,000, is, and will be, required to
use commercially reasonable best efforts (which shall not require the
expenditure of cash or the making of any material concessions under any relevant
lease that was in effect on the Issue Date or if such (i) Domestic Restricted
Subsidiary of the Company was not a Domestic Restricted Subsidiary of the
Company on the Issue Date, the date such Domestic Restricted Subsidiary became a
Domestic Restricted Subsidiary of the Company or (ii) Restricted Subsidiary of
the Dutch Issuer was not a Restricted Subsidiary of the Dutch Issuer on the
Issue Date, the date such Restricted Subsidiary became a Restricted Subsidiary
of the Dutch Issuer) to deliver to the Collateral Agent a landlord waiver,
substantially in the form of the exhibit form thereof to be attached to the
Indenture, executed by the lessor of such real property; provided that in the
case where such lease is a lease in existence on the Issue Date or the lessee
thereof that is a (A) Domestic Restricted Subsidiary of the Company was not a
Domestic Restricted Subsidiary of the Company on the Issue Date or (B)
Restricted Subsidiary of the Dutch Issuer was not a Restricted Subsidiary of the
Dutch Issuer on the Issue Date, the Company or its Domestic Restricted
Subsidiary or the Dutch Issuer or its Restricted Subsidiary that is the lessee
thereunder shall have 60 days from the Issue Date (or from the date the lessee
thereof becomes a Domestic Restricted Subsidiary of the Company or a Restricted
Subsidiary of the Dutch Issuer) to satisfy such requirement and shall be
relieved of such obligation with respect to any landlord waiver to the extent
such lessor has refused to deliver such a waiver following such Person's use of
such commercially reasonable efforts. Each of the Company, each of its Domestic
Restricted Subsidiaries, the Dutch Issuer and each of its Restricted
Subsidiaries that provides any of its assets having an aggregate fair market
value of at least $50,000 to a bailee or consignee agrees to be bound by the
terms of the immediately preceding sentence, mutatis mutandis; provided that (i)
the terms "landlord", "lessee" and "lease" shall be replaced, respectively, with
the terms "bailee" or "consignee", as applicable, "bailor" or "consignor", as
applicable, and the "applicable agreement" and (ii) the condition that the
lessee maintain, store, hold or locate all or any of its assets having an
aggregate fair market value of at least $50,000 shall instead be replaced with
the condition that the fair market value of the assets subject to the applicable
bailment or consignment have a fair market value of at least $50,000.
Real Estate Mortgages and Recordings. With respect to any real property
(individually and collectively, the "Premises") that (a) is owned as of the
Issue Date by the Dutch Issuer or any of its Restricted subsidiaries or (b)(i)
is acquired by Dutch Issuer or any of its Restricted Subsidiaries after the
Issue Date and (ii) has a purchase price or a Fair Market Value, of at least
$250,000 (other than properties purchased subject to Acquired Indebtedness or
Purchase Money Indebtedness), the Dutch Issuer or such Restricted Subsidiary, as
the case may be, shall, at its sole cost and expense:
(A) take all such actions as the Collateral Agent deems necessary or
desirable to cause the Collateral Agent to have a valid first priority
perfected Lien in such Premises free and clear of all defects and
encumbrances (other than Permitted Liens), including, without limitation,
(1) duly executing and delivering a Foreign Collateral Agreement, (2)
recording, registering or filing such Foreign Collateral Agreement with
the necessary offices or authorities to result in such Lien being a valid,
perfected first priority Lien against the such Premises under the laws of
the jurisdiction in which such Premises is located and (3) paying all
recordation taxes, fees and expenses required in connection with such
recordation, registration or filing; and
(B) deliver to the Collateral Agent, with respect to such Premises,
a copy of such Foreign Collateral Agreement and evidence of such
recordation, registration or filing, as the case may be, local counsel
opinions and such other documents, instruments, certificates and
agreements as the Collateral Agent and its counsel shall, consistent with
the laws of the jurisdiction in which such Premises is located, reasonably
request or as may be required under the Indenture;
provided that the Dutch Issuer or such Restricted Subsidiary, as the case
may be, shall have a period of 90 days from (x) the date of the Issue Date to
satisfy the foregoing requirements with respect to any such Premises that is
owned by the Dutch Issuer or such Restricted Subsidiary, as the case may be, as
of the Issue Date and (y) the date such interest was acquired by the Dutch
Issuer or such Restricted Subsidiary, as the case may be, to satisfy the
foregoing requirements with respect to any such Premises that was acquired after
the Issue Date.
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Future Guarantors. The Indenture provides that the Company and each
Domestic Guarantor shall cause each Domestic Restricted Subsidiary of the
Company which, after the date of the Indenture (if not then a Guarantor),
becomes a Domestic Restricted Subsidiary (including, without limitation, as the
result of the redesignation of an Unrestricted Subsidiary that is a Domestic
Subsidiary as a Restricted Subsidiary) to:
(1) execute and deliver to the Trustee a supplemental indenture
pursuant to which such Domestic Restricted Subsidiary shall
unconditionally guarantee on a senior secured basis all of the Company's
obligations under the U.S. Notes and the Indenture on the terms set forth
in the Indenture;
(2) (a) execute and deliver to the Collateral Agent and the Trustee
such amendments or supplements to the Domestic Collateral Agreements as
may be necessary or as the Collateral Agent deems reasonably desirable in
order to grant to Collateral Agent, for the benefit of itself, the Holders
and the Trustee, a perfected security interest in the Capital Stock of
such new Domestic Restricted Subsidiary and the debt securities of such
new Domestic Restricted Subsidiary, subject to Permitted Liens, which are
owned by the Company or any Domestic Restricted Subsidiary and required to
be pledged pursuant to the Domestic Collateral Agreements, and (b) deliver
to Collateral Agent the certificates representing such Capital Stock and
debt securities, together with (i) in the case of such Capital Stock,
undated stock powers or instruments of transfer, as applicable, endorsed
in blank, and (ii) in the case of such debt securities, endorsed in blank,
in each case executed and delivered by a Officer of the Company or such
Domestic Restricted Subsidiary, as the case may be;
(3) cause such new Domestic Restricted Subsidiary to take such
actions as may be necessary or as necessary or as the Collateral Agent
deems reasonably desirable to grant to the Collateral Agent for the
benefit of itself, the Holders and the Trustee a perfected security
interest in substantially all of the assets of such new Domestic
Restricted Subsidiary (excluding real property and interests therein),
subject to Permitted Liens, including the filing of Uniform Commercial
Code financing statements in such jurisdictions as may be required by the
Domestic Collateral Agreements or by law or as may be reasonably requested
by the Collateral Agent;
(4) take such further action and execute and deliver such other
documents specified in the Indenture or otherwise reasonably requested by
the Trustee or the Collateral Agent to effectuate the foregoing; and
(5) deliver to the Trustee an opinion of counsel relating to the
foregoing actions and the perfection of such security interests so
granted, in each case, to the extent required under the Trust Indenture
Act.
The Indenture also provides that the Dutch Issuer and each Restricted
Subsidiary of the Dutch Issuer shall cause each Restricted Subsidiary of the
Dutch Issuer which, after the date of the Indenture (if not then a Foreign
Guarantor), becomes a Restricted Subsidiary of the Dutch Issuer (including,
without limitation, as the result of the redesignation of an Unrestricted
Subsidiary that is a Subsidiary of the Dutch Issuer as a Restricted Subsidiary
thereof) to take the actions and make the deliveries specified in the
immediately preceding paragraph, mutatis mutandis; provided that (i) the terms
"Domestic Restricted Subsidiary", "Company's" and "U.S. Notes" as used in the
immediately preceding paragraph shall be deemed to refer to the terms
"Restricted Subsidiary", "Dutch Issuer's" and "Dutch Notes", respectively, and
(ii) clauses (2) and (3) thereof shall be deemed to read in their respective
entireties as follows:
"(2) execute and deliver to the Collateral Agent and the Trustee
such Foreign Collateral Agreements or amendments or supplements thereto
and take all such other actions including, without limitation, recording,
registering or filing such amendments, supplements or any other documents
or instruments and paying all such taxes, fees and expenses required in
connection with such recordation, registration or filing, in each case, as
may be necessary or as the Collateral Agent deems reasonably desirable in
order to grant to the Collateral Agent, for the benefit of itself, the
Holders and the Trustee, a Lien in 100% of the Capital Stock of such new
Restricted Subsidiary, which is owned by the Dutch Issuer or any
Restricted Subsidiary of the Dutch Issuer, and provide the Collateral
Agent with a valid first priority perfected Lien (subject to Permitted
Liens) in all such Capital Stock for the benefit of itself, the Holders
and the Trustee;
(3) cause such new Restricted Subsidiary of the Dutch Issuer to (x)
execute and deliver to the Collateral Agent and the Trustee such Foreign
Collateral Agreements or amendments or supplements thereto and take all
such other actions including, without limitation, recording, registering
or filing such amendments, supplements or any other documents or
instruments and paying all such taxes, fees and expenses required in
connection with such recordation, registration or filing, in each case, as
may be
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necessary or as the Collateral Agent deems reasonably desirable in order
to grant to the Collateral Agent, for the benefit of itself, the Holders
and the Trustee, a Lien in all of the accounts receivable, inventory (to
the extent permitted by applicable law) and Capital Stock of each direct
Subsidiary of such new Restricted Subsidiary that is then owned or
thereafter acquired by such new Restricted Subsidiary, and provide the
Collateral Agent with a valid first priority perfected Lien (subject to
Permitted Liens) in all such accounts receivable, inventory (to the extent
permitted by applicable law) and Capital Stock for the benefit of itself,
the Holders and the Trustee and (y) to the extent such new Restricted
Subsidiary of the Dutch Issuer owns any real property on the date it
became a new Restricted Subsidiary of the Dutch Issuer, comply with the
requirements of the covenant "-- Certain Covenants -- Real Estate
Mortgages and Recordings" as if such new Restricted Subsidiary of the
Dutch Issuer had acquired such real property on such date;".
Provision of Financial Statements and Information. Whether or not either
Issuer is then subject to Section 13(a) or 15(d) of the Exchange Act, the
Indenture provides that the Company will file with the Commission following the
effectiveness of the Exchange Offer Registration Statement, so long as any Notes
are outstanding, the annual reports, quarterly reports and other periodic
reports which the Company would have been required to file with the Commission
pursuant to such Section 13(a) or 15(d) if the Company were so subject, and such
documents shall be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Company would have been required so
to file such documents if the Company were so subject; provided the Commission
will accept such filings. The Company will also in any event (i) within 15 days
of each Required Filing Date following the effectiveness of the Exchange Offer
Registration Statement, file with the Trustee, and supply the Trustee with
copies for delivery to the Holders and prospective purchasers of the Notes, the
annual reports, quarterly reports and other periodic reports which the Company
would have been required to file with the Commission pursuant to Section 13(a)
or 15(d) of the Exchange Act if the Company were subject to such Sections and
(ii) if the Commission will not accept the filing of such documents promptly
upon written request and payment of the reasonable cost of duplication and
delivery, supply copies of such documents to any prospective Holder of the
Notes. Prior to the effectiveness of the Exchange Offer Registration Statement,
the Company will provide upon request from Holders or prospective Holders of
Notes the information required by Rule 144A(d)(4) under the Securities Act.
Payments for Consent. Neither Issuer will, nor will either Issuer permit
any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any
consideration to or for the benefit of any Holder for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the Indenture,
the Notes, the Registration Rights Agreement, the Collateral Agreements or the
Intercreditor Agreement unless such consideration is offered to be paid or is
paid to all Holders that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
Additional Covenants. The Indenture also contains covenants with respect
to the following matters: (i) payment of principal, premium, interest and
Additional Interest; (ii) maintenance of an office or agency in The City of New
York; (iii) maintenance of corporate existence; (iv) payment of taxes and other
claims; (v) maintenance of properties; and (vi) maintenance of insurance.
Merger, Consolidation and Sale of Assets
The Indenture provides that the Company shall not, in any single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the Surviving Person), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets (determined on a consolidated basis for the Company and its Restricted
Subsidiaries) in one or more related transactions to, another Person, and the
Company will not permit any Restricted Subsidiary to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries, taken
as a whole, to another Person, unless:
(i) the Surviving Person is a corporation organized or existing
under the laws of the United States, any State thereof or the District of
Columbia;
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(ii) the Surviving Person (if other than the Company) assumes (a)
all the obligations of the Company under the U.S. Notes (and the
Guarantees of the Company's Domestic Restricted Subsidiaries shall be
confirmed as applying to such Surviving Person's obligations), the
Indenture, the Company Guarantee and, if then in effect, the Registration
Rights Agreement pursuant to a supplemental indenture or other written
agreement, as the case may be, in a form reasonably satisfactory to the
Trustee and (b) by amendment, supplement or other instrument (in form and
substance satisfactory to the Trustee and the Collateral Agent), executed
and delivered to the Trustee, all Obligations of the Company under the
Collateral Agreements and the Intercreditor Agreement, and in connection
therewith shall cause such instruments to be filed and recorded in such
jurisdictions and take such other actions as may be required by applicable
law to perfect or continue the perfection of the Lien created under the
Collateral Agreements on the Collateral owned by or transferred to the
surviving entity;
(iii) immediately both before and after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing;
(iv) after giving pro forma effect to such transaction, the
Surviving Person (x) would have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately
preceding such transaction and (y) would be permitted to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described under "-- Certain Covenants --
Limitation on Incurrence of Indebtedness;" and
(v) the Company or the Surviving Person shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture or any
amendment or supplement to the Collateral Agreements is required in
connection with such transaction, such supplemental indenture or such
amendment or supplement comply with the applicable provisions of the
Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied to the extent such conditions are
required to be satisfied thereunder either prior to or concurrent with the
consummation of the applicable transaction.
Notwithstanding clauses (iii) and (iv) above, any Restricted Subsidiary
(other than the Dutch Issuer) may consolidate with, merge into or transfer all
or part of its properties and assets to the Company.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, such Surviving Person shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from its obligations under, the
Indenture, the U.S. Notes, the Domestic Collateral Agreements and the
Registration Rights Agreement.
Each Domestic Guarantor (other than any Domestic Guarantor whose Domestic
Guarantee is to be released in accordance with the terms of the Domestic
Guarantee and the Indenture in connection with any transaction complying with
the provisions of "-- Certain Covenants -- Limitation on Asset Sales") will not,
and the Company will not cause or permit any Domestic Guarantor to, consolidate
with or merge with or into any Person other than the Company or any other
Domestic Guarantor unless:
(1) the entity formed by or surviving any such consolidation or
merger (if other than the Domestic Guarantor) or to which such sale,
lease, conveyance or other disposition shall have been made is a
corporation organized and existing under the laws of the United States or
any State thereof or the District of Columbia;
(2) such entity assumes (a) by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the
Trustee, all of the obligations of the Domestic Guarantor under the
Domestic Guarantee and, to the extent applicable, the Intercreditor
Agreement and (b) by amendment, supplement or other instrument (in form
and substance satisfactory to the Trustee and the Collateral Agent)
executed and delivered to the Trustee and the Collateral Agent, all
obligations of the Domestic Guarantor under the Domestic Collateral
Agreements and, to the extent applicable, the Intercreditor Agreement and
in connection therewith shall cause such instruments to be filed and
recorded in such jurisdictions and take
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such other actions as may be required by applicable law to perfect or
continue the perfection of the Lien created under the Domestic Collateral
Agreements on the Collateral owned by or transferred to the surviving
entity;
(3) immediately both before and after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing;
(4) immediately after giving effect to such transaction and the use
of any net proceeds therefrom on a pro forma basis, the Company could
satisfy the provisions of clause (iv) of the first paragraph of this
covenant; and
(5) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or
other disposition and, if a supplemental indenture or any amendment or
supplement to the Domestic Collateral Agreements is required in connection
with such transaction, such supplemental indenture or such amendment or
supplement comply with the applicable provisions of the Indenture and that
all conditions precedent in the Indenture relating to such transaction
have been satisfied.
Notwithstanding clauses (3) and (4) above, any Restricted Subsidiary
(other than the Dutch Issuer) may consolidate with, merge into or transfer all
or part of its properties and assets to the Company or any Domestic Guarantor.
Any merger or consolidation of (i) a Domestic Guarantor with and into the
Company (with the Company being the surviving entity) or another Domestic
Guarantor or (ii) a Domestic Guarantor or the Company with an Affiliate
organized solely for the purpose of reincorporating such Domestic Guarantor or
the Company in another jurisdiction in the United States or any State thereof or
the District of Columbia or changing the legal form of such Domestic Guarantor
or the Company need only comply with in the case of a merger or consolidation
involving (x) the Company as described in clause (ii) above, clauses (ii) and
(v) of the first paragraph of this covenant and (y) in the case of a Domestic
Guarantor as described in (1) clause (i) above, clause (5) of the immediately
preceding paragraph and (2) clause (ii) above, clauses (2) and (5) of the
immediately preceding paragraph.
The Indenture will contain similar restrictions on mergers, consolidations
and sales of assets by the Dutch Issuer and the Foreign Guarantors as those
contained in the paragraphs set forth above in this covenant, mutatis mutandis;
provided that
(i) the terms "Company", "Restricted Subsidiary", "Restricted
Subsidiaries", "the United States, any State thereof or the District of
Columbia", "U.S. Notes", "Domestic Guarantee", "Domestic Guarantor", and
"Domestic Collateral Agreements" as used in the preceding paragraphs of
this covenant, other than clause (iv) of the first paragraph hereof and
clause (4) of the third paragraph hereof shall remain unchanged, shall be
deemed to refer to the terms "Dutch Issuer", "Restricted Subsidiary of the
Dutch Issuer", "Restricted Subsidiaries of the Dutch Issuer", "the
jurisdiction of organization of the Dutch Issuer or Foreign Guarantor that
is the subject of such transaction", "Dutch Notes", "Foreign Guarantee",
"Foreign Guarantor", and "Foreign Collateral Agreements", respectively;
(ii) the words "of the Company's Domestic Restricted Subsidiaries"
contained in clause (ii)(a) of the first paragraph of this covenant shall
be deemed to have been replaced with the words "of the Guarantors and the
Company Guarantee";
(iii) clause (ii) of the first paragraph of this covenant shall also
be deemed to be revised to delete the words "and the Intercreditor
Agreement" and the words ", the Company Guarantee" therefrom;
(iv) the last sentence of the first paragraph of this covenant shall
be deemed to read in its entirety as follows "Notwithstanding clauses
(iii) and (iv) above, any Restricted Subsidiary of the Dutch Issuer may
consolidate with, merge into or transfer all or part of its properties and
assets to the Dutch Issuer.";
(v) clause (2) of the third paragraph of this covenant shall also be
deemed to be revised to delete the words "and, to the extent applicable,
the Intercreditor Agreement"; and
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(vi) the last sentence of the third paragraph of this covenant shall
be deemed to read in its entirety as follows "Notwithstanding clauses (3)
and (4) above, any Restricted Subsidiary of the Dutch Issuer may
consolidate with, merge into or transfer all or part of its properties and
assets to the Dutch Issuer, the U.S. Issuer or any other Guarantor.".
Possession, Use and Release of Collateral
Unless an Event of Default shall have occurred and be continuing, each
Issuer and each Guarantor has the right to remain in possession and retain
exclusive control of its Collateral securing the Notes (other than as set forth
in the Collateral Agreements), to freely operate the Collateral and to collect,
invest and dispose of any income therefrom; provided that until delivery of a
written notice from the Collateral Agent to the Company or the applicable
Domestic Guarantor, when any Event of Default shall have occurred and be
continuing, to refrain from exercising any voting, consensual rights and other
rights pertaining to Collateral consisting of Capital Stock pledged by it to the
Collateral Agent for the benefit of itself, the Trustee and the Holders, the
Company or such Domestic Guarantor, as the case may be, shall be entitled to
exercise all such voting, consensual rights and other rights pertaining to such
Collateral.
Release of Collateral. Upon compliance by the applicable Issuer or
Guarantor with the conditions set forth below under the caption "-- Asset Sale
Release," "-- Non-Asset Sale Release" or "-- Release of Inventory and Accounts
Receivable Collateral" in respect of any release of items of its Collateral
described thereunder (and in the case of any such items of Collateral subject to
the conditions set forth below under the caption "-- Asset Sale Release," upon
delivery by the Company to the Collateral Agent and the Trustee of an opinion of
counsel to the effect that such conditions have been met), (a) (i) in the case
of any such items of Collateral subject to the conditions set forth below under
the caption "-- Asset Sale Release," the Collateral Agent will terminate and
release its Lien granted under the Collateral Agreements on such items of
Collateral and (ii) in the case of any such items of Collateral subject to the
conditions set forth below under the caption "-- Non-Asset Sale Release" or
"-- Release of Inventory and Accounts Receivable Collateral", the Lien granted
under the Collateral Agreements on such items of Collateral shall terminate and
be released automatically and without any action by or on behalf of the
Collateral Agent, and (b) in each such case, the Collateral Agent shall, at the
sole cost and expense of such applicable Issuer or Guarantor, execute and
deliver to such applicable Issuer or Guarantor such documents, without any
representation, warranty or recourse of any kind whatsoever, as or such
applicable Issuer or Guarantor shall reasonably request to evidence such
termination and release.
Asset Sale Release. Each Issuer and Guarantor have the right to obtain a
release of items of Collateral (the "Released Interests") subject to an Asset
Sale permitted hereunder upon compliance with the condition that the Company
deliver to the Collateral Agent the following:
(1) A notice from the Company requesting the release of Released
Interests: (i) describing the proposed Released Interests; and (ii)
specifying the Fair Market Value of such Released Interests on a date
within 60 days of such notice (the "Valuation Date"); and
(2) An Officers' Certificate of the Company certifying that: (i)
such Asset Sale complies with the terms and conditions of the Indenture
with respect to such Asset Sale to the extent such terms and conditions
are required to be satisfied thereunder either prior to or concurrent with
the consummation of such Asset Sale; (ii) there is no Default or Event of
Default in effect or continuing on the date thereof or the date of such
Asset Sale; (iii) the release of the Collateral will not result in a
Default or Event of Default under the Indenture; (iv) the purchase price
received is at least equal to the Fair Market Value of the Released
Interests; (v) the release of such Released Interests would not be
expected to interfere in any material respect with the Collateral Agent's
ability to realize the value of the remaining Collateral and will not
impair in any material respect the maintenance and operation of the
remaining Collateral; and (vi) all conditions precedent in the Indenture
relating to the release in question have been or will be complied with.
Non-Asset Sale Releases. The Liens granted in favor of the Collateral
Agent for the benefit of itself, the Trustee and the Holders on Collateral
(including Collateral consisting of the Capital Stock of any Restricted
Subsidiary and any equipment that is obsolete or no longer useful in the
business of the applicable Issuer or Guarantor) and proceeds thereof that is
sold, conveyed or otherwise disposed of by the applicable Issuer or Guarantor
(including by way of a sale-and-leaseback) in the ordinary course of business,
whether in a single
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transaction or a series of related transactions, to any Person (other than to
the Company or any Guarantor) for Net Proceeds of $250,000 or less shall be
subject to termination and release upon the consummation of any such sale,
conveyance or disposition.
Release of Inventory and Accounts Receivable Collateral. Notwithstanding
any provision to the contrary in the Indenture, Collateral comprised of accounts
receivable, inventory or (prior to an Event of Default) the proceeds of the
foregoing shall be subject to termination and release upon sales of such
inventory and collection of the proceeds of such receivables in the ordinary
course of business.
Events of Default
The Indenture provides that each of the following constitutes an event of
default (each, an "Event of Default"):
(i) a default for 30 days in the payment when due of premium, if
any, or interest or Additional Interest, if any, on or with respect to any
Note;
(ii) a default in the payment when due of principal on any Note,
whether upon maturity, acceleration, optional or mandatory redemption,
required repurchase or otherwise;
(iii) failure to perform or comply with any covenant, agreement or
warranty in the Indenture (other than the defaults specified in clauses
(i) and (ii) above) or any Collateral Agreement which failure continues
for 30 days after written notice thereof has been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least
25% in aggregate principal amount of the then outstanding Notes;
(iv) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company or any Restricted
Subsidiary then has outstanding Indebtedness in excess of $5.0 million in
the aggregate and, if not already matured at its final maturity in
accordance with its terms, such Indebtedness shall have been accelerated
and such acceleration is not rescinded, annulled or cured within 10 days
thereafter;
(v) one or more judgments, orders or decrees for the payment of
money in excess of $5.0 million, either individually or in the aggregate,
shall be entered against the Company or any Restricted Subsidiary or any
of their respective properties and which judgments, orders or decrees are
not paid, discharged, bonded or stayed or stayed pending appeal for a
period of 60 days after their entry;
(vi) certain events of bankruptcy, insolvency or reorganization of
either Issuer or any Significant Subsidiary;
(vii) any Guarantee of a Significant Subsidiary or the Company
Guarantee ceases to be in full force and effect (other than as expressly
provided for under the Indenture) or is declared null and void, or any
Guarantor which is a Significant Subsidiary or the U.S. Issuer denies that
it has any further liability under its Guarantee or the Company Guarantee,
as applicable, or gives notice to such effect (other than by reason of the
termination of the Indenture or the release of such Guarantor or the U.S.
Issuer from its Guarantee or the Company Guarantee, as applicable, in
accordance with the Indenture); or
(viii) any Collateral Agreement at any time for any reason shall
cease to be in full force and effect, or either Issuer or any Guarantor
which is a Significant Subsidiary denies that it has any further liability
under any Collateral Agreement, or gives notice to such effect (other than
by reason of the termination of the Indenture or the release of such
Guarantor from any Collateral Agreement in accordance with the Indenture),
or any Collateral Agreement at any time for any reason shall cease to be
effective in all material respects to grant the Collateral Agent the Liens
purported to be created thereby on a material portion of the Collateral
thereunder, subject to Permitted Liens and no other Liens except as
permitted by the Indenture or the Collateral Agreements, in each case for
30 days after the Company receives written notice thereof specifying such
occurrence from the Trustee, the Collateral Agent or the Holders of at
least 25% of the outstanding principal amount at maturity of the Notes.
If any Event of Default (other than as specified in clause (vi) of the
preceding paragraph with respect to either Issuer) occurs and is continuing, the
Trustee or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may, and the Trustee at the request of such Holders shall,
declare all the Notes to be due and payable immediately by notice in writing to
the Issuers, and to the Issuers and the Trustee if by the
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Holders, specifying the respective Event of Default and that such notice is a
"notice of acceleration," and the Notes shall become immediately due and
payable. Notwithstanding the foregoing, in the case of an Event of Default
arising from the events specified in clause (vi) of the preceding paragraph with
respect to either Issuer, the principal of, premium, if any, and any accrued
interest and Additional Interest, if any, on all outstanding Notes of both
Issuers shall ipso facto become immediately due and payable without further
action or notice. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture and under the Trust Indenture Act.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of all of the Holders waive
any existing Default or Event of Default and its consequences under the
Indenture except (i) a continuing Default or Event of Default in the payment of
the principal of, or premium, if any, or interest or Additional Interest, if
any, on, the Notes (which may only be waived with the consent of each affected
Holder), or (ii) in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of each Holder. Subject to
certain limitations, the Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from the Holders notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal, premium, interest or Additional Interest) if it determines that
withholding notice is in their interest.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, interest on or Additional Interest, if any, with respect to
any of the Notes or for any claim based thereon or otherwise in respect thereof,
and no recourse under or upon any obligation, covenant or agreement of either
Issuer in the Indenture, or in any of the Notes or because of the creation of
any Indebtedness represented thereby, shall be had against any officer,
employee, incorporator, direct or indirect controlling person, shareholder,
member, partner or Affiliate of such Issuer or of any successor Person thereof.
Each Holder, by accepting the Notes, and the Collateral Agent and the Trustee,
waive and release all such liability.
Defeasance
The Issuers may, at their option and at any time, elect to have the
obligations of the Issuers discharged with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Issuers shall be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding Notes
and to have satisfied all other obligations under the Notes and the Indenture
except for:
(i) the rights of the Holders to receive, solely from the trust fund
described below, payments in respect of the principal of, premium, if any,
and interest and Additional Interest, if any, on such Notes when such
payments are due;
(ii) the Issuers' obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes, and the maintenance of an office or agency for payment;
(iii) the rights, powers, trusts, duties and immunities of the
Trustee under the Indenture; and
(iv) the defeasance provisions of the Indenture.
In addition, the Issuers may, at their option and at any time, elect to
have the obligations of the Issuers released with respect to certain covenants
that are described in the Indenture ("covenant defeasance") and any omission to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Notes. In the event that a covenant defeasance
occurs, certain events (not including non-payment, bankruptcy and insolvency
events) described under "-- Events of Default" will no longer constitute Events
of Default with respect to the Notes.
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In order to exercise either defeasance or covenant defeasance:
(i) the Issuers shall irrevocably deposit with the Trustee, as trust
funds in trust, for the benefit of the Holders, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the report
of a nationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, to pay and discharge the
principal of, premium, if any, and interest and Additional Interest, if
any, on the outstanding Notes to redemption or maturity;
(ii) the Issuers shall have delivered to the Trustee an opinion of
counsel in the United States to the effect that the Holders will not
recognize income, gain or loss for Federal income tax purposes as a result
of such defeasance or covenant defeasance, as the case may be, and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance or
covenant defeasance, as the case may be, had not occurred (in the case of
defeasance, such opinion must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable Federal income tax
laws);
(iii) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clause (vi) under the
first paragraph under "-- Events of Default" is concerned, at any time
during the period ending on the 91st day after the date of deposit;
(iv) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a Default under the Indenture or a
default under any other agreement or instrument to which either Issuer is
a party or by which it is bound;
(v) the Issuers shall have delivered to the Trustee opinions of
counsel to the effect that (A) the trust funds will not be subject to any
rights of holders of Indebtedness (other than the Holders) and (B) after
the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally; and
(vi) the Issuers shall have delivered to the Trustee Officers'
Certificate and opinions of counsel, each stating that all conditions
precedent under the Indenture to either defeasance or covenant defeasance,
as the case may be, have been complied with and that no violations under
agreements governing any other outstanding Indebtedness would result
therefrom.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when:
(i) either (a) all Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid
and Notes for whose payment money has theretofore been deposited in trust
and thereafter repaid to the Issuers) have been delivered to the Trustee
for cancellation or (b) all Notes not theretofore delivered to the Trustee
for cancellation have become due and payable and the Issuers have
irrevocably deposited or caused to be deposited with the Trustee an amount
in United States dollars sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for the principal of, premium, if any, interest and
Additional Interest, if any, to the date of deposit;
(ii) the Issuers have paid or caused to be paid all other sums
payable under the Indenture by the Company; and
(iii) the Issuers have delivered to the Trustee Officers'
Certificate and opinions of counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge
of the Indenture have been complied with.
Release of Guarantee
So long as no Event of Default shall have occurred and be continuing, upon
(i)(A) the sale or disposition (whether by merger, stock purchase, asset or sale
or otherwise) of a Guarantor (or all or substantially all of the assets of any
such Guarantor or all of the Capital Stock of any such Guarantor) to an entity
which is not a
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Subsidiary of the Company or (B) such Guarantor ceases to be a Restricted
Subsidiary, and our compliance, in each case, to the extent applicable, with the
provisions of the covenant described above under the caption "-- Certain
Covenants -- Limitation on Asset Sales" that are required to be satisfied
thereunder either prior to or concurrent with the consummation of the applicable
transaction; (ii) the designation by the Company of such Guarantor as an
Unrestricted Subsidiary in accordance with the "-- Certain Covenants --
Limitation on Restricted Payments" covenant described above; (iii) upon
satisfaction and discharge of the Indenture or payment in full of the principal
of, premium, if any, accrued and unpaid interest and Additional Interest, if
any, on the Notes and all other Obligations that are then due and payable, such
Guarantor or the U.S. Issuer with respect to the Company Guarantee shall be
deemed released from all its obligations under its Guarantee of the Notes and
the Indenture or the Company Guarantee, as applicable, or (iv) in the case of
any Foreign Guarantor or the U.S. Issuer with respect to the Company Guarantee,
upon payment in full of the principal of, premium, if any, accrued and unpaid
interest and Additional Interest, if any, on the Dutch Notes and all other
Obligations of the Dutch Issuer that are then due and payable, such Foreign
Guarantor or the U.S. Issuer, as the case may be, shall be deemed released from
all its Obligations under its Foreign Guarantee of the Dutch Notes and the
Indenture or the Company Guarantee, as applicable. Upon the release of any
Guarantor or the U.S. Issuer, as the case may be, from its Guarantee or the
Company Guarantee, as applicable, pursuant to the provisions of the Indenture,
each other Guarantor not so released shall remain liable for the full amount of
principal of, premium, if any, and interest and Additional Interest, if any, on,
the Notes as and to the extent provided in the Indenture.
Upon delivery by the Company to the Collateral Agent and the Trustee of an
opinion of counsel to the effect that the conditions described in the
immediately preceding paragraph have been met, the Collateral Agent shall, at
the sole cost and expense of the Company, execute and deliver to the Company
such documents, without any representation, warranty or recourse of any kind
whatsoever, as the Company shall reasonably request to evidence such release.
Amendment, Supplement and Waiver
Except as provided in the next two paragraphs, the Indenture, the Notes,
the Collateral Agreements, the Guarantees, the U.S. Guarantee or the
Registration Rights Agreement may be amended or supplemented with the written
consent of the Holders of at least a majority in aggregate principal amount of
the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for the Notes), and any existing Default or Event
of Default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in aggregate principal
amount of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for Notes).
Without the consent of each affected Holder, an amendment or waiver shall
not:
(i) reduce the principal amount of the Notes whose Holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any
Note, or alter or waive the provisions with respect to the redemption of
the Notes in a manner adverse to the Holders other than with respect to a
Change of Control Offer or an Asset Sale Offer;
(iii) reduce the rate of or change the time for payment of interest
or Additional Interest on any Notes;
(iv) waive a Default or Event of Default in the payment of principal
of, premium, if any, or interest or Additional Interest, if any, on the
Notes (except that the Holders of at least a majority in aggregate
principal amount of the then outstanding Notes may (a) rescind an
acceleration of the Notes that resulted from a non-payment default, and
(b) waive the payment default that resulted from such acceleration)
(v) make any Note payable in money other than that stated in the
Notes;
(vi) make any change in the provisions of the Indenture relating to
the right of the Holders to waive past Defaults or the rights of the
Holders to receive payments of principal of, or premium, if any, or
interest or Additional Interest, if any, on, the Notes;
(vii) following the occurrence of a Change of Control, amend, change
or modify either Issuer's obligation to make and consummate a Change of
Control Offer by reason of such a Change of Control or modify any of the
provisions or definitions with respect thereto in a manner adverse to the
Holders with respect to such Change of Control, or following the exercise
by the Dutch Issuer of the Change of Control
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Redemption of Dutch Notes Right or Tax Redemption, amend, change or modify
the Dutch Issuer's obligation to make and consummate a Change of Control
Redemption of Dutch Notes or Tax Redemption with respect to such exercise
or modify any of the provisions or definitions with respect thereto in a
manner adverse to the Holders with respect to such Change of Control
Redemption of Dutch Notes Right, Change of Control Redemption of Dutch
Notes or Tax Redemption, or following the occurrence of an Asset Sale or
any fiscal year of the Company ending on or after June 30, 2004, for which
Excess Cash Flow was in an amount at least equal to $250,000, amend,
change or modify the Issuers' obligations to make and consummate an Asset
Sale Offer with respect to such Asset Sale or an Excess Flow Offer with
respect to such fiscal year, as the case may be, or modify any of the
provisions or definitions with respect thereto in a manner adverse to the
Holders with respect to such Asset Sale Offer or Excess Cash Flow Offer,
as the case may be;
(viii) release any Guarantor that is a Significant Subsidiary or the
U.S. Issuer with respect to the Company Guarantee from any of its
obligations under its Guarantee or the Indenture or the Company Guarantee,
as applicable, other than in accordance with the terms of the Indenture;
or
(ix) release all or substantially all of the Collateral.
Notwithstanding the foregoing, without the consent of any Holder, the
Issuers and the Trustee may amend or supplement the Indenture or the Notes:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Notes in addition to or in place
of certificated Notes;
(iii) to provide for the assumption of either Issuer's Obligations
to Holders in the event of any Disposition involving such Issuer in which
such Issuer is not the Surviving Person;
(iv) to make any change that would provide any additional rights or
benefits to the Holders or that does not adversely affect the rights of
any such Holder;
(v) to release any Guarantor from its Guarantee and the Indenture or
the U.S. Issuer with respect to the Company Guarantee from the Company
Guarantee that is permitted to be released under the Indenture in
accordance with the terms thereof; or
(vi) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
Transfer and Exchange
The registered Holder of a Note will be treated as the owner of such Note
for all purposes. A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder among other
things, to furnish appropriate endorsements and transfer documents and the
applicable Issuer may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. Neither either Issuer nor the Registrar shall be
required to issue, register the transfer of or exchange any Note (i) during a
period beginning at the opening of business on the day that the Trustee receives
notice of any redemption from such Issuer and ending at the close of business on
the day the notice of redemption is sent to the Holders, (ii) selected for
redemption, in whole or in part, except the unredeemed portion of any Note being
redeemed in part may be transferred or exchanged, and (iii) during a Change of
Control Offer, Change of Control Redemption of Dutch Notes, Tax Redemption or an
Asset Sale Offer if such Note is tendered pursuant to such Change of Control
Offer, Change of Control Redemption of Dutch Notes, Tax Redemption or Asset Sale
Offer and not withdrawn.
The Trustee
HSBC Bank USA is the Trustee under the Indenture and has been appointed by
the Issuers as Registrar and Paying Agent with regard to the Notes.
The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) contains limitations on the rights of the
Trustee thereunder, should it become a creditor of either Issuer, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such
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claims, as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest (as
defined in the Trust Indenture Act) it must eliminate such conflict or resign.
Governing Law
The Indenture is, and the Notes, the Guarantees, the Company Guarantee and
the U.S. Security Agreement will be, governed by the laws of the State of New
York, without regard to the principles of conflicts of law.
Enforceability of Judgments
Since the operating assets of the Dutch Issuer and the Foreign Guarantors
are outside the United States, any judgment obtained in the United States
against either the Dutch Issuer or any Foreign Guarantor, including judgments
with respect to the payment of principal, premium, if any, interest, Additional
Amounts, if any, Additional Interest, if any, redemption price and any purchase
price with respect to the Dutch Notes, or any guarantee in respect thereof, may
not be collectible within the United States.
A judgment obtained in the courts of another EU Member State would be
enforced by Dutch courts without re-examination of the merits of the case
subject to and in accordance with the EU Regulation on jurisdiction and
Recognition and Enforcement of Judgements in Civil and Commercial Matters, as
amended. In the absence of an applicable treaty between the United States and
The Netherlands, a judgment rendered by a court in the United States (the
"Foreign Court") will not be enforced by Dutch courts. In order to obtain a
judgment which is enforceable in The Netherlands, the claim must be relitigated
before a competent Dutch court. If and to the extent that the Dutch court finds
that the jurisdiction of the Foreign Court has been based on grounds which are
internationally acceptable and that proper legal procedures have been observed,
the Dutch court would, in principle, give binding effect to the final judgment
of the Foreign Court unless such judgment contravenes principles of Dutch public
policy.
A final and conclusive judgment rendered in a court in another EU Member
State would be recognized and enforced by the Belgian courts without
re-examination of the merits, subject to the conditions set out in EU
legislation (the EU Regulation on Jurisdiction and Enforcement of Judgments in
Civil and Commercial Matters (44/2001) of 22 December 2001). A final and
conclusive judgment rendered in a court of a non-EU Member State would be
recognized and enforced by the Belgian courts, provided that the procedure set
out in Article 570 of the Belgian Judicial Code is followed. The foreign
judgment would only be recognized and enforced in Belgium after review of the
merits by a court of first instance, and if the court is satisfied that certain
conditions have been fulfilled.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of all other terms used in the
Indenture.
"Acquired Debt" means, with respect to any specified Person, Indebtedness
of any other Person (the "Acquired Person") existing at the time the Acquired
Person merges with or into, or becomes a Restricted Subsidiary of, such
specified Person, including Indebtedness incurred in connection with, or in
contemplation of, the Acquired Person merging with or into, or becoming a
Restricted Subsidiary of, such specified Person; provided, however, that
Indebtedness of such Acquired Person which is redeemed, defeased, retired or
otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Acquired Person merges with or into or becomes a
Restricted Subsidiary of such specified Person shall not be Acquired Debt.
"Additional Interest" has the meaning set forth in the Registration Rights
Agreement.
"Administrative Agent" has the meaning set forth in the definition of the
term "Credit Agreement."
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under
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common control with") of any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise.
"Asset Sale" means (i) any sale, lease, conveyance or other disposition by
the Company or any Restricted Subsidiary of any assets (including by way of a
sale-and-leaseback) other than in the ordinary course of business or (ii) the
issuance or sale of Capital Stock of any Restricted Subsidiary, in the case of
each of (i) and (ii), whether in a single transaction or a series of related
transactions, to any Person (other than (A) (1) in the case of the Company or
any Domestic Restricted Subsidiary to the Company or any Guarantor and (2) in
the case of any Foreign Restricted Subsidiary to the Company or any Wholly Owned
Restricted Subsidiary, (B) directors' qualifying shares and (C) sales or grants
of licenses to use the patents, trade secrets, know-how and other intellectual
property of the Company or any of its Restricted Subsidiaries to the extent that
such license does not prohibit the Company and its Restricted Subsidiaries from
using the intellectual property so licensed or require the Company or any of its
Restricted Subsidiaries to pay any fees for such use) for Net Proceeds in excess
of $250,000.
"Capital Lease Obligation" of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease for property leased by such Person that would at such time be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, of
such Person, including any Preferred Stock.
"Cash Equivalents" means:
(i) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency or
instrumentality thereof and backed by the full faith and credit of the
United States, in each case maturing within one year from the date of
acquisition thereof;
(ii) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Rating Services
or Moody's Investors Service, Inc.;
(iii) commercial paper maturing no more than one year from the date
of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from Standard & Poor's Rating Services or at least P-1 from
Moody's Investors Service, Inc.;
(iv) certificates of deposit, time deposits or bankers' acceptances
(or, with respect to foreign banks, similar instruments) maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any member of the European Union or any U.S.
branch of a foreign bank or (with respect to any Restricted Subsidiary)
any foreign country in which such Restricted Subsidiary is located, having
at the date of acquisition thereof combined capital and surplus of not
less than $250.0 million and a Thompson or Keefe Bank Watch Rating of "B"
or better (including bank accounts in such banks);
(v) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause
(iv) above;
(vi) in the case of any Foreign Restricted Subsidiary, Investments:
(a) in direct obligations of the sovereign nation (or any agency or
instrumentality thereof) in which such Foreign Restricted Subsidiary is
organized or is conducting business or in obligations fully and
unconditionally guaranteed by such sovereign nation (or any agency or
instrumentality thereof), (b) of the type and maturity described in
clauses (i) through (v) above of foreign obligors, which Investments or
obligors (or the parents of such obligors) have ratings described in such
clauses or equivalent ratings from comparable foreign rating agencies or
(c) of the type and maturity described in clauses (i) through (v) above of
foreign obligors (or the parents of such obligors), which Investments or
obligors (or
125
the parents of such obligors), are not rated as provided in such clauses
or in clause (vi)(b) but which are, in the reasonable judgment of the
Company, comparable in investment quality to such Investments and obligors
(or the parents of such obligors); and
(vii) investments in money market funds which invest substantially
all their assets in securities of the types described in clauses (i)
through (vi) above.
"Cash Flow" means, with respect to any period, Consolidated Net Income for
such period, plus, to the extent deducted in computing such Consolidated Net
Income: (i) extraordinary net losses, plus (ii) provision for taxes based on
income or profits and any provision for taxes utilized in computing the
extraordinary net losses under clause (i) hereof, plus (iii) Consolidated
Interest Expense, plus (iv) depreciation, amortization and all other non-cash
charges (including amortization of goodwill and other intangibles but excluding
any items that will require cash payments in the future for which an accrual or
reserve is made), plus (v) any non-recurring fees, charges or other expenses
made or incurred by the Company in connection with the Transactions.
"Change of Control" means:
(a) with respect to the Company, the occurrence of any of the following
events after the Issue Date:
(i) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act) (other than one or more Permitted
Holders) is or becomes (including by merger, consolidation or otherwise)
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a Person shall be deemed to have beneficial
ownership of all shares that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of 50% or more of the voting power of the total
outstanding Voting Stock of the Company;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election to such Board of
Directors, or whose nomination for election by the stockholders of the
Company, was approved by a vote of 662?3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of such Board of Directors of the
Company then in office;
(iii) the approval by the holders of Capital Stock of the Company of
any plan or proposal for the liquidation or dissolution of the Company as
a whole and not any Restricted Subsidiary or Guarantor (whether or not
otherwise in compliance with the terms of the Indenture); or
(iv) the sale or other disposition (other than by way of merger or
consolidation) of all or substantially all of the Capital Stock or assets
of the Company and its Restricted Subsidiaries taken as a whole to any
Person or group (as defined in Rule 13d-5 of the Exchange Act) (other than
to one or more of the Permitted Holders) as an entirety or substantially
as an entirety in one transaction or a series of related transactions,
unless the "beneficial owners" of the Voting Stock of such Person
immediately prior to such transaction own, directly or indirectly, more
than 50% of the total voting power of such Person immediately after such
transaction; and
(b) with respect to the Dutch Issuer, the failure of the Company to own,
directly or indirectly, 100% of the issued and outstanding Capital Stock of the
Dutch Issuer (other than directors' qualifying shares).
"Collateral" means, collectively, the Domestic Collateral and the Foreign
Collateral.
"Collateral Agent" means HSBC Bank USA, as collateral agent, and any
successor thereto in accordance with the terms of the Indenture.
"Collateral Agreements" means, collectively, the Domestic Collateral
Agreements and the Foreign Collateral Agreements.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company Guarantee" means a guarantee by the U.S. Issuer in respect of the
Dutch Notes and all other Obligations of the Dutch Issuer under the Indenture.
126
"Consolidated Cash Flow Coverage Ratio" means, for any period, the ratio
of (i) the aggregate amount of Cash Flow for such period, to (ii) Consolidated
Interest Expense for such period, determined on a pro forma basis after giving
pro forma effect to (a) the incurrence of the Indebtedness giving rise to the
calculation of the Consolidated Cash Flow Coverage Ratio and (if applicable) the
application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of such
proceeds occurred, at the beginning of such period; (b) the incurrence,
repayment or retirement of any other Indebtedness by the Company and its
Restricted Subsidiaries since the first day of such period as if such
Indebtedness was incurred, repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average balance of
such Indebtedness at the end of each month during such period); (c) in the case
of Acquired Debt, the related acquisition as if such acquisition had occurred at
the beginning of such period; and (d) any acquisition or disposition by the
Company and its Restricted Subsidiaries of any company or any business or any
assets out of the ordinary course of business, or any related repayment of
Indebtedness, in each case since the first day of such period, assuming such
acquisition or disposition had been consummated on the first day of such period.
"Consolidated Interest Expense" means, with respect to any period, the sum
of (i) the interest expense of the Company and its Restricted Subsidiaries for
such period, including, without limitation, (a) amortization of debt discount,
(b) the net payments, if any, under interest rate contracts (including
amortization of discounts), (c) the interest portion of any deferred payment
obligation and (d) accrued interest, plus (ii) the interest component of the
Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued
by the Company and its Restricted Subsidiaries during such period, and all
capitalized interest of the Company and its Restricted Subsidiaries, plus (iii)
all dividends paid during such period by the Company and its Restricted
Subsidiaries with respect to any Disqualified Stock (other than by any
Restricted Subsidiary to the Company or any other Restricted Subsidiary and
other than any dividend paid in Capital Stock (other than Disqualified Stock)),
in each case, as determined on a consolidated basis in accordance with GAAP
consistently applied.
"Consolidated Net Income" means, with respect to any period, the net
income (or loss) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted to the extent included in calculating such net income (or loss), by
excluding, without duplication:
(i) all extraordinary gains (less all fees and expenses relating
thereto);
(ii) the portion of net income (or loss) of the Company and its
Restricted Subsidiaries allocable to interests in unconsolidated Persons
or Unrestricted Subsidiaries, except to the extent of the amount of
dividends or distributions actually paid to the Company or its Restricted
Subsidiaries by such other Person during such period;
(iii) for purposes of the covenant entitled "-- Certain Covenants --
Limitation on Restricted Payments," net income (or loss) of any Person
combined with the Company or any of its Restricted Subsidiaries on a
"pooling-of-interests" basis attributable to any period prior to the date
of combination;
(iv) net gains and losses (less all fees and expenses relating
thereto) in respect of disposition of assets (including, without
limitation, pursuant to sale and leaseback transactions) other than in the
ordinary course of business;
(v) the net income of any Restricted Subsidiary to the extent that
the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income to the Company is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders;
(vi) the cumulative non-cash effect of any change in accounting
principles; provided that any net gain referred to in clause (iv) above
that relates to a Restricted Investment and which is received in or
converted into cash by the Company or a Restricted Subsidiary during such
period shall be included in the consolidated net income of the Company;
and
(vii) the amount of accretions on preferred stock not paid in cash
and dividends paid in kind on preferred stock reducing Consolidated Net
Income in accordance with FASB 150.
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"Consolidated Net Worth" means, with respect to any Person at any date,
the sum of (i) the consolidated stockholders' equity of such Person less the
amount of such stockholders' equity attributable to Disqualified Stock of such
Person and its Restricted Subsidiaries, as determined on a consolidated basis in
accordance with GAAP consistently applied and (ii) the amount of any Preferred
Stock of such Person not included in the stockholders' equity of such Person in
accordance with GAAP, which Preferred Stock does not constitute Disqualified
Stock.
"Credit Agreement" means the Credit Agreement among the Company, the
lenders party thereto (together with their successors and assigns, the
"Lenders") and HSBC Bank USA, as administrative agent (in such capacity,
together with its successors and assigns, the "Administrative Agent"), as the
same may be further amended, modified, renewed, refunded, replaced or refinanced
from time to time (including extending the maturity of, increasing the amount of
available borrowings under, extending the purpose to include acquisition,
working capital and other facilities of, changing the conditions and basis of
borrowing of, combining the seniority of, changing the covenants and other
provisions of, and adding Subsidiaries of the Company as additional borrowers or
guarantors, or otherwise restructuring all or any portion of the Indebtedness
under such agreement or any successor or replacement and whether with the same
or any other agent, lender or group of lenders), including (i) any related
notes, letters of credit, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time, and (ii)
any notes, guarantees, collateral documents, instruments and agreements executed
in connection with any such amendment, modification, renewal, refunding,
replacement or refinancing.
"Currency Agreement Obligations" means the obligations of any person under
a foreign exchange contract, currency swap agreement or other similar agreement
or arrangement to protect such person against fluctuations in currency values.
"Default" means any event that is, or after the giving of notice or
passage of time or both would be, an Event of Default.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Stock" means (i) any Preferred Stock of any Restricted
Subsidiary (other than Preferred Stock owned by the Company or any Wholly Owned
Restricted Subsidiary) and (ii) that portion of any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof (other than upon a Change of
Control of the Company in circumstances where the Holders would have similar
rights), in whole or in part on or prior to the stated maturity of the Notes.
"Dollars" and "$" means lawful money of the United States of America.
"Domestic Collateral" shall mean Collateral as defined in the Domestic
Collateral Agreements.
"Domestic Collateral Agreements" means the U.S. Security Agreement.
"Domestic Guarantee" means a guarantee by a Domestic Restricted Subsidiary
of the U.S. Issuer in respect of the U.S. Notes and all other Obligations of the
U.S. Issuer under the Indenture and the Dutch Notes and all other Obligations of
the Dutch Issuer under the Indenture.
"Domestic Guarantor" means each Domestic Restricted Subsidiary of the U.S.
Issuer that is designated as such on the signature pages of the Indenture and
each other Domestic Restricted Subsidiary of the U.S. Issuer that has issued a
Domestic Guarantee.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of the
Company that is not a Foreign Restricted Subsidiary.
"Domestic Subsidiary" means any Subsidiary of the Company that is not a
Foreign Subsidiary.
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"Excess Cash Flow" means, for any period, Cash Flow for such period minus
the sum of (i) the lesser of (x) all Capital Expenditures made during such
period by the Company and its Restricted Subsidiaries and (y) $8.5 million; (ii)
the sum of (x) the cash portion of the Consolidated Interest Expense (net of
interest income) for such period and (y) the cash portion of any related
financing fees for such period; (iii) the aggregate amount (without duplication)
of all federal, state and foreign income taxes and franchise taxes actually paid
in cash by the Company and its Restricted Subsidiaries during such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Existing Notes" shall mean the Company's outstanding 9.875% senior
subordinated notes due 2008 as the same may be amended, modified, renewed,
refunded or refinanced from time to time.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"Foreign Collateral" shall mean the assets or property subject to any Lien
under a Foreign Collateral Agreement.
"Foreign Collateral Agreements" means, collectively, any and all
agreements purporting to grant a Lien on assets and properties of the Dutch
Issuers and the Foreign Guarantors to secure their respective Obligations under
the Dutch Notes, the Indenture and the Foreign Guarantees, which agreements
shall be in form and substance reasonably satisfactory to the Collateral Agent,
in each case as amended or supplemented from time to time in accordance with its
terms.
"Foreign Guarantee" means a guarantee by Restricted Subsidiary of the
Dutch Issuer in respect of the Dutch Notes and all other Obligations of the
Dutch Issuer under the Indenture.
"Foreign Guarantor" means each Restricted Subsidiary of the Dutch Issuer
that is designated as such on the signature pages of the Indenture and each
other Restricted Subsidiary of the Dutch Issuer that has issued a Foreign
Guarantee.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary of the
Company that is a Foreign Subsidiary.
"Foreign Subsidiary" means a Subsidiary of the Company (1) which is
organized under the laws of any jurisdiction outside of the United States of
America, (2) which conducts the major portion of its business outside of the
United States of America and (3) all or substantially all of the property and
assets of which are located outside of the United States of America.
"GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession in the United States of America, which are applicable
as of the Issue Date and consistently applied.
"Guarantees" means, collectively, the Domestic Guarantees and the Foreign
Guarantees.
"Guarantors" means, collectively, the Domestic Guarantors and the Foreign
Guarantors; provided that any Person constituting a Guarantor as described above
shall cease to constitute a Guarantor when its respective Guarantee is released
in accordance with the terms of the Indenture.
"guaranty" means a guarantee (other than by endorsement of negotiable
instruments for collection or deposit in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, and
whether or not contingent:
(i) all indebtedness of such Person for borrowed money or which is
evidenced by a note, bond, debenture or similar instrument;
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(ii) all obligations of such Person to pay the deferred or unpaid
purchase price of property, which purchase price is due more than six
months after the date of placing such property in service or taking
delivery and title thereto;
(iii) all Capital Lease Obligations of such Person;
(iv) all obligations of such Person in respect of letters of credit
or bankers' acceptances issued or created for the account of such Person;
(v) to the extent not otherwise included in this definition, all net
obligations of such Person under Interest Rate Agreement Obligations or
Currency Agreement Obligations of such Person;
(vi) all liabilities of others of the kind described in the
preceding clause (i), (ii) or (iii) secured by any Lien on any property
owned by such Person; provided, however, if the obligations secured by a
Lien (other than a Permitted Lien not securing any liability that would
itself constitute Indebtedness) on any assets or property have not been
assumed by such Person in full or are not such Person's legal liability in
full, the amount of such Indebtedness for purposes of this definition
shall be limited to the lesser of the amount of Indebtedness secured by
such Lien and the Fair Market Value of the property subject to such Lien;
(vii) all Disqualified Stock issued by such Person and all Preferred
Stock issued by a Subsidiary of such Person (other than Preferred Stock of
a Restricted Subsidiary owned by the Company or a Wholly Owned Restricted
Subsidiary); and
(viii) to the extent not otherwise included, any guaranty by such
Person of any other Person's indebtedness or other obligations described
in clauses (i) through (vii) above. "Indebtedness" of the Company and the
Restricted Subsidiaries shall not include current trade payables incurred
in the ordinary course of business, and non-interest bearing installment
obligations and accrued liabilities incurred in the ordinary course of
business. The principal amount outstanding of any Indebtedness issued with
original issue discount is the accreted value of such Indebtedness.
Notwithstanding the foregoing, Indebtedness shall not include Indebtedness
arising from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently drawn against insufficient funds in
the ordinary course of business; provided that such Indebtedness is extinguished
within 3 business days of the incurrence thereof. In addition, Indebtedness
shall not include a government grant and any guaranty of the Company or a
Restricted Subsidiary required by such grant which obligates the Company or a
Restricted Subsidiary to repay such grant at the discretion of such government
or upon the failure of the conditions of such grant specified therein to be
fulfilled, but which is forgiven solely by reason of the passage of time or the
fulfillment of such grant conditions (other than repayment); provided that if
the conditions for forgiveness of such government grant lapse for whatever
reason and the Company or a Restricted Subsidiary becomes obligated to repay
such grant, the grant shall be deemed Indebtedness which is incurred at the time
such obligation to repay is triggered.
"Indenture Documents" means, collectively, the Indenture, the Notes, the
Guarantees, the Company Guarantee and the Collateral Agreements.
"Intercreditor Agreement" means the Intercreditor Agreement, dated as of
the Issue Date, among the Administrative Agent, the Collateral Agent, the
Company and the Domestic Guarantors, as the same may be amended, supplemented or
modified from time to time.
"Interest Rate Agreement Obligations" means, with respect to any Person,
the obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, any guaranty)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude (x) extensions of trade credit
by the Company and its Restricted Subsidiaries on commercially reasonable terms
in accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be, and (y) payments made by the Company and its
Restricted Subsidiaries in respect of liabilities of the type described in
clauses (ii)(b) and (e) of
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the definition of the term "Net Proceeds" in connection with (1) any Asset Sales
by the Company or any of its Restricted Subsidiaries (provided, however, that
the aggregate amount of such payments relating to any such Asset Sale shall at
no time exceed the gross proceeds actually received by the Company or such
Restricted Subsidiary in connection with such Asset Sale) and (2) the
disposition of all or substantially all of the Capital Stock or assets of MRT
and PMC. For the purposes of the "Limitation on Restricted Payments" covenant,
(i) "Investment" shall include and be valued at the Fair Market Value of the net
assets of any Restricted Subsidiary (to the extent of the Company's equity
interest in such Restricted Subsidiary) at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary and shall exclude the Fair
Market Value of the net assets of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the
amount of any Investment shall be the original cost of such Investment plus the
cost of all additional Investments by the Company or any of its Restricted
Subsidiaries, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment, reduced by
the payment of dividends or distributions in connection with such Investment or
any other amounts received in respect of such Investment; provided, however,
that no such payment of dividends or distributions or receipt of any such other
amounts shall reduce the amount of any Investment if such payment of dividends
or distributions or receipt of any such amounts would be included in
Consolidated Net Income. If the Company or any Restricted Subsidiary of the
Company sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, the Company no longer owns, directly or
indirectly, greater than 50% of the outstanding Common Stock of such Restricted
Subsidiary, the Company and/or such Restricted Subsidiary shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
Fair Market Value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means October 21, 2003, the date of the original issuance of
the Notes.
"Lenders" has the meaning set forth in the definition of the term "Credit
Agreement."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or similar encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to give a security
interest in any asset).
"MRT" means Mineral Resource Technologies, Inc., a Delaware corporation.
"Net Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate cash or Cash Equivalent proceeds received by such Person and/or its
Affiliates in respect of such Asset Sale, which amount is equal to the excess,
if any, of (i) the cash or Cash Equivalents received by such Person and/or its
Affiliates (including any cash payments received by way of deferred payment
pursuant to, or monetization of, a note or installment receivable or otherwise,
but only as and when received) in connection with such Asset Sale, over (ii) the
sum of (a) the amount of any Indebtedness that is secured by such asset and
which is required to be (and is in fact) repaid by such Person in connection
with such Asset Sale, plus (b) all fees, commissions and other expenses incurred
by such Person in connection with such Asset Sale, plus (c) provision for taxes,
including income taxes, directly attributable to the Asset Sale or to
prepayments or repayments of Indebtedness with the proceeds of such Asset Sale,
plus (d) if such Person is a Restricted Subsidiary, any dividends or
distributions payable to holders of minority interests in such Restricted
Subsidiary from the proceeds of such Asset Sale, plus (e) appropriate amounts to
be provided or established by the Company or any Restricted Subsidiary as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale; provided that upon
the release of any such reserves, such amounts shall constitute "Net Proceeds"
hereunder.
"Obligations" means any principal, premium, interest (including Additional
Interest), Additional Amounts, penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities and obligations payable under the
Indenture, any Note or any other Indenture Document.
"Officers' Certificate" means a certificate signed on behalf of a Person
by two Officers of such Person, one of whom must be the principal executive
officer, the principal financial officer or the principal accounting officer of
such Person, that meets the requirements set forth in the Indenture.
131
"Permitted Holders" means (i) Jack Bendheim; (ii) each of his spouse,
siblings, ancestors, descendants (whether by blood, marriage or adoption, and
including stepchildren) and the spouses, siblings, ancestors and descendants
thereof (whether by blood, marriage or adoption, and including stepchildren) of
such natural persons, the beneficiaries, estates and legal representatives of
any of the foregoing, the trustee of any bona fide trust of which any of the
foregoing, individually or in the aggregate, are the majority in interest
beneficiaries or grantors, and any corporation, partnership, limited liability
company or other Person in which any of the foregoing, individually or in the
aggregate, own or control a majority in interest; and (iii) all Affiliates
controlled by the individual named in clause (i) above.
"Permitted Investments" means:
(i) Investments by the Company or any Restricted Subsidiary of the
Company (A) in any Person that is or will become immediately after such
Investment a Domestic Guarantor or that will merge or consolidate into the
Company or a Domestic Guarantor or (B) in either Issuer or any Guarantor,
to the extent 100% of the net proceeds thereof are used substantially
contemporaneously with the receipt of such proceeds to make any
redemption, repurchase or other retirement for value or payment on or in
respect of the Dutch Notes or its Guarantee or the Company Guarantee, as
applicable, in respect thereof, as applicable;
(ii) any investment in cash or Cash Equivalents;
(iii) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment held by
a Restricted Subsidiary shall satisfy the requirements of clause (vii) of
the definition of the term "Permitted Indebtedness";
(iv) Investments in accounts and notes receivable acquired in the
ordinary course of business;
(v) any notes, obligations or other securities received in
connection with an Asset Sale that complies with the covenant described
under "Limitations on Asset Sales" or any other disposition not
constituting an Asset Sale;
(vi) Interest Rate Agreement Obligations and Currency Agreement
Obligations permitted pursuant to the second paragraph of the covenant
described under "Limitation on Incurrence of Indebtedness" above;
(vii) investments in or acquisitions of Capital Stock or similar
interests in Persons (other than Affiliates of the Company) received in
the bankruptcy or reorganization of or by such Person or any exchange of
such investment with the issuer thereof or taken in settlement of or other
resolution of claims or disputes;
(viii) Investments by any Foreign Subsidiary of the Company that (A)
is not the Dutch Issuer or a Restricted Subsidiary of the Dutch Issuer, in
any other Foreign Subsidiary of the Company and (B) is the Dutch Issuer or
a Foreign Guarantor, in either Issuer or any Guarantor;
(ix) Investments in any Foreign Subsidiary of the Company by the
Company or any Restricted Subsidiary of the Company to the extent the
aggregate amount of such Investments at any one time outstanding does not
exceed $5.0 million; and
(x) other Investments made after the Issue Date in an aggregate
amount at any one time outstanding not to exceed $2.5 million.
"Permitted Liens" means:
(i) Liens securing Indebtedness under the Credit Agreement to the
extent such Indebtedness is permitted under clause (i), (xiii), (xiv) or
(xvii) of the definition of the term "Permitted Indebtedness";
(ii) Liens securing Acquired Debt incurred in accordance with the
terms of the Indenture; provided, however, that (A) such Liens secured
such Acquired Debt at the time of and prior to the incurrence of such
Acquired Debt by the Company or a Restricted Subsidiary of the Company and
were not granted in connection with, or in anticipation of, the incurrence
of such Acquired Debt by the Company or a Restricted Subsidiary of the
Company and (B) such Liens do not extend to or cover any property or
assets of the Company or of any of its Restricted Subsidiaries other than
the property or assets that secured the Acquired Debt prior to the time
such Indebtedness became Acquired Debt of the Company or a Restricted
Subsidiary of the Company (and property or assets acquired in replacement
of any such property or assets
132
after such time to the extent acquired using the proceeds of any such
replaced property or assets) and are not materially more favorable to the
lienholders than those securing the Acquired Debt prior to the incurrence
of such Acquired Debt by the Company or a Restricted Subsidiary of the
Company;
(iii) Liens on property acquired by the Company or a Restricted
Subsidiary; , that such Liens were in existence prior to the contemplation
of such acquisition and do not extend to any other property of the Company
or such Restricted Subsidiary;
(iv) Liens in respect of Interest Rate Agreement Obligations and
Currency Agreement Obligations permitted under the Indenture;
(v) Liens in favor of the Company or any Restricted Subsidiary so
long as such Liens are subordinated to the Liens described in clause (vii)
below;
(vi) Liens existing or created on the Issue Date;
(vii) Liens securing the Notes, the Guarantees or the Company
Guarantee;
(viii) Liens securing Capital Lease Obligations and Purchase Money
Obligations permitted pursuant to clause (xi) of the definition of
"Permitted Indebtedness"; provided, however, that (A) in the case of any
Capital Lease Obligations, such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligations (whether or not such property or assets were the initial
leased property thereunder) and (B) in the case of any Purchase Money
Obligations, (1) the Indebtedness shall not exceed the cost of the real
property acquired, together with the cost of the installation and
construction thereof and improvements thereto, and shall not be secured by
any property or assets of the Company or any Restricted Subsidiary of the
Company other than such property and improvements thereto so acquired,
installed or constructed (and property or assets acquired in replacement
of any such property or assets after such date of acquisition,
installation or construction to the extent acquired using the proceeds of
any such replaced property or assets) and (2) the Lien securing such
Indebtedness shall be created within 30 days of such acquisition,
installation or construction or, in the case of a refinancing of any such
Purchase Money Obligations, within 30 days of such refinancing;
(ix) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding operating leases;
(xi) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xii) Liens to secure obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company or any of
its Restricted Subsidiaries, including the performance of statutory
obligations, surety or appeal bonds or performance bonds, or landlords',
carriers', warehousemen's, mechanics', suppliers', materialmen's or other
like Liens, in any case incurred in the ordinary course of business and
rights to offset and set-off;
(xiii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good
faith by appropriate proceedings promptly instituted and diligently
concluded; provided that any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made therefor;
(xiv) Liens securing Indebtedness incurred to amend, modify, renew,
refund, replace or refinance Indebtedness that has been secured by a Lien
permitted under the Indenture; provided that (a) any such Lien not extend
to or cover any assets or property not securing the Indebtedness so
refinanced; (b) any such Lien is no less favorable to the Holders and are
not more favorable to the lienholders with respect to such Lien than the
Lien in respect of the Indebtedness being amended, modified, renewed
refunded, replaced or refinanced and (c) the Refinancing Indebtedness
secured by such Lien shall have been permitted to be incurred under the
Indenture;
(xv) Liens securing Indebtedness of Foreign Restricted Subsidiaries
to the extent such Indebtedness is permitted under clauses (x), (xv) and
(xvii) of the definition of the term "Permitted Indebtedness;" provided,
however, that no asset of the Company or any Domestic Restricted
Subsidiary shall be subject to any such Lien;
133
(xvi) judgment Liens not giving rise to an Event of Default so long
as such Lien is adequately bonded and any appropriate legal proceedings
which may have been duly initiated for the review of such judgment shall
not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired;
(xvii) easements, rights-of-way, zoning restrictions, title
irregularities and other similar charges or encumbrances in respect of
real property not interfering in any material respect with the ordinary
conduct of the business of the Company or any if its Restricted
Subsidiaries;
(xviii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligation in respect of
bankers' acceptances issued or created for the account of such Person (to
the extent the Indebtedness evidenced thereby was permitted to be incurred
under the terms of the Indenture) to facilitate the purchase, shipment or
storage of such inventory or other goods; and
(xix) Liens arising in connection with the placement by either
Issuer or any Restricted Subsidiary of the Company, as the case may be, of
a reasonable amount of cash (as determined in good faith by such Person's
board of director) in escrow against any obligations permitted pursuant to
clause (xviii) of "Certain Covenants -- Limitation on Incurrence of
Indebtedness."
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PMC Sale Transactions" means the following transactions and payments,
including payments required pursuant to the documents evidencing such
transactions: (i) the transfer of ownership to the Palladium Investors of The
Prince Manufacturing Company ("PMC") which would be valued at approximately $21
million; (ii) the reduction of the preferred stock of the Palladium Investors to
$15.2 million (as of September 30, 2003); (iii) the termination of any
obligation of the Company or any Restricted Subsidiary of the Company in respect
of the $2.25 million annual management advisory fee (subject to reinstatement if
these transactions are not consummated on or before December 31, 2003); (iv) a
separate cash payment to the Palladium Investors of $10 million from the recent
sale of MRT; (v) payments by PMC to the Company for central support services for
the three years ending June 30, 2006 of $1 million, $0.5 million and $0.2
million, respectively; (iv) supply arrangements between the Company and PMC with
respect to manganous oxide and red iron oxide; (vii) customary representations,
warranties and indemnities by the Company, and provisions for closing working
capital balance adjustments, settlement of intercompany accounts owed to PMC, a
closing fee payable to Palladium and the agreement of the Company to pay or
reimburse the Palladium Investors for their reasonable out-of-pocket expenses;
and (viii) the establishment by the Company of a $1 million escrow or other
credit support for two years to secure its net working capital and foregoing
indemnification obligations, and indemnification of the Palladium Investors,
payable after the maturity of the Notes, for a portion, at the rate of $0.65 for
every dollar, of the amount they receive in respect of the disposition of PMC
less than $21 million, up to a maximum payment by the Company of $4 million.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"Purchase Money Obligation" means any Indebtedness (as amended, modified,
renewed, refunded, replaced or refinanced) secured by a Lien on assets related
to the business of the Company or the Restricted Subsidiaries, and any additions
and accessions thereto, which are purchased, constructed or improved by the
Company or any Restricted Subsidiary at any time after the Issue Date; provided,
however, that (i) any security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively, a "Security Agreement") shall be entered into within 90 days
after the purchase or substantial completion of the construction or improvement
of such assets and shall at all times be confined solely to the assets so
purchased, constructed or improved, any additions and accessions thereto and any
proceeds therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect of fees
and other obligations in respect of such Indebtedness and (iii)(A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions
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and accessions) shall not at the time such Security Agreement is entered into
exceed 100% of the purchase price or cost of construction or improvement to the
Company or any Restricted Subsidiary of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased, constructed or improved, any additions and accessions thereto and any
proceeds therefrom.
"Related Business" means any business that is reasonably related to or
complementary to the businesses conducted by the Company, or the Restricted
Subsidiaries, on the Issue Date.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means (i) any dividend or other distribution declared
or paid on any Capital Stock of the Company (other than (A) dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or (B) dividends or distributions payable to the Company or any
Restricted Subsidiary); (ii) any payment to purchase, redeem or otherwise
acquire or retire for value any Capital Stock of the Company; (iii) any payment
to purchase, redeem, defease or otherwise acquire or retire for value, prior to
any scheduled maturity, repayment or sinking fund payment, any Subordinated
Indebtedness other than a purchase, redemption, defeasance or other acquisition
or retirement for value that is paid for with the proceeds of Refinancing
Indebtedness that is permitted under the covenant described under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness;" or (iv) any Restricted
Investment. A Permitted Investment is not a Restricted Payment.
"Restricted Subsidiary" means each direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
"Shareholders Agreements" means (i) the Shareholders Agreement dated
December 29, 1987 by and between Marvin S. Sussman and the Company; (ii) the
Shareholders Agreement dated February 21, 1995 among Phibro-Tech, Inc., I. David
Paley, Nathan Z. Bistricer and James O. Herlands; (iii) the Severance Agreement
between Phibro-Tech, Inc. and James O. Herlands, dated February 21, 1995 and
(iv) the Stockholders Agreement, dated as of November 30, 2000, among, inter
alia, the Company, Jack C. Bendheim and the Palladium Investors; each as amended
and in effect on the Issue Date, and as thereafter amended, except for any
amendment subsequent to the Issue Date which causes the terms of such agreement
to be less favorable to the Company or Phibro-Tech, as the case may be.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X promulgated
pursuant to the Securities Act, as such Regulation S-X is in effect on the Issue
Date.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor which (A) if incurred by the Company, is subordinated in right of
payment to the Notes, or (B) if incurred by a Guarantor, is subordinated in
right of payment to the Guarantee of such Guarantor.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding voting power of the Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries thereof, or
(ii) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or (iii) any other Person (other than a corporation
or limited partnership) in which such Person or one or more other Subsidiaries
of such Person, or such Person and one or more other Subsidiaries thereof,
directly or indirectly, has more than 50% of the outstanding partnership or
similar interests or has the power, by contract or otherwise, to direct or cause
the direction of the policies, management and affairs thereof.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Transactions" means, collectively, the Offering and the other
transactions as described or contemplated under the caption "Offering Circular
Summary -- The Transactions" above, including but not limited to the PMC Sale
Transactions.
"U.S. Security Agreement" means the security agreement, dated as of the
Issue Date, made by the Company and the Domestic Guarantors in favor of the
Collateral Agent, as amended or supplemented from time to time in accordance
with its terms.
135
"Unrestricted Subsidiary" means any Subsidiary of the Company designated
as such pursuant to and in compliance with the covenant described under "--
Limitation on Designation of Unrestricted Subsidiaries" and not redesignated a
Restricted Subsidiary in compliance with such covenant.
"Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment at final maturity, in respect thereof, with (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary with
respect to which all of the outstanding voting securities (other than directors'
qualifying shares or nominee shares held by a third party to comply with local
law) of which are owned, directly or indirectly, by the Company or a Surviving
Person of any Disposition involving the Company, as the case may be.
Registration Rights Agreement
We have filed the registration statement of which this prospectus forms a
part and are conducting the exchange offer in accordance with our obligations
under the Registration Rights Agreement dated October 21, 2003, by and among the
Issuers and the Initial Purchaser.
Book-Entry; Delivery and Form
The certificates representing each New Unit will be issued in fully
registered, global form without interest coupons in minimum denominations of
$1,000 and integral multiples of $1,000. New Units will be issued at the closing
of the exchange offer only against surrender of corresponding old units.
Units originally sold in reliance on Rule 144A will be represented by
global units (each a "Domestic Global Unit") consisting of US Notes and Dutch
Notes in fully registered form without interest coupons (each a "Domestic Global
Note") and will be deposited with the Trustee as a custodian for The Depository
Trust Company ("DTC") and registered in the name of a nominee of such
depositary.
Units originally sold in offshore transactions in reliance on Regulation S
under the Securities Act will be represented by global units (a "Regulation S
Global Unit") consisting of US Notes and Dutch Notes in fully registered form
without interest coupons (each a "Regulation S Global Note") and will be
deposited with the Trustee as custodian for DTC, as depositary, and registered
in the name of a nominee of such depositary for the account of the operator of
the Euroclear System or Clearstream Banking.
Book-entry interests for Domestic Global Units and Regulation S Global
Units (together the "Global Units") will be shown on, and transfers thereof will
be effected only through, records maintained by Euroclear or Clearstream and
their participants. The laws of some jurisdictions, including some states of the
United States, may require that certain purchasers of securities take physical
delivery of those securities in definitive form.
The Global Units
We expect that pursuant to procedures established by DTC (i) upon the
issuance of the Global Units, DTC or its custodian will credit, on its internal
system, the principal amount at maturity of the individual beneficial interests
represented by the underlying Global Notes to the respective accounts of Persons
who have accounts with such depositary and (ii) ownership of beneficial
interests in the Global Units will be shown on, and the transfer of such
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of Persons other than participants).
Such accounts initially will be designated by or on behalf of the initial
purchasers and ownership
136
of beneficial interests in the Global Units will be limited to Persons who have
accounts with DTC ("participants') or Persons who hold interests through
participants. Holders may hold their interests in the Global Units directly
through DTC if they are participants in such system, or indirectly through
organizations that are participants in such system.
So long as DTC, Euroclear, Clearstream, or any of their respective
nominees, is the registered owner or holder of the Units, DTC, Euroclear,
Clearstream or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Units for all purposes
under the indenture. No beneficial owner of an interest in the Global Units will
be able to transfer that interest except in accordance with DTC's, Euroclear's
or Clearstream's, as applicable, procedures, in addition to those provided for
under the indenture with respect to the Units.
Payments of the principal of, and premium (if any) and interest (including
Additional Interest) on, the Global Notes will be made to DTC, Euroclear,
Clearstream or their respective nominees, as the case may be, as the registered
owner thereof. None of us, the Trustee or any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Units
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
We expect that DTC, Euroclear, Clearstream or their respective nominees,
upon receipt of any payment of principal, premium, if any, interest (including
Additional Interest) on the Global Notes, will credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Notes as shown on the records of DTC,
Euroclear, Clearstream or their respective nominees. We also expect that
payments by participants to owners of beneficial interests in the Global Units
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a Holder requires physical delivery of a
Certificated Security for any reason, including to sell Units to Persons in
states which require physical delivery of the Units, or to pledge such
securities, such Holder must transfer its interest in a Global Unit, in
accordance with the normal procedures of DTC and with the procedures set forth
in the indenture.
Participants in Euroclear and/or Clearstream must rely upon the procedures
of Euroclear and Clearstream in order to transfer their interests in the Global
Units, and indirect participants must rely on the procedures of the participants
through which they own book-entry interests to transfer their interests or to
exercise any rights of holders under the indenture.
DTC, Euroclear and Clearstream have advised us that they will take any
action permitted to be taken by a Holder of New Units and New Notes (including
the presentation of New Units and New Notes for exchange as described below)
only at the direction of one or more participants to whose account the DTC,
Euroclear or Clearstream interests in the Global Units are credited and only in
respect of such portion of the aggregate principal amount of New Notes as to
which such participant or participants has or have given such direction.
However, if there is an event of default under the indenture, DTC, Euroclear and
Clearstream will exchange the Global Units and Global Notes for Certificated
Securities, which they will distribute to their participants.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
137
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Units among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Trustee nor we will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
We understand as follows with respect to Euroclear and Clearstream:
Euroclear and Clearstream hold securities for participating organizations and
facilitate the clearance and settlement of securities transactions between their
respective participants through electronic book-entry changes in accounts of
such participants. Euroclear and Clearstream provide to their participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Euroclear and Clearstream interface with domestic securities markets.
Euroclear and Clearstream participants are financial institutions such as
underwriters, securities brokers and dealers, banks, trust companies and certain
other organizations. Indirect access to Euroclear or Clearstream is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodian relationship with Euroclear or Clearstream
participants, either directly or indirectly.
Certificated Securities
Certificated Securities shall be issued in exchange for beneficial
interests in the Global Units and underlying Global Notes (i) for Global Units
or Global Notes held by DTC, if requested by a Holder of such interests or (ii)
if DTC, Euroclear or Clearstream is at any time unwilling or unable to continue
as a depositary for the Global Notes and a successor depositary is not appointed
by us within 90 days.
138
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The following is a summary of certain material U.S. federal income tax
consequences of the exchange, ownership and disposition of Notes and Units to
holders of old units that acquired old units at the initial offering price
pursuant to the initial offering. Unless the context otherwise requires, any
reference in this summary to Units refers to both old units and Exchange Units
and any reference to Notes refers to both old notes and Exchange Notes. Unless
otherwise stated under the heading "Non-U.S. holders" below, this summary deals
only with Units (and the notes comprising the components thereof) held as
capital assets within the meaning of Section 1221 of the Code (as defined below)
by U.S. holders (as defined below). It does not deal with special classes of
holders such as banks, thrifts and other financial institutions, real estate
investment trusts, regulated investment companies, insurance companies, dealers
or traders in securities or currency or tax-exempt investors. This summary also
does not address the tax consequences to U.S. holders that have a functional
currency other than the U.S. Dollar, U.S. expatriates, partnerships or other
entities treated as partnerships that hold Units, persons that hold Units as
part of a straddle, hedging, constructive sale or conversion transaction, or
shareholders, partners or beneficiaries of a holder of Units. It also does not
include any description of any tax consequences under the tax laws of any state
or local government or of any foreign jurisdiction that may be applicable to the
Units (and the notes comprising the components thereof) (a description of
certain Netherlands tax consequences follows this summary). This summary is
based on the Internal Revenue Code of 1986, as amended, which we refer to in
this prospectus as the Code, Treasury regulations under the Code, which we refer
to in this prospectus as the Treasury Regulations, and administrative and
judicial interpretations thereof, as of the date of this prospectus, all of
which are subject to change, possibly on a retroactive basis.
If you are considering exchanging Units, you should consult your own tax
advisor to determine the federal, state, local and foreign income tax
consequences of the exchange, ownership and disposition of the old notes and the
application of the U.S. federal income tax laws to your situation.
As used in this section, the term "U.S. holder" means any beneficial owner
of old units (and the old notes comprising the components thereof) that is, for
United States federal income tax purposes,
o a citizen or resident of the United States,
o a corporation (or other entity taxable as a corporation for U.S.
federal income tax purposes) created or organized in or under the
laws of the United States or of any state thereof or the District of
Columbia,
o an estate the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust or (2) the trust has in effect a
valid election to be treated as a domestic trust for United States
federal income tax purposes.
As used in this discussion, the term Non-U.S. holder means a beneficial
owner of old units (and the old notes comprising the components thereof) that is
not a U.S. holder and is not an entity organized in or under the laws of the
United States, any state thereof or the District of Columbia.
Tax Consequences of the Exchange Offer
The exchange of old units and underlying old notes for publicly registered
Units ("Exchange Units") and underlying publicly registered notes ("Exchange
Notes") having substantially identical terms, under current law, will not be
treated as an "exchange" or other taxable event for federal income tax purposes.
Accordingly,
o holders will not recognize taxable gain or loss upon the receipt of
Exchange Units (and underlying Exchange Notes) in exchange for old
units (and underlying old notes) in the Exchange Offer,
o the holding period for an Exchange Unit (or underlying Exchange
Note) received in the exchange offer will include the holding period
of the old unit (or underlying old note) surrendered in exchange
therefor, and
139
o the adjusted tax basis of an Exchange Unit (or underlying Exchange
Note) immediately after the exchange will be the same as the
adjusted tax basis of the old unit (or underlying old note)
surrendered in exchange therefor.
Tax Consequences of Ownership and Disposition of Notes and Units
U.S. Holders
Allocation of Issue Price. The issue price of a Unit for U.S. federal
income tax purposes will be the first price at which a substantial amount of the
Units are sold to the public. Under Treasury Regulations, we are required to
allocate the issue price of a Unit between the Notes comprising the components
of the Unit based on the relative fair market values of each. The portion of the
issue price of a Unit allocated to each Note will constitute the issue price of
such Note. Such allocation is binding on a U.S. holder unless the holder
discloses on a statement attached to its U.S. federal income tax return that it
is using a different allocation. There can be no assurance, however, that the
IRS will respect our determination of the relative fair market values of the
Notes. If our determination were successfully challenged by the IRS, the amount,
timing, and character of income on a Note could be different from that resulting
under the allocation determined by us.
Interest Income. Stated interest on a Note comprising a portion of a Unit
will be includible in a U.S. holder's gross income as ordinary interest income
at the time it is accrued or received in accordance with the U.S. holder's
method of accounting for United States federal income tax purposes.
Sale, Exchange or Retirement of Notes or Units. Upon sale, exchange, or
retirement of a Note, a U.S. holder generally will recognize gain or loss equal
to the difference between the U.S. holder's adjusted tax basis in the Note and
the amount realized on the sale, exchange, or retirement (less any accrued but
previously unpaid interest, which would be treated as a payment of previously
accrued interest on the Notes). A U.S. holder's adjusted tax basis in a Note
will generally equal the cost of the related Unit allocable to such note as
described above in "-- U.S. Holders -- Allocation of Issue Price." The amount
realized on disposition of a Unit will be treated as an amount realized on
disposition of each Note comprising the components thereof, such amount to be
allocated between the Notes on the basis of the relative fair market values of
each. Assuming the Unit and related Note was held as a capital asset, gain or
loss so recognized will be capital gain or loss and will be long-term capital
gain or loss if, at the time of the sale, exchange, or retirement, the Unit and
related note was held for more than one year. Under current law, net capital
gains of non-corporate taxpayers, under certain circumstances, are taxed at
lower rates than items of ordinary income. The deduction of capital losses is
subject to certain limitations applicable to both corporations and individuals.
Non-U.S. holders
Interest Income. Generally, interest income on a U.S. Note (including
original issue discount) of a Non-U.S. holder that is not effectively connected
with a United States trade or business will be subject to a withholding tax at a
30% rate or, if applicable, a lower tax rate specified by a treaty. However,
interest income (including original issue discount) earned on a U.S. Note by a
Non-U.S. holder may qualify for the "portfolio interest" exemption and therefore
not be subject to United States federal income tax or withholding tax, if such
interest income is not effectively connected with a United States trade or
business of the Non-U.S. holder and if:
o the Non-U.S. holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of the
Company's stock entitled to vote,
o the Non-U.S. holder is not a controlled foreign corporation that is
related to the Company through stock ownership,
o the Non-U.S. holder certifies to the Company or the Company's agent,
under penalties of perjury, that it is not a U.S. holder and
provides its name and address or otherwise satisfies applicable
identification requirements, and
o neither the Company nor its paying agent knows or has reason to know
that the conditions of the exemption are, in fact, not satisfied.
140
In the case of U.S. Notes held by foreign partnerships, the certification
described above generally must be provided by the partners, rather than by the
partnerships, and the partnership must provide certain information, including a
U.S. taxpayer identification number. A look through rule applies in the case of
tiered partnerships.
Subject to the discussion below, a Non-U.S. holder generally will not be
subject to U.S. federal income or withholding tax on interest income on a Dutch
Note.
A Non-U.S. holder generally will be taxed in the same manner as a U.S.
holder with respect to interest income on U.S. Notes or Dutch Notes that is
effectively connected with a United States trade or business of the Non-U.S.
holder unless an applicable treaty provides otherwise. In the case of a Non-U.S.
holder that is eligible for benefits of an income tax treaty with the United
States, such Non-U.S. holder generally will be taxed on its effectively
connected interest income in the same manner as a U.S. holder only if such
income is attributable to a permanent establishment maintained by the Non-U.S.
holder in the United States. Such effectively connected interest received or
accrued by a corporate Non-U.S. holder may also, under certain circumstances, be
subject to an additional "branch profits" tax at a 30% rate or, if applicable, a
lower tax rate specified by a treaty. Even though such effectively connected
interest is subject to U.S. income tax and may be subject to the branch profits
tax, it is not subject to U.S. withholding tax if the holder delivers a properly
executed IRS Form W-8ECI (or a suitable substitute form) to us or our paying
agent and neither we nor our paying agent knows or has reason to know that the
information on the form is incorrect.
Sale, Exchange, or Retirement of Note or Units. A Non-U.S. holder
generally will not be subject to United States federal income tax or withholding
tax on any gain realized on the sale, exchange, or retirement of U.S. Notes or
Dutch Notes or Units unless:
o the gain is effectively connected with a United States trade or
business of the Non-U.S. holder (and, if a treaty applies, the gain
is generally attributable to a United States permanent establishment
maintained by that Non-U.S. holder), or
o in the case of a Non-U.S. holder who is an individual, such holder
is present in the United States for a period or periods aggregating
183 days or more during the taxable year of the disposition, and
either such holder has a "tax home" in the United States or the
disposition is attributable to an office or other fixed place of
business maintained by such holder in the United States.
Information Reporting and Backup Withholding Tax
In general, information reporting on IRS Form 1099 will apply to payments
to a U.S. Holder of principal, premium (if any) and interest on the Notes
comprising the Units and the proceeds of the sale of the Units. Backup
withholding tax may apply to such payments to a non-corporate U.S. holder if:
o the U.S. holder fails to furnish or certify its correct taxpayer
identification number to us or our paying agent in the manner
required,
o we are notified by the IRS that the U.S. holder has failed to report
payments of interest or dividends properly, or
o under certain circumstances the U.S. holder fails to certify that it
has not been notified by the IRS that it is subject to backup
withholding for failure to report interest or dividend payments.
Information reporting on IRS Form 1099 and backup withholding tax
generally will not apply to payments of interest on Notes to a Non-U.S. holder
if the certification or identification requirements described in "-- Non-U.S.
holders -- Interest Income" above are satisfied by the holder, unless the payor
knows or has reason to know that the holder is not entitled to an exemption from
information reporting or backup withholding tax. However, we may report payments
of interest on the U.S. Notes to a Non-U.S. holder on IRS Form 1042-S regardless
of whether a Non-U.S. holder provides the certification or identification
requirements described above.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of Notes or Units effected
outside the United States by a foreign office of a "broker" (as defined in
applicable Treasury Regulations), unless the broker is a United States person or
has certain other connections to the United States. Payment of the proceeds of
any such sale effected outside the United States by
141
a foreign office of a broker with such connections to the United States
described in the preceding sentence will not be subject to backup withholding
tax, but will be subject to information reporting requirements, unless the
broker has documentary evidence in its records that the beneficial owner is a
Non-U.S. holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption. Payment of the proceeds of any such sale to
or through the United States office of a broker is subject to information
reporting and backup withholding requirements unless the beneficial owner of the
Notes provides the certification described in "-- Non-U.S. holders -- Interest
Income" or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a credit against that holder's United States federal income tax liability and
may entitle the holder to a refund, provided that the required information is
furnished to the IRS. The current rate for backup withholding tax is 28%.
The foregoing summary of certain United States federal income tax
consequences of the exchange, ownership and disposition of Units and Notes is
intended for general information. You are urged to consult with your own tax
advisor as the U.S. federal income tax consequences of an investment in the
Units as well as the consequences under state, local and foreign income tax law.
Non-U.S. holders are urged to consult their own tax advisors as to the effect of
income tax treaties and reporting requirements with regard to the Units.
142
CERTAIN NETHERLANDS TAX CONSEQUENCES
General
The following summary describes the principal Netherlands tax consequences
of the acquisition, holding, redemption and disposal of Dutch notes. This
summary does not purport to be a comprehensive description of all Netherlands
tax considerations that may be relevant to a decision to acquire, to hold, and
to dispose of the Dutch notes. Each prospective noteholder should consult a
professional adviser with respect to the tax consequences of an investment in
the Dutch notes. The discussion of certain Netherlands taxes set forth below is
included for general information purposes only.
This summary is based on the Netherlands tax legislation, published case
law, treaties, rules, regulations and similar documentation, in force as of the
date of this prospectus, without prejudice to any amendments introduced at a
later date and implemented with retroactive effect.
This summary does not address the Netherlands tax consequences of a holder
of Dutch notes who holds a substantial interest in the Dutch issuer, within the
meaning of Section 4.3 of the Income Tax Act 2001. Generally speaking, a
noteholder holds a substantial interest in the Dutch issuer, if such noteholder,
alone or together with his or her partner (statutory defined term) or certain
other related persons, directly or indirectly, holds (i) an interest of 5
percent or more of the total issued capital of the Dutch issuer or of 5 percent
or more of the issued capital of a certain class of shares of the Dutch issuer,
(ii) rights to acquire, directly or indirectly, such interest or (iii) certain
profit sharing rights in the Dutch issuer.
Withholding Tax
No Netherlands withholding tax is due upon payments on the Dutch notes.
Corporate Income Tax and Individual Income Tax
Residents of the Netherlands. If the holder of Dutch notes is subject to
Netherlands corporate income tax and the Dutch notes are attributable to its
(deemed) business assets, income derived from the Dutch notes and gains realized
upon the redemption and disposal of the Dutch notes are generally taxable in the
Netherlands.
If the holder of Dutch notes is an individual, resident or deemed to be
resident of the Netherlands for Netherlands tax purposes (including the
individual holder of Dutch notes who has opted to be taxed as a resident of the
Netherlands), the income derived from the Dutch notes and the gains realized
upon the redemption and disposal of the Dutch notes are taxable at the
progressive rates of the Income Tax Act 2001, if:
(i) the holder of Dutch notes has an enterprise or an interest in an
enterprise, to which enterprise the Dutch notes are attributable; or
(ii) such income or gains qualify as "income from miscellaneous
activities" (resultaat uit overige werkzaamheden) within the meaning
of Section 3.4 of the Income Tax Act 2001, which include activities
with respect to the Dutch notes that exceed "regular, active
portfolio management" (normaal, actief vermogensbeheer).
If neither condition (i) nor condition (ii) applies to the individual
holder of Dutch notes, the actual income derived from the Dutch notes and the
actual gains realized with respect to the Dutch notes will not be taxable.
Instead, such holder of Dutch notes will be taxed at a flat rate of 30% on
deemed income from "savings and investments" (sparen en beleggen) within the
meaning of Section 5.1 of the Income Tax Act 2001. This deemed income amounts to
4% of the average of the individual's "yield basis" (rendementsgrondslag) within
the meaning of article 5.3 of the Income Tax Act 2001 at the beginning of the
calendar year and the individual's yield basis at the end of the calendar year,
insofar the average exceeds a certain threshold. The fair market value of the
Dutch notes will be included in the individual's yield basis.
143
Non-residents of the Netherlands. A holder of Dutch notes that is not a
resident nor deemed to be a resident of the Netherlands for Netherlands tax
purposes (nor, if he or she is an individual, has opted to be taxed as a
resident of the Netherlands) is not taxable in respect of income derived from
the Dutch notes and gains realized upon the redemption and disposal of the Dutch
notes, unless:
(i) the holder of Dutch notes has an enterprise or an interest in an
enterprise, that is, in whole or in part, carried on through a
permanent establishment or a permanent representative in the
Netherlands to which Netherlands permanent establishment or
permanent representative the Dutch notes are attributable, or
(ii) the holder of Dutch notes is entitled to a share in the profits of
an enterprise that is effectively managed in the Netherlands, other
than by way of securities or through an employment contract, and to
which enterprise the Dutch notes are attributable; or
(iii) the holder of Dutch notes is an individual and such income or gains
qualify as "income from miscellaneous activities" (resultaat uit
overige werkzaamheden) in the Netherlands within the meaning of
Section 3.4 of the Income Tax Act 2001, which include activities in
the Netherlands with respect to the Dutch notes that exceed
"regular, active portfolio management" (normaal, actief
vermogensbeheer).
Gift and Inheritance Taxes
Residents of the Netherlands. Generally, gift and inheritance taxes will
be due in the Netherlands in respect of the acquisition of the Dutch notes by
way of a gift by, or on the death of, a holder of Dutch notes who is a resident
or deemed to be a resident of the Netherlands for the purposes of Netherlands
gift and inheritance tax at the time of the gift or his or her death.
An individual of the Netherlands nationality is deemed to be a resident of
the Netherlands for the purposes of the Netherlands gift and inheritance tax, if
he or she has been resident in the Netherlands during the ten years preceding
the gift or his or her death. An individual of any other nationality is deemed
to be a resident of the Netherlands for the purposes of the Netherlands gift and
inheritance tax only if he or she has been residing in the Netherlands at any
time during the twelve months preceding the time of the gift.
Non-residents of the Netherlands. No gift or inheritance taxes will arise
in the Netherlands in respect of the acquisition of the Dutch notes by way of
gift by, or as a result of the death of, a holder of Dutch notes who is neither
a resident nor deemed to be a resident of the Netherlands for the purposes of
the Netherlands gift and inheritance tax, unless:
(i) such holder of Dutch notes at the time of the gift has or at the
time of his or her death had an enterprise or an interest in an
enterprise that is or was, in whole or in part, carried on through a
permanent establishment or a permanent representative in the
Netherlands and to which Netherlands permanent establishment or
permanent representative the Dutch notes are or were attributable;
or
(ii) the Dutch notes are or were attributable to the assets of an
enterprise that is effectively managed in the Netherlands and the
donor is or the deceased was entitled to a share in the profits of
that enterprise, at the time of the gift or at the time of his or
her death, other than by way of securities or through an employment
contract; or
(iii) in the case of a gift of the Dutch notes by an individual who at the
date of the gift was neither a resident nor deemed to be a resident
of the Netherlands, such individual dies within 180 days after the
date of the gift, while at the time of his or her death, being a
resident or deemed to be a resident of the Netherlands.
Treaties. Treaties may limit the Dutch sovereignty to levy gift and
inheritance tax.
Other Taxes and Duties
No Netherlands VAT, capital duty, registration tax, customs duty, transfer
tax, stamp duty or any other similar documentary tax or duty, will be due in the
Netherlands by a holder of Dutch notes in respect of or in connection with the
subscription, issue, placement, allotment or delivery of the Dutch notes.
144
EU Savings Directive
On June 3, 2003, the European Council of Economics and Finance Ministers
adopted a Directive on the taxation of savings income under which Member States
will be required, from a date not earlier than January 1, 2005, to provide to
the tax authorities of another Member State details of payments of interest (or
similar income) paid by a person within its jurisdiction to an individual
resident in that other Member State, except that, for a transitional period,
Belgium, Luxembourg and Austria will instead be required (unless during that
period they elect otherwise) to operate a withholding system in relation to such
payments (the ending of such transitional period being dependent upon the
conclusion of certain other agreements relating to information exchange with
certain other countries).
Dutch tax aspects in relation to the exchange
Considering the fact that, except for the removal of the legend relating
to the SEC registration, the terms and conditions of the old notes are identical
to the terms and conditions of the new notes, it is reasonable to take the view
that the Exchange should not constitute a taxable event for Netherlands tax
purposes. Since there is no authority or guidance with respect to this issue, it
is, however, possible that the Dutch tax authorities will assert that the
Exchange does constitute a taxable event.
In the situation that the Dutch tax authorities take the view that the
Exchange constitues a taxable event, a gain (if any) realized as a result of the
Exchange by a Dutch resident corporate noteholder will, in principle, be
taxable. If certain conditions are met, the gain can be deferred under the
"like-kind-exchange" case law (ruilarresten).
If any gain would be realized as a result of the Exchange by a Dutch
resident individual noteholder, such gain would not be taxable when the notes
are held as a passive investment and as such are part of the "yield basis"
(rendementsgrondslag) within the meaning of article 5.3 of the Income Tax Act
2001. Such Dutch resident individual holder will be taxed on deemed income from
"savings and investments" (sparen en beleggen) within the meaning of Section 5.1
of the Income Tax Act 2001. A possible gain realized by a Dutch resident
individual holder would only be taxable if:
(i) the noteholder has an enterprise or an interest in an enterprise, to
which enterprise the Notes are attributable, with an exception for a
possible deferral for gains realized upon the Exchange under the
"like-kind-exchange" case law (ruilarresten); or
(ii) such gain qualifies as "income from miscellaneous activities"
(resultaat uit overige werkzaamheden) within the meaning of Section
3.4 of the Dutch Income Tax Act 2001, which include the performance
of activities with respect to the Notes that exceed "regular, active
portfolio management" (normaal, actief vermogensbeheer).
If a non-resident noteholder would realize a gain as a result of the
Exchange, such gain would only be taxable if:
(i) the noteholder has an enterprise or an interest in an enterprise,
that is, in whole or in part, carried on through a permanent
establishment or a permanent representative in the Netherlands to
which enterprise Netherlands permanent establishment or permanent
representative the Notes are attributable, with an exception for a
possible deferral for gains realized upon the Exchange under the
"like-kind-exchange" case law (ruilarresten); or
(ii) the noteholder is an individual and such gain qualifies as "income
from miscellaneous activities" (resultaat uit overige werkzaamheden)
in the Netherlands within the meaning of Section 3.4 of the Dutch
Income Tax Act 2001, which include the performance of activities in
the Netherlands with respect to the Notes that exceed "regular,
active portfolio management" (normaal, actief vermogensbeheer).
145
PLAN OF DISTRIBUTION
The exchange offer is not being made to, nor will we accept surrenders of
old units for exchange from, holders of old units in any jurisdiction in which
the exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
This communication is directed solely at persons who are outside the
Netherlands and Belgium. (all such persons together are referred to as "relevant
persons"). This communication must not be acted on or relied on by persons who
are not relevant persons. Any investment or investment activity to which this
communication relates is available only to relevant persons and will be engaged
in only with relevant persons.
The distribution of this prospectus and the offer and sale of the new
units may be restricted by law in certain jurisdictions. Persons who come into
possession of this prospectus or any of the new units must inform themselves
about and observe any such restrictions. You must comply with all applicable
laws and regulations in force in any jurisdiction in which you purchase, offer
or sell the new units or possess or distribute this prospectus and, in
connection with any purchase, offer or sale by you of the new units, must obtain
any consent, approval or permission required under the laws and regulations in
force in any jurisdiction to which you are subject or in which you make such
purchase, offer or sale.
Under existing SEC interpretations, the new units will be freely
transferable by holders other than our affiliates after the exchange offer
without further registration under the Securities Act if the holder of the new
units represents that it is acquiring the new units in the ordinary course of
its business, that it has no arrangement or understanding with any person to
participate in the distribution of the new units and that it is not an affiliate
of ours, as such terms are interpreted by the SEC; provided that broker-dealers
receiving new units in the exchange offer will have a prospectus delivery
requirement with respect to resales of such new units. While the SEC has not
taken a position with respect to this particular transaction, under existing SEC
interpretations relating to transactions structured substantially like this
exchange offer, participating broker-dealers may fulfill their prospectus
delivery requirements with respect to new units (other than a resale of an
unsold allotment of the new units) with the prospectus contained in the exchange
offer registration statement.
Each broker-dealer that receives new units for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new units. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new units received in exchange for old units where
such old units were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 90 days after the date
of this prospectus, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 2004 (90 days after the date of this prospectus), all dealers
effecting transactions in the new units may be required to deliver a prospectus.
A broker-dealer intending to use this prospectus in the resale of new
units must so notify us on or prior to the expiration date. This notice may be
given in the space provided in the letter of transmittal or may be delivered to
the exchange agent.
We may, in certain cases, issue a notice suspending use of this exchange
offer registration statement. If we do so, the period during which the
registration statement must remain effective will be extended for a number of
days equal to the number of days the registration statement was in suspense.
We will not receive any proceeds from any sale of new units by
brokers-dealers. New units received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new units or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new units. Any broker-dealer
that resells the new units that were received by it for its own account pursuant
to the exchange offer and any broker or dealer that participates in a
distribution of such new units may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit of any such resale of new units and
any commissions or
146
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the date of this prospectus, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holder of the old
units) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the old units (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the new units and the guarantees
offered hereby will be passed upon for the Company by Golenbock Eiseman Assor
Bell & Peskoe LLP, New York, New York. Certain legal matters with respect to
Philipp Brothers Netherlands III B.V. and Phibro Animal Health SA will be passed
upon for the Company by Allen & Overy.
EXPERTS
The consolidated financial statements as of June 30, 2003 and 2002 and for
each of the three years in the period ended June 30, 2003 included in this
prospectus, have been so included in reliance on the report (which contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern as described in Note 2 to the consolidated financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are not subject to the reporting requirements of the Securities
Exchange Act of 1934, but have voluntarily filed certain periodic reports and
other information with the SEC. Upon effectiveness of the registration
statement, we will become subject to the informational requirements of the
Securities and Exchange Act of 1934, and, in accordance therewith, will file
reports and other information with the SEC. Those reports and other information
so filed with the SEC may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of those materials can be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. You may call the SEC at
1-800-SEC-0330 to obtain information on the operation of the public reference
room. The SEC also maintains a site on the World Wide Web at http://www.sec.gov,
which contains reports and other information regarding registrants that file
electronically with the SEC.
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, covering the new units to be issued in the exchange
offer (Registration No. 333- ). This prospectus, which is a part of the
registration statement, does not contain all of the information included in the
registration statement. Any statement made in this prospectus concerning the
contents of any contract, agreement or other document is not necessarily
complete. For further information regarding us and the new units to be issued in
the exchange offer, please reference the registration statement, including its
exhibits. If we have filed any contract, agreement or other document as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the documents or matter involved.
Copies of the registration statement, including all related exhibits and
schedules, may be inspected without charge at the public reference facilities
maintained by the SEC, or obtained at prescribed rates from the Public Reference
Section of the SEC. In addition, you may request a copy of any of these filings,
at no cost, by writing our Chief Financial Officer at our principal executive
offices, which are located at One Parker Plaza, 400 Kelby Street, Fort Lee, NJ
07024 telephone number (201) 944-6020.
147
SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES
Philipp Brothers Netherlands III B.V. ("PB Netherlands") is a company
incorporated under the laws of the Netherlands. Certain of its directors and
executive officers are resident outside of the United States and many of its
assets are located outside of the United States. Although PB Netherlands has
agreed, in accordance with the terms of the indenture, to accept service of
process in the United States by agents designated for such purpose, it may not
be possible for holders of new notes (a) to effect service of process upon
certain of its directors or officers or (b) to enforce judgements of courts of
the United States predicated upon the civil liability of such persons under the
United States securities law against any such persons in the courts of a foreign
jurisdiction.
Philipp Brothers Netherlands III B.V.
Philipp Brothers Netherlands III B.V., the Dutch issuer, is an indirect
wholly-owned subsidiary of the US issuer and is incorporated under the laws of
the Netherlands as a private company with limited liability. The Dutch issuer is
a holding company formed to finance the operations of Phibro Animal Health SA, a
Belgian company ("PAH Belgium"), which owns and operates our Rixensart, Belgium
plant. Such plant uses fermentation processes to produce the active ingredients
semduramycin and virginiamycin and conducts all of our fermentation development
activities.
Philipp Brothers Netherlands II B.V. is the sole managing director of
Philipp Brothers Netherlands III B.V. The managing directors of Philipp Brothers
Netherlands II B.V. are Mr. Jack Bendheim and Mr. Joseph Katzenstein. Mr.
Bendheim has served as a managing director of Philipp Brothers Netherlands II
B.V., since November 2000. See also "Management" for additional information
regarding Mr. Bendheim. Mr. Joseph Katzenstein, age 62, has served as a managing
director of Philipp Brothers Netherlands II B.V. since February 2001. Mr.
Katzenstein, has also served as the secretary and treasurer of Phibro Animal
Health Corporation since 1982. Mr. Katzenstein served as corporate controller of
Phibro Animal Health Corporation from 1965 to 1985.
148
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Phibro Animal Health Corporation Page
----
Audited Consolidated Financial Statements
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of June 30, 2003 and 2002.................. F-3
Consolidated Statements of Operations and Comprehensive (Loss)
for the years ended June 30, 2003, 2002 and 2001..................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended June 30, 2003, 2002 and 2001..................... F-5
Consolidated Statements of Cash Flows
for the years ended June 30, 2003, 2002 and 2001..................... F-6
Notes to Consolidated Financial Statements................................ F-7
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2003 and
June 30, 2003........................................................ F-37
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the six months ended December 31, 2003 and 2002.... F-38
Condensed Consolidated Statements of Changes in Stockholders' Deficit
for the six months ended December 31, 2003........................... F-39
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 2003 and 2002 ................. F-40
Notes to Condensed Consolidated Financial Statements...................... F-41
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Phibro Animal Health Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive (loss), changes in
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the financial position of Phibro Animal Health Corporation (formerly
Philipp Brothers Chemicals, Inc.) and its subsidiaries at June 30, 2003 and June
30, 2002, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2, the Company's senior
bank credit facility and note payable to Pfizer Inc. mature in November 2003 and
March 2004, respectively. It is unlikely the Company will have sufficient cash
resources from operations to repay these obligations as they become due. The
Company plans to refinance these obligations prior to their respective
maturities; however, there is no assurance that it will be able to do so on
terms acceptable to the Company, if at all. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are further described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
In fiscal 2003, the Company adopted a new accounting standard for the accounting
for the impairment or disposal of long-lived assets.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 29, 2003, except for Note 20, as to which the date is February 17, 2004.
F-2
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30,
----------------------
2003 2002
--------- ---------
(In thousands, except
share and per share
amounts)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 11,179 $ 6,419
Trade receivables, less allowance for doubtful accounts of $1,445 at
June 30, 2003 and $1,485 at June 30, 2002........................................ 55,671 57,979
Other receivables.................................................................. 3,642 3,075
Inventories........................................................................ 88,767 85,396
Prepaid expenses and other current assets.......................................... 10,188 15,325
Current assets from discontinued operations........................................ 4,942 16,780
-------- --------
Total current assets........................................................... 174,389 184,974
Property, plant and equipment, net................................................... 66,440 65,665
Intangibles.......................................................................... 8,669 9,633
Other assets......................................................................... 14,199 14,448
Other assets from discontinued operations............................................ 10,650 21,724
-------- --------
$274,347 $296,444
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft..................................................................... $ 1,686 $ 7,767
Loans payable to banks............................................................. 38,914 41,535
Current portion of long-term debt.................................................. 24,124 8,851
Accounts payable................................................................... 56,915 38,158
Accrued expenses and other current liabilities..................................... 41,609 29,813
Current liabilities from discontinued operations................................... 2,051 8,389
-------- --------
Total current liabilities...................................................... 165,299 134,513
Long-term debt....................................................................... 102,391 136,641
Other liabilities.................................................................... 22,088 28,399
Other liabilities from discontinued operations....................................... 198 1,478
-------- --------
Total liabilities.............................................................. 289,976 301,031
-------- --------
Commitments and contingencies
Redeemable securities:
Series B and C preferred stock..................................................... 68,881 56,602
-------- --------
Stockholders' (deficit):
Preferred stock -- $100 par value, 150,543 shares authorized, none issued at
June 30, 2003 and 2002; Series A preferred stock -- $100 par value, 6% non-
cumulative, 5,207 shares authorized and issued at June 30, 2003 and 2002....... 521 521
Common stock-- $0.10 par value, 30,300 authorized and 24,488 shares issued
at June 30, 2003 and 2002........................................................ 2 2
Paid-in capital.................................................................... 860 740
Accumulated deficit................................................................ (79,489) (49,652)
Accumulated other comprehensive income (loss):
Gain on derivative instruments................................................... 81 1,062
Cumulative currency translation adjustment....................................... (6,485) (13,862)
-------- --------
Total stockholders' (deficit).................................................. (84,510) (61,189)
-------- --------
$274,347 $296,444
======== ========
The accompanying notes are an integral part of the
consolidated financial statements
F-3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)
For the Years Ended June 30,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
Net sales.............................................................. $355,225 $340,549 $319,664
Cost of goods sold..................................................... 263,728 258,555 250,305
-------- -------- --------
Gross profit........................................................... 91,497 81,994 69,359
Selling, general and administrative expenses (includes
litigation income of $3,040 in 2003 and $742 in 2002)................ 66,360 72,277 63,925
-------- -------- --------
Operating income..................................................... 25,137 9,717 5,434
Other:
Interest expense..................................................... 16,342 18,158 18,297
Interest (income).................................................... (86) (356) (566)
Other expense, net................................................... 1,277 3,104 855
(Gains) from sale of assets.......................................... (127) (18) (1,457)
-------- -------- --------
Income (loss) from continuing operations before income taxes........... 7,731 (11,171) (11,695)
Provision (benefit) for income taxes................................... 10,076 14,829 (381)
-------- -------- --------
(Loss) from continuing operations.................................... (2,345) (26,000) (11,314)
Discontinued operations:
(Loss) from discontinued operations (net of income taxes)............ (14,531) (25,770) (3,581)
(Loss) on disposal of discontinued operations (net of income taxes).. (683) -- --
-------- -------- --------
Net (loss)........................................................... (17,559) (51,770) (14,895)
Other comprehensive income (loss):
Change in derivative instruments..................................... (981) 1,062 --
Change in currency translation adjustment............................ 7,377 (6,125) (5,146)
-------- -------- --------
Comprehensive (loss)................................................. $(11,163) $(56,833) $(20,041)
======== ======== ========
Net (loss)............................................................. (17,559) (51,770) (14,895)
Dividends on preferred stock........................................... 12,278 7,623 8,172
-------- -------- --------
Net (loss) available to common stockholders............................ (29,837) (59,393) (23,067)
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements
F-4
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 2000, 2001, 2002 and 2003
------------------------------------------------------------------------------------
Retained Accumulated
Preferred Common Stock Earnings Other
Stock --------------------- Paid-in (Accumulated Comprehensive
Series A Class "A" Class "B" Capital Deficit) (Loss) income Total
--------- --------- --------- ------- ------------ ------------- ---------
(In thousands)
Balance, July 1, 2000 ....................... $521 $1 $1 $878 $ 32,808 $ (2,591) $ 31,618
Accretion of redeemable preferred
securities to fair market value (4,192) (4,192)
Dividends on Series B and C
redeemable preferred stock............... (3,980) (3,980)
Foreign currency translation
adjustment............................... (5,146) (5,146)
Net (loss)................................. (14,895) (14,895)
---- -- -- ---- -------- -------- --------
Balance, June 30, 2001....................... $521 $1 $1 $878 $ 9,741 $ (7,737) $ 3,405
==== == == ==== ======== ======== ========
Dividends on Series B and C
redeemable preferred stock............... (7,623) (7,623)
Change in derivative instruments 1,062 1,062
Foreign currency translation
adjustment............................... (6,125) (6,125)
Receivable from principal
shareholder.............................. (138) (138)
Net (loss)................................. (51,770) (51,770)
---- -- -- ---- -------- -------- --------
Balance, June 30, 2002....................... $521 $1 $1 $740 $(49,652) $(12,800) $(61,189)
==== == == ==== ======== ======== ========
Dividends on Series B and C
redeemable preferred stock.. (8,808) (8,808)
Equity value accreted on Series B
and C redeemable preferred
stock.................................... (3,470) (3,470)
Change in derivative instruments (981) (981)
Foreign currency translation
adjustment............................... 7,377 7,377
Payable to principal shareholder 120 120
Net (loss)................................. (17,559) (17,559)
---- -- -- ---- -------- -------- --------
Balance, June 30, 2003....................... $521 $1 $1 $860 $(79,489) $ (6,404) $(84,510)
==== == == ==== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements
F-5
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
---------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
Operating activities:
Net (loss)........................................................... $(17,559) $(51,770) $(14,895)
Adjustment for discontinued operations............................... 15,214 25,770 3,581
-------- -------- --------
Income (loss) from continuing operations............................. (2,345) (26,000) (11,314)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided (used) by operating activities:
Depreciation and amortization...................................... 12,883 12,680 10,405
Deferred income taxes.............................................. 7,228 12,512 (5,731)
Gains from sale of assets.......................................... (127) (18) (1,457)
Change in redemption amount of redeemable common stock............. -- (378) (3,491)
Unrealized foreign currency losses................................. 390 2,120 --
Other.............................................................. 79 2,175 784
Changes in operating assets and liabilities:
Accounts receivable.............................................. 3,008 9,756 (1,607)
Inventories...................................................... (522) (13,853) (1,570)
Prepaid expenses and other current assets........................ (3,177) (2,780) 5,975
Other assets..................................................... (2,632) 2,667 2,782
Accounts payable................................................. 20,548 (8,058) 18,243
Accrued expenses and other liabilities........................... (1,462) 7,222 2,725
Cash provided (used) by discontinued operations...................... 786 (2,790) (2,603)
-------- -------- --------
Net cash provided (used) by operating activities............... 34,657 (4,745) 13,141
-------- -------- --------
Investing activities:
Capital expenditures................................................. (9,045) (8,677) (6,610)
Acquisition of a business, net of cash acquired...................... -- (7,182) (51,700)
Proceeds from property damage claim.................................. -- 411 --
Proceeds from sale of assets......................................... 2,566 80 25,418
Other investing...................................................... 724 580 (320)
Discontinued operations.............................................. 1,784 (2,573) (6,937)
-------- -------- --------
Net cash (used) by investing activities........................ (3,971) (17,361) (40,149)
-------- -------- --------
Financing activities:
Cash overdraft....................................................... (6,081) 3,438 2,654
Net increase (decrease) in short-term debt........................... (6,260) 12,656 (8,006)
Proceeds from long-term debt......................................... 2,000 2,322 9,363
Proceeds from issuance of redeemable preferred stock................. -- -- 45,000
Payments of long-term debt........................................... (16,037) (4,739) (4,924)
Other financing...................................................... -- -- (4,192)
-------- -------- --------
Net cash provided (used) by financing activities............... (26,378) 13,677 39,895
-------- -------- --------
Effect of exchange rate changes on cash................................ 452 3 (445)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents............. 4,760 (8,426) 12,442
Cash and cash equivalents at beginning of period....................... 6,419 14,845 2,403
-------- -------- --------
Cash and cash equivalents at end of period............................. $ 11,179 $ 6,419 $ 14,845
======== ======== ========
Supplemental Cash Flow Information:
Interest paid........................................................ $ 16,244 $ 17,173 $ 16,810
Income taxes paid.................................................... 3,062 2,645 704
Noncash investing and financing activities:
Debt issued in connection with acquisition........................... -- -- 25,093
The accompanying notes are an integral part of the
consolidated financial statements
F-6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Description of Business
Phibro Animal Health Corporation (formerly Philipp Brothers Chemicals,
Inc.) (the "Company") is a leading diversified global manufacturer and marketer
of a broad range of animal health and nutrition products, specifically medicated
feed additives and nutritional feed additives, which the Company sells
throughout the world predominately to the poultry, swine and cattle markets. The
Company is also a specialty chemicals manufacturer and marketer, serving
numerous markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
The Company consolidates the financial statements of Koffolk (1949) Ltd.
(Israel) ("Koffolk") 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 Company's Odda, Carbide, and MRT businesses have been classified as
discontinued operations, as discussed in Note 3. These footnotes present
information only for continuing operations, unless otherwise indicated.
The Company presents its consolidated financial statements on the basis of
its fiscal year ending June 30. All references to years 2003, 2002, and 2001 in
these financial statements refer to the fiscal year ended June 30 of that year.
Liquidity and Refinancing Risk:
The Company's senior bank credit facility and its note payable to Pfizer
Inc. ("Pfizer") mature in November 2003 and March 2004, respectively (See Note
8). It is unlikely the Company will have sufficient cash resources from
operations to repay these obligations as they come due.
In connection with the Company's acquisition in November 2000 of the
Medicated Feed Additives business of Pfizer (the "MFA acquisition"), it incurred
certain obligations to Pfizer (amounts are shown as of June 30, 2003), the
following of which will be terminated and satisfied in full by the payment to
Pfizer of approximately $28,500, plus accrued interest on the existing
promissory note due 2004, from the proceeds of the Notes: (i) $20,075 aggregate
principal amount of such promissory note; (ii) $12,826 of accounts payable,
(iii) $9,257 of accrued expenses; and (iv) future contingent purchase price
obligations under the Pfizer agreements.
The Company is currently pursuing the issuance of $105,000 of Senior
Secured Notes due 2007 (the "Notes"). Concurrently, the Company is purchasing
through privately negotiated transactions up to $51,900 of its 9 7/8% Senior
Subordinated Notes due 2008 ("Existing Notes") at a price equal to 60% of the
principal amount thereof, plus accrued and unpaid interest. The offering is
subject to certain conditions, including, among other things, receiving consents
of holders of Existing Notes that represent more than 50% of the outstanding
principal amount of the Existing Notes. The Company will use the proceeds from
the Notes to repurchase the Existing Notes, repay its senior credit facility,
and pay certain of its outstanding obligations to Pfizer, including the note
payable due 2004.
If the Company is unable to refinance these obligations on acceptable
terms, the lenders could declare the loans to be in default and exercise their
rights under the respective agreements, and the Company might be required to
take actions outside of the ordinary course of operations to generate cash or
otherwise settle these obligations, all of which would have a material adverse
impact on the Company's financial position, results of operations, and cash
flows. There can be no assurance the Company will be successful in executing the
F-7
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
refinancing plan. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company intends to sell PMC to Palladium Equity Partners II, LP and
certain of its affiliates (the "Palladium Investors"). The material elements of
the transactions relating to PMC include the following: (i) the transfer of
ownership to the Palladium Investors of PMC; (ii) the reduction of the preferred
stock of the Palladium Investors from $68.9 million (as of June 30, 2003) to
$15.2 million (as of September 30, 2003); (iii) the termination of any
obligation of the Company or any Restricted Subsidiary of the Company in respect
of the $2.25 million annual management advisory fee; (iv) a separate cash
payment to the Palladium Investors of $10 million (from the recent sale of MRT);
(v) payments by PMC to the Company for central support services for the next
three years of $1 million, $0.5 million and $0.2 million, respectively; and (vi)
supply arrangements between the Company and PMC with respect to manganous oxide
and red iron oxide. The PMC transactions are subject to definitive documentation
that is expected to include customary representations, warranties and
indemnities of the Company, and provisions for working capital adjustments and
settlement of intercompany accounts. Any transaction with the Palladium
Investors is dependent upon successful completion of the refinancing plan.
Other Risks and Uncertainties:
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and subsidiaries are subject to a
wide variety of complex and stringent federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials and wastes, the remediation of contaminated soil and
groundwater, the manufacture, sale and use of pesticides and the health and
safety of employees. As such, the nature of the Company's current and former
operations and those of its subsidiaries exposes the Company and its
subsidiaries to the risk of claims with respect to such matters.
Use of Estimates:
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. Actual results could differ from these estimates. Significant
estimates include reserves for bad debts, inventory obsolescence, environmental
matters, depreciation and amortization periods of long-lived assets,
recoverability of long-lived assets and realizability of deferred tax assets.
F-8
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Revenue Recognition:
Revenue is recognized upon transfer of title and risk of loss to the
customer, generally at time of shipment. Net sales reflect total sales billed,
less reductions for goods returned, trade discounts and customer allowances.
Cash and Cash Equivalents:
Cash equivalents include highly liquid investments with maturities of
three months or less when purchased.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average methods; cost for
certain inventories is determined under the last-in, first-out (LIFO) method.
Inventories valued at LIFO amounted to $3,805 and $3,111 at June 30, 2003 and
2002, respectively. Obsolete and unsaleable inventories are reflected at
estimated net realizable value. Inventory costs include materials, direct labor
and manufacturing overhead. Inventories were:
As of June 30,
-------------------
2003 2002
------- -------
Raw materials................................... $22,277 $22,501
Work-in-process................................. 1,765 2,155
Finished goods.................................. 65,357 61,261
Excess of FIFO cost over LIFO cost.............. (632) (521)
------- -------
Total inventory................................. $88,767 $85,396
======= =======
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. The Company capitalizes
interest expense as part of the cost of construction of facilities and
equipment. Interest expense capitalized was $0, $106 and $227 in 2003, 2002 and
2001, respectively.
Depreciation is charged to results of operations using the straight-line
method based upon the assets' estimated useful lives ranging from 8 to 20 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
Deferred Financing Costs:
Deferred financing costs related to the senior subordinated notes are
amortized using the interest method over the ten-year life of the notes.
Deferred financing costs related to the senior credit facility are amortized
over the three-year life of the agreement.
Intangibles:
Intangible assets with determinable useful lives are amortized on a
straight-line basis over their estimated useful lives of 10 years.
Product intangibles cost arising from the MFA acquisition was $10,449 at
June 30, 2003 and 2002 and accumulated amortization of $1,780 and $816 at June
30, 2003 and 2002, respectively. Amortization expense was $964, $816 and $0 for
2003, 2002 and 2001, respectively. Amortization expense from the MFA acquisition
for each of the next five years from 2004 to 2008 will be $1,045 per year.
Foreign Currency Translation:
Financial position and results of operations of the Company's
international subsidiaries generally are measured using local currencies as the
functional currency. Assets and liabilities of these operations are translated
at the exchange rates in effect at each fiscal year end. The translation
adjustments related to assets and
F-9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
liabilities that arise from the use of differing exchange rates from period to
period are included in accumulated other comprehensive loss in shareholders'
equity. Income statement accounts are translated at the average rates of
exchange prevailing during the year.
A business unit of Koffolk and all of Planalquimica operate primarily in
U.S. dollars. The U.S. dollar is designated as the functional currency for these
businesses and translation gains and losses are included in determining net
income or loss.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction and
translation losses were $480, $3,027 and $711 for 2003, 2002 and 2001,
respectively, and were included in other expense, net in the consolidated
statements of operations.
Derivative Financial Instruments:
Effective for 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended ("SFAS No. 133"). The standard requires all derivative
financial instruments be recorded on the consolidated balance sheet at fair
value. Changes in the fair value of derivatives are recorded in results of
operations or accumulated other comprehensive income, depending on whether a
derivative is designated and effective as part of a hedge transaction and, if it
is, the type of hedge transaction. Gains and losses on derivative instruments
reported in accumulated other comprehensive income are included in operations in
the periods in which operations are affected by the hedged item. The cumulative
effect of a change in accounting principle due to the adoption of SFAS No. 133
was not material.
Recoverability of Long-Lived Assets:
The Company evaluates the recoverability of long-lived assets, including
intangible assets, when events or circumstances indicate that a diminution in
value may have occurred, using financial indicators such as historical and
future ability to generate cash flows from operations. The Company's policy is
to record an impairment loss in the period it is determined the carrying amount
of the asset may not be recoverable. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future net cash flows (undiscounted and without interest or income
taxes) are less than the carrying amount of the assets.
Environmental Liabilities:
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate. The
Company capitalizes expenditures made to improve the condition of property,
compared with the condition of that property when constructed or acquired. The
Company also capitalizes expenditures that prevent future environmental
contamination. Other expenditures are expensed as incurred. The Company records
the expense and related liability in the period an environmental assessment
indicates remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability are based upon currently available facts,
existing technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered, including prior experience in
remediation of contaminated sites, other companies' experience, and data
released by the U.S. Environmental Protection Agency or other organizations.
When such costs will be incurred over a long-term period and can be reliably
estimated as to timing, the liabilities are included in the consolidated balance
sheet at their discounted amounts.
Income Taxes:
Income tax expense includes U.S. federal, state, and foreign income taxes.
The tax effect of certain temporary differences between amounts recognized for
financial reporting purposes and amounts recognized for tax purposes are
reported as deferred income taxes. Deferred tax balances are adjusted to reflect
tax rates, based
F-10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
on current tax laws, which will be in effect in the years in which the temporary
differences are expected to reverse. Valuation allowances are established as
necessary to reduce deferred tax assets to amounts more likely than not to be
realized.
Research and Development Expenditures:
Research and development expenditures are expensed as incurred and were
$4,634, $4,251 and $1,889 for 2003, 2002 and 2001, respectively.
Reclassification:
Certain prior-year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2003
presentation.
New Accounting Pronouncements:
Effective for 2003, the Company adopted the following new accounting
pronouncements:
Statements of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS No. 141") and No. 142 "Goodwill and Other Intangibles"
("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
142 establishes specific criteria for recognition of intangible assets
separately from goodwill. The statement requires that goodwill and indefinite
lived intangible assets no longer be amortized and be tested for impairment at
least annually. The amortization period of intangible assets with determinable
lives will no longer be limited to forty years. Identifiable intangible assets
with determinable useful lives will continue to be amortized. The Company has no
goodwill, but has assessed the useful lives of its intangible assets. The
adoption of SFAS No. 141 and SFAS No. 142 did not result in an impact on the
Company's financial statements.
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 established accounting
standards for the recognition and measurement of an asset retirement obligation
("ARO") and its associated asset retirement cost. The Company has reviewed its
tangible long-lived assets for associated asset retirement obligations in
accordance with SFAS No. 143. The adoption of SFAS No. 143 did not result in an
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
addresses significant issues relating to the implementation of FASB Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), and the development of a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired. As a result of the adoption of SFAS No. 144, the Company
classified the Odda, Carbide, and MRT businesses as discontinued operations.
Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections" ("SFAS No.
145"). The adoption of SFAS No. 145 did not result in an impact on the Company's
financial statements.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred rather than at the date of a commitment to an exit or disposal plan.
Costs covered by SFAS No. 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not result in an impact on the Company's
financial statements.
F-11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. The adoption of FIN No. 45 did not
result in a material impact on the Company's financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN No. 46"). FIN No. 46 requires consolidation by business enterprises of
variable interest entities (including entities commonly referred to as special
purpose entities), which meet certain characteristics. The adoption of FIN No.
46 did not result in an impact on the Company's financial statements.
The Company will adopt the following new accounting pronouncements in
2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS
No. 149 amends and clarifies accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The Company is currently
assessing the impact of this pronouncement.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a
financial instrument, that is within its scope, as a liability (or an asset in
some circumstances). SFAS No. 150 also revises the definition of liabilities to
encompass certain obligations that can, or must, be settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Effective
in 2004, the Company will classify its Redeemable Preferred Stock as a
liability.
3. Discontinued Operations
During 2003, the Company decided to shutdown or divest Odda Smelteverk
(Norway), Carbide Industries (U.K.), and Mineral Resource Technologies, Inc.
These businesses have been classified as discontinued operations. The Company's
consolidated financial statements have been reclassified to report separately
the operating results, financial position, and cash flows of the discontinued
operations. Prior year financial statements have been reclassified to conform to
the 2003 presentation.
Odda and Carbide:
During 2003, the Company determined that it would permanently shutdown and
no longer fund the operations of Odda. On February 28, 2003, Odda filed for
bankruptcy in Norway. The bankruptcy is proceeding in accordance with Norwegian
law. The Company has been advised that, as a result of the bankruptcy, the
creditors of Odda have recourse only to the assets of Odda, except in the case
of certain debt guaranteed by the Company. The Company has removed all assets,
liabilities (except as noted below), and cumulative translation adjustments
related to Odda from the Company's consolidated balance sheet as of June 30,
2003, and has recorded the net result as a Loss on disposal of discontinued
operations. The Company is the guarantor of certain debt of Odda. As of June 30,
2003, debt of Norwegian Krone (NOK) 41,073 ($5,731) was outstanding and was
included in Loans payable to banks on the Company's consolidated balance sheet.
The Company has entered into forbearance agreements with the Norwegian banks
holding the guarantees from the Company, under which the banks have agreed not
to demand immediate payment and the Company has agreed to pay the principal
amount plus interest in installments. The Company has been advised by Norwegian
counsel that it will obtain the benefit
F-12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
of the banks' position as a secured creditor upon payment pursuant to the
guarantees. The Company obtained the consent of a majority of the holders of its
senior subordinated notes due 2008 to amend the Indenture governing these notes
in such a manner that the bankruptcy of Odda did not create an event of default
thereunder.
During 2003, the Company sold Carbide, previously a distributor for one of
Odda's product lines. Proceeds from the divestiture were not material. Odda was
included in the Company's Industrial Chemicals segment and Carbide was included
in the Company's Distribution segment. Operating results, loss on disposal, and
certain balance sheet items of Odda and Carbide were:
For the Years Ended June 30,
-------------------------------
2003 2002 2001
--------- --------- ---------
OPERATING RESULTS:
Net sales....................................... $ 11,217 $ 31,219 $30,440
Cost of goods sold.............................. 13,723 46,116 27,877
Selling, general and administrative expenses.... 3,175 12,812 5,698
Asset write downs............................... 7,781 -- --
Other income (expense).......................... 2,327 3,699 (723)
-------- -------- -------
Loss before income taxes........................ (11,135) (24,010) (3,858)
Benefit for income taxes........................ (58) (1,170) (1,150)
-------- -------- -------
Loss from operations............................ $(11,077) $(22,840) $(2,708)
-------- -------- -------
Depreciation and amortization................... $ 894 $ 17,676 $ 2,962
======== ======== =======
LOSS ON DISPOSAL:
Assets.......................................... $ (3,359)
Liabilities..................................... 6,432
Unsecured debt.................................. 2,488
Currency translation adjustment................. (6,244)
========
Loss on disposal................................ $ (683)
========
As of June 30,
--------------------
2003 2002
-------- --------
BALANCE SHEET:
Trade receivables............................... $ -- $ 4,004
Other receivables............................... -- 728
Inventories..................................... -- 6,592
Prepaid expenses and other current assets....... -- 445
-------- --------
Current assets from discontinued operations..... $ -- $ 11,769
======== ========
Property, plant and equipment, net.............. $ -- $ 8,234
Intangibles..................................... -- 1,411
Other assets.................................... -- 787
-------- --------
Other assets from discontinued operations....... $ -- $ 10,432
======== ========
Accounts payable................................ $ -- $ 2,565
Accrued expenses and other current liabilities.. -- 4,095
-------- --------
Current liabilities from discontinued
operations ................................... $ -- $ 6,660
======== ========
Other liabilities............................... $ -- $ 1,280
======== ========
Other liabilities from discontinued operations.. $ -- $ 1,280
======== ========
F-13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Mineral Resource Technologies, Inc. ("MRT"):
During 2003, the Company decided to pursue a sale of MRT. The sale was
completed in August 2003 for net proceeds, after transaction costs, of
approximately $14,000, the amount dependent upon certain post-closing
adjustments. The Company does not anticipate a material gain or loss on disposal
based upon its assessment of the likely outcomes of the post-closing
adjustments. MRT was included in the Company's All Other segment. Operating
results and certain balance sheet items of MRT were:
For the Years Ended June 30,
--------------------------------
2003 2002 2001
--------- --------- --------
OPERATING RESULTS:
Net sales..................................... $ 18,671 $ 17,045 $14,306
Cost of goods sold............................ 19,943 17,676 12,955
Selling, general and administrative expenses.. 2,182 2,299 2,674
-------- -------- -------
Loss before income taxes...................... (3,454) (2,930) (1,323)
Provision (benefit) for income taxes.......... -- -- (450)
-------- -------- -------
Loss from operations.......................... $ (3,454) $ (2,930) $ (873)
-------- -------- -------
Depreciation and amortization................. $ 1,309 $ 1,192 $ 465
======== ======== =======
As of June 30,
--------------------
2003 2002
--------- --------
BALANCE SHEET:
Trade receivables............................ $ 2,633 $ 3,178
Other receivables............................ 304 109
Inventories.................................. 1,643 1,529
Prepaid expenses and other current
assets..................................... 362 195
-------- --------
Current assets from discontinued operations.. $ 4,942 $ 5,011
======== ========
Property, plant and equipment, net........... $ 9,999 $ 10,831
Intangibles.................................. 196 149
Other assets................................. 455 312
-------- --------
Other assets from discontinued operations.... $ 10,650 $ 11,292
======== ========
Accounts payable............................. $ 1,466 $ 1,557
Accrued expenses and other current
liabilities................................ 585 172
-------- --------
Current liabilities from discontinued
operations................................. $ 2,051 $ 1,729
======== ========
Other liabilities............................ $ 198 $ 198
-------- --------
Other liabilities from discontinued
operations................................. $ 198 $ 198
======== ========
4. Acquisition
On November 30, 2000, the Company purchased the medicated feed additives
("MFA") business of Pfizer. The operating results of this business are included
in the Company's consolidated statements of operations from the date of
acquisition and are included in the Animal Health and Nutrition segment.
The purchase price of $76,793 (including costs of acquisition) was paid
with cash of $51,700 and the issue of a promissory note to Pfizer for $25,093.
The Company financed the cash payment through the issuance of $40,808 of
redeemable preferred securities ($45,000 of redeemable preferred securities,
less costs connected with the issue of those securities of $4,192), and through
bank credit facilities. In addition, under the terms of the purchase agreement,
the Company is required to pay Pfizer a contingent purchase price based on a
percentage of future net revenues of a certain product. The maximum contingent
purchase price due under this arrangement is limited to $55,000 over five years
with a maximum annual payment of $12,000. In addition, the Company is required
to pay Pfizer a contingent purchase price up to a maximum of $10,000 over five
years
F-14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
based on gross profit levels of certain other products. Contingent purchase
price paid or accrued of $7,498 has been allocated to related production
equipment and $9,349 has been allocated to product intangibles. During 2003,
Pfizer agreed to defer until March 1, 2004, without interest, accrued purchase
price amounts existing at May 31, 2002 and to waive contingent purchase price
payments on future net revenues from June 1, 2002 through March 1, 2004. Accrued
purchase price payable was $9,040 at June 30, 2003 and 2002. The accrued
purchase price is expected to be paid as part of the payment to Pfizer described
in Note 2.
The acquisition was accounted for as a purchase. The purchase price was
allocated to inventory; property, plant and equipment; product intangibles; and,
pension liabilities. Property, plant and equipment include manufacturing
facilities in Rixensart, Belgium and Guarulhos, Brazil. The Company recorded, as
a cost of acquisition, a pension liability of $1,076 relating to the employees
of the Belgium plant who elected to transfer their benefits and the amount of
their accumulated benefit obligations.
The unaudited consolidated results of operations on a pro-forma basis as
if such acquisition had occurred at the beginning of 2001 are net sales of
$367,257 and loss from continuing operations of $12,141 for 2001.
Purchase accounting adjustments allocated to the inventory acquired from
Pfizer increased cost of goods sold by $3,257 and $8,889 in 2002 and 2001,
respectively.
5. Property, Plant and Equipment
Property, plant and equipment was:
As of June 30,
--------------------
2003 2002
-------- --------
Land................................................ $ 6,356 $ 6,140
Buildings and improvements.......................... 30,907 28,905
Machinery and equipment............................. 110,885 111,553
-------- --------
148,148 146,598
Less: accumulated depreciation...................... 81,708 80,933
-------- --------
$ 66,440 $ 65,665
======== ========
Certain of the buildings of Koffolk are on land leased for a nominal
amount from the Israel Land Authority. The lease expires on July 9, 2027.
Depreciation expense was $9,561, $10,560 and $8,659 for 2003, 2002 and
2001, respectively.
6. Related Party Transactions
The Company owns $1,980 par value of preferred stock of a pharmaceutical
company. The principal common stockholder of the Company owns a 20% voting
common stock interest in the pharmaceutical company, acquired for $20. The
preferred stock investment, included in other assets, is carried on the equity
basis with a net carrying value of $1,274 at June 30, 2003. The Company has
recorded losses of $199, $289 and $218 in other expense, net for 2003, 2002 and
2001, respectively.
A subsidiary of the Company leases the property underlying its Santa Fe
Springs, California plant from a limited partnership controlled by common
shareholders of the Company. The lease requires annual base rent of $250 and
terminates on December 31, 2008. The Company is responsible under the lease
agreement to pay all real property taxes.
F-15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were:
As of June 30,
-------------------
2003 2002
------- -------
Employee related expenses..................... $10,485 $ 7,717
Accrued purchase price due Pfizer............. 9,040 --
Taxes......................................... 7,898 3,690
Other accrued liabilities..................... 14,186 18,406
------- -------
$41,609 $29,813
======= =======
Accrued purchase price due Pfizer of $9,040 was included in Long-Term
Liabilities at June 30, 2002.
8. Debt
Loans Payable to Banks
At June 30, 2003, loans payable to banks included $32,147 under the
domestic senior credit facility with its lending banks, for which PNC Bank
serves as agent; NOK 41,073 ($5,731) under guarantees of certain debt of Odda;
and $1,036 under foreign revolving lines of credit.
At June 30, 2003, the Company's senior credit facility was $55,000 and
included a revolving credit facility and amounts currently outstanding under a
capital expenditure facility. The senior credit facility was amended in October
2002 to: waive noncompliance with financial covenants as of June 30, 2002; amend
financial covenants prospectively until maturity; amend the borrowing base
formula; reduce the credit facility from $70,000 to $55,000; limit borrowings
under the capital expenditure line of the facility to the then outstanding
balance of $5,800; and revise the interest rate from 1.5% to 1.75% per annum
over the base rate (as defined in the agreement). The senior credit facility
expires November 30, 2003.
The revolving credit facility is subject to availability under a borrowing
base formula for domestic accounts receivable and inventories (as defined in the
agreement), which also serve as collateral for the borrowings. At June 30, 2003,
the Company had $9,992 available under the borrowing base formula.
As of June 30, 2003, the Company was in compliance with the financial
covenants in the senior credit facility. The senior credit facility requires,
among other things, the maintenance of a consolidated interest coverage ratio
calculated quarterly, a certain level of trailing three month domestic cash
flows calculated on a monthly basis, and an acceleration clause should a
material adverse event (as defined in the agreement) occur. In addition, there
are certain restrictions on additional borrowings, additional liens on the
Company's assets, guarantees, dividend payments, redemption or purchase of the
Company's stock, sale of subsidiaries' stock, disposition of assets,
investments, and mergers and acquisitions.
The revolving credit facility contains a lock-box requirement and a
subjective acceleration clause. Accordingly, the amounts outstanding have been
classified as short-term and are included in Loans payable to banks in the
consolidated balance sheet. Advances under the capital expenditure facility were
included in the current portion of long-term debt as of June 30, 2003.
F-16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Long-Term Debt:
As of June 30,
------------------
2003 2002
-------- --------
Domestic:
Senior subordinated notes due June 1, 2008(a)............ $100,000 $100,000
Bank capital expenditure facility........................ 1,496 5,800
Pfizer promissory note(b)................................ 20,075 22,584
Capitalized lease obligations and other.................. 910 1,413
Foreign:
Norwegian bank loans payable in Norwegian Krone(c)....... -- 8,222
Norwegian government loans payable in Norwegian Krone(d). -- 3,557
Bank loans(e)............................................ 3,750 3,000
Capitalized lease obligations and other.................. 284 916
-------- --------
126,515 145,492
Less: current maturities................................. 24,124 8,851
-------- --------
$102,391 $136,641
======== ========
- ----------
(a) The Company issued $100 million aggregate principal amount of ten year
9 7/8% Senior Subordinated Notes in June 1998. The Notes are general
unsecured obligations of the Company and are subordinated in right of
payment to all existing and future senior debt (as defined in the
indenture agreement of the Company) and rank pari passu in right of
payment with all other existing and future senior subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed on a
senior subordinated basis by the domestic subsidiaries of the Company (the
"Guarantors"). Additional future domestic subsidiaries may become
Guarantors under certain circumstances.
The Indenture contains certain covenants with respect to the Company and
the Guarantors, which restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of dividends and other restricted
payments, (c) the creation of certain liens, (d) the sale of assets, (e)
certain payment restrictions affecting subsidiaries, and (f) transactions
with affiliates. The Indenture restricts the Company's ability to
consolidate, or merge with or into, or to transfer all or substantially
all of its assets to, another person.
(b) In connection with the MFA acquisition, the Company issued a 13%
promissory note to Pfizer in the amount of $25,093 with interest payable
semi-annually. Principal payments of 10% were paid December 3, 2001 and
2002. The remaining balance of $20,075 is due March 1, 2004. The note is
collateralized by the Company's facilities in Rixensart, Belgium and
Guarulhos, Brazil. The note is expected to be paid and the facilities
released from the collateral agreements as part of the payment to Pfizer
described in Note 2.
(c) As a result of the Odda bankruptcy in 2003 (see Note 3), and due to the
Company's guarantee of the Norwegian bank loans, the Company agreed to pay
the remaining principal amount in installments through November 30, 2003.
The remaining amounts outstanding of NOK 41,073 ($5,731) are included in
Loans payable to banks at June 30, 2003. The loans accrue interest at
NIBOR plus 2% to 2.75%.
(d) Odda entered into two separate loan agreements with the Norwegian Bank
Industrial and Regional Development Fund originally totaling NOK 26,500.
The Company is not a guarantor of these loans. The outstanding balance at
the date of Odda's bankruptcy was NOK 12,329 ($1,770) and is payable only
from the assets of the bankruptcy estate. The Company has removed this
debt from its June 30, 2003 balance sheet as a component of the loss on
disposal of Odda.
(e) The bank loans are collateralized by Koffolk's receivables and inventory,
accrue interest at LIBOR plus 1.25%, and are repayable in equal quarterly
payments through 2005.
The aggregate maturities of long-term debt as of June 30, 2003 are:
Year Ended June 30,
-------------------
2004................................................... $ 24,124
2005................................................... 2,154
2006................................................... 78
2007................................................... 142
2008................................................... 100,017
--------
Total................................................ $126,515
========
9. Redeemable Common Stock of Subsidiary
A key executive of the Company has a 2.1% ownership interest in the common
stock of a subsidiary. The subsidiary's shares are redeemable at fair market
value, based on independent appraisal, upon the death, disability or termination
of the key executive. The Company and its subsidiary have entered into a
severance agreement with the executive for payments based on a multiple of
pre-tax earnings (as defined). The payments are subject to certain restrictions
pursuant to terms of the senior credit facility. At June 30, 2003 no severance
payments would have been due upon termination.
F-17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
In connection with the 2001 separation of employment of a senior
executive, who also had an ownership interest in the subsidiary, pursuant to
stock buyback and severance provisions similar to the aforementioned agreements,
the Company recorded a charge of $1,282 in selling, general and administrative
expenses and reclassified $200 from redeemable securities to accrued expenses
and other current liabilities.
10. Redeemable Preferred Stock
Redeemable preferred securities were issued on November 30, 2000 to
Palladium Equity Partners II, LP and certain of its affiliates ("Palladium
Investors") as follows:
Preferred B -- $25,000 - 25,000 shares
Preferred C -- $20,000 - 20,000 shares
The redeemable preferred stock is entitled to cumulative cash dividends,
payable semi-annually, at 15% per annum of the liquidation value. The
liquidation value of the Preferred B stock is an amount equal to $1 per share
plus all accrued and unpaid dividends (the "Liquidation Value"). The redeemable
Preferred C stock is entitled to the Liquidation Value plus a percentage of the
equity value of the Company, as defined in the amended Certificate of
Incorporation. The equity value is calculated as a multiple of earnings before
interest, taxes, depreciation and amortization ("EBITDA") of the Company's
business ("Equity Value"). The Company may, within 90 days before and 90 days
after the annual anniversary of the closing date, redeem the Preferred B stock,
in whole or in part, at the Liquidation Value for cash, provided that if
Preferred B is redeemed separately from the Preferred C, then the Preferred B
must be redeemed for the Liquidation Value plus an additional amount that would
generate an internal rate of return of 20% to Palladium Investors on the
Preferred B investment.
Redemption in part of Preferred B is only available if at least 50% of the
outstanding Preferred B is redeemed. On the third closing anniversary and on
each closing anniversary thereafter, the Company may redeem, for cash only, in
whole the Preferred C, at the Liquidation Value plus the Equity Value payment.
At any time after the redemption of the Company's Senior Subordinated
Notes (due June 2008), Palladium Investors shall have the right to require the
Company to redeem, for cash, the Preferred B at the Liquidation Value and the
Preferred C at the Liquidation Value plus the Equity Value payment.
In 2001, the redeemable preferred securities were initially recorded at
$40,808, representing proceeds of $45,000, net of issuance costs of $4,192.
Immediately thereafter, the Company recorded a charge of $4,192 to retained
earnings to reflect the accretion of the preferred securities to their fair
market value at the closing date.
Dividends of $8,808, $7,623 and $3,980 for 2003, 2002 and 2001,
respectively, were accrued on the preferred securities and charged to retained
earnings. Equity Value of $3,470, $0 and $0 for 2003, 2002 and 2001,
respectively, was accrued and charged to retained earnings.
An annual management advisory fee of $2,250 is payable to the Palladium
Investors until all Preferred B and Preferred C shares are redeemed. Payments
are due quarterly in advance and are charged to general and administrative
expense. The management fee was $2,250, $2,250 and $1,313 for 2003, 2002 and
2001, respectively.
The agreement with the Palladium Investors contains covenants which
restrict, without the consent of at least one director designated by the
Palladium Investors (or if no such director is then serving on the Board, at
least one of the Palladium Investors), certain (a) issuances of equity
securities, (b) sales of assets in excess of $10,000, (c) purchases of business
and other investments in excess of $10,000, (d) incurrence of indebtedness for
borrowed money in excess of $12,500, (e) redemptions, acquisitions or other
purchases of equity securities, (f) transactions with officers, directors,
stockholders or employees or any family member or affiliate thereof in excess of
$500, (g) compensation and benefits of certain officers, and (h) transactions
involving a change of control.
F-18
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
11. Common Stock and Paid-in Capital
Common Stock:
Common stock at June 30, 2003 and 2002 was:
Authorized Issued Amount
Shares Shares at Par
---------- -------- -------
Class A common stock........................ 16,200 12,600 $.10
Class B common stock........................ 14,100 11,888 $.10
------ ------
30,300 24,488
The entire voting power is vested in the holders of Class A common stock,
except the holders of Class A common stock are entitled to elect all but three
of the directors. The holders of Class B common stock are entitled to elect one
director, and the purchasers of the Preferred B and Preferred C are entitled by
contract to elect two directors. No dividends may be paid to common stockholders
until all dividends have been paid to preferred stockholders. Thereafter,
holders of Class A common stock shall receive dividends, when and as declared by
the directors, at the rate of 5.5% of the par value of such stock
(non-cumulative). After all declared dividends have been paid to Class A common
stockholders, dividends may be declared and paid to the holders of Class B
common stock. In the event of any complete liquidation, dissolution, winding-up
of the business, or sale of all the assets of the Company, and after the
redemption of the preferred stock, the Class A common stockholders are entitled
to a distribution equal to the par value of the stock plus declared and unpaid
dividends. Thereafter, the remaining assets of the Company shall be distributed
to the holders of Class B common stock.
Issued shares include redeemable common stock held by a minority
shareholder.
Redeemable Common Stock:
Pursuant to terms of an agreement with a minority shareholder, who is also
an officer of the Company, the Company is required to purchase at book value,
the Class B shares of such shareholder upon his retirement, death, disability,
or the termination of his employment. Should such shareholder elect to sell his
shares, the Company has a right of first offer and an option to purchase the
shares. The Company records a liability for the redemption amount as calculated
at each balance sheet date. The liability was $0 as of June 30, 2003 and 2002.
Income of $0, $378 and $3,135 for 2003, 2002 and 2001, respectively, was
recorded to adjust the shares to redeemable value at the balance sheet date.
12. Employee Benefit Plans
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible domestic nonunion employees who meet
certain requirements of age, length of service and hours worked per year. The
benefits provided by the plans are based upon years of service and the
employees' average compensation, as defined. The Company's policy is to fund the
pension plans in amounts which comply with contribution limits imposed by law.
The Company's Belgium subsidiary maintains a defined contribution and a
defined benefit plan for eligible employees. Benefits are based on employee
compensation and service.
F-19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Reconciliations of changes in benefit obligations, plan assets, and funded
status of the plans were:
Domestic International
---------------------- ----------------------
June 2003 June 2002 June 2003 June 2002
--------- --------- --------- ---------
Change in benefit obligation
Benefit obligation at beginning of year.................... $11,821 $ 9,652 $ 4,251 $ 3,518
Service cost............................................... 1,056 879 310 217
Employee contributions..................................... -- -- 100 --
Interest cost.............................................. 784 714 259 164
Benefits paid.............................................. (243) (179) (29) --
Actuarial (gain) or loss................................... (663) (34) 879 --
Amendments................................................. -- 37 -- --
Change in discount rate.................................... 3,091 752 218 --
Exchange rate effect....................................... -- -- 607 352
------- ------- ------- -------
Benefit obligation at end of year.......................... $15,846 $11,821 $ 6,595 $ 4,251
======= ======= ======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year............. $ 9,717 $ 9,193 $ 2,882 $ 2,524
Actual return on plan assets............................... 537 75 204 123
Employer contributions..................................... 376 628 841 --
Employee contributions..................................... -- -- 100 --
Benefits paid.............................................. (243) (179) (29) --
Exchange rate effect....................................... -- -- 568 235
------- ------- ------- -------
Fair value of plan assets at end of year................... $10,387 $ 9,717 $ 4,566 $ 2,882
======= ======= ======= =======
Funded status
Funded status of the plan.................................. $(5,459) $(2,104) $(2,029) $(1,369)
Unrecognized net actuarial (gain) or loss.................. 2,359 (346) 961 --
Unrecognized prior service cost............................ (554) (715) -- --
Unrecognized transition (asset)............................ (12) (15) -- --
------- ------- ------- -------
(Accrued) pension cost..................................... $(3,666) $(3,180) $(1,068) $(1,369)
======= ======= ======= =======
Significant assumptions for the plans were:
Domestic International
-------------------------------------- ----------------
2003 2002 2001 2003 2002
--------- --------- --------- ---- ----
Discount rate for service and interest cost. 7.1% 7.5% 7.5% 5.8% 5.8%
Expected rate of return on plan assets...... 7.5% 7.5% 7.5% 6.0% 6.0%
Rate of compensation increase
(depending on age)........................ 3.0%-4.5% 3.0%-4.5% 3.0%-4.5% 3.0% 3.0%
Discount rate for year-end benefit
obligation................................ 5.8% 7.1% 7.5% 5.5% 5.8%
Components of net periodic pension expense were:
Domestic International
------------------------------- -----------------
2003 2002 2001 2003 2002
------- ----- ----- ------ -----
Service cost-- benefits earned during the year....... $1,056 $879 $ 949 $ 310 $ 217
Interest cost on benefit obligation.................. 784 714 618 259 164
Expected return on plan assets....................... (756) (709) (576) (203) (123)
Amortization of initial unrecognized net
transition (asset)................................. (3) (3) (3) -- --
Amortization of prior service costs.................. (162) (165) (165) -- --
Amortization of (gain)............................... (57) (57) (31) -- --
------ ---- ----- ----- -----
Net periodic pension expense......................... $ 862 $659 $ 792 $ 366 $ 258
====== ==== ===== ===== =====
The Company assumed the liability for the International pension plan
during 2002 as part of the MFA acquisition.
F-20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
In addition to Belgium, most of the Company's foreign subsidiaries have
retirement plans covering substantially all employees. Contributions to these
plans are generally deposited under fiduciary-type arrangements. Benefits under
these plans primarily are based on compensation levels. Funding policies are
based on legal requirements and local practices. Expense under these plans was
$682, $683 and $489 for 2003, 2002 and 2001, respectively.
The Company and its domestic subsidiaries provide a 401(k) savings plan,
under which an employee may make a pre-tax contribution of up to 60% of base
compensation. The Company makes a non-matching contribution equal to 1% of the
employee's base compensation and a matching contribution equal to 50% of the
employee's contribution up to the first 3% of base compensation and 25% of the
employee's contribution from 3% to 6% of base compensation. All employee
contributions are subject to the maximum amounts permitted for federal income
tax purposes. Employees vest in the Company's matching contributions over 5
years. The Company's contribution was $528, $539 and $580 in 2003, 2002 and
2001, respectively.
The Company has a deferred compensation and supplemental retirement plan
for certain senior executives. The benefits provided by the plan are based upon
years of service and the executives' average compensation, subject to certain
limits. The plan also provides for death benefits before retirement. Expense
under this plan was $249, $204, and $123 in 2003, 2002 and 2001, respectively.
The aggregate liability under this plan amounted to $1,678 and $1,429 at June
30, 2003 and 2002, respectively. To assist in funding the benefits of the plan,
the Company invested in corporate-owned life insurance policies, through a
trust, which at June 30, 2003 and 2002 had cash surrender values of $1,299 and
$1,142, respectively, and are included in other assets.
The Company has an executive income program to provide a pre-retirement
death benefit and a supplemental retirement benefit for certain senior
executives. The aggregate liability under this plan amounted to $385 and $364 at
June 30, 2003 and 2002, respectively. To assist in funding the benefits of the
plan, the Company invested in split-dollar life insurance policies, which at
June 30, 2003 and 2002 had cash surrender values to the Company of $1,392 and
$1,257, respectively, and are included in other assets.
13. Income Taxes
Income (loss) from continuing operations before income taxes was:
2003 2002 2001
------ -------- --------
Domestic...................................... $3,855 $ (5,507) $(11,238)
Foreign....................................... 3,876 (5,664) (457)
------ -------- --------
Income (loss) from continuing operations
before income taxes......................... $7,731 $(11,171) $(11,695)
====== ======== ========
Components of the provision (benefit) for income taxes were:
2003 2002 2001
------- ------- -------
Current tax provision (benefit):
U.S. Federal.............................. $ -- $ -- $ --
State and local........................... 516 (256) 1,711
Foreign................................... 2,332 2,573 3,639
------- ------- -------
Total current tax provision............... 2,848 2,317 5,350
Deferred tax provision (benefit):
U.S. Federal................................ 1,705 (1,225) (3,078)
State and local............................. (345) (590) (210)
Foreign..................................... 1,618 (399) (3,373)
Change in valuation allowance -- domestic... (1,360) 14,726 930
-- foreign.... 5,610 -- --
------- ------- -------
Total deferred tax provision (benefit)...... 7,228 12,512 (5,731)
------- ------- -------
Provision (benefit) for income taxes........ $10,076 $14,829 $ (381)
======= ======= =======
F-21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Reconciliations of the Federal statutory rate to the Company's effective
tax rate are:
2003 2002 2001
------ ------ ------
U.S. Federal income tax rate..................... 35.0% (35.0)% (35.0)%
State and local taxes, net of federal
income tax effect.............................. 1.4 (4.9) 8.3
Foreign tax rate differences and taxes in
certain profitable foreign
jurisdictions.................................. 33.9 42.1 23.8
Change in valuation allowance.................... 55.0 131.8 8.0
Non-taxable income............................... -- -- (9.4)
Expenses with no tax benefit..................... 4.4 1.0 1.5
Other............................................ 0.6 (2.3) (0.5)
----- ----- -----
Effective tax rate............................... 130.3% 132.7% (3.3)%
===== ===== =====
Provision has not been made for United States or additional foreign taxes
on undistributed earnings of foreign subsidiaries of approximately $37,500,
whose earnings have been or are intended to be reinvested. It is not practicable
at this time to determine the amount of income tax liability that would result
should such earnings be repatriated.
The tax effects of significant temporary differences that comprise
deferred tax assets and liabilities at June 30, 2003 and 2002 were:
As of June 30,
---------------------
2003 2002
-------- --------
Deferred tax assets:
Employee benefits..................................... $ 3,194 $ 2,440
Property, plant and equipment......................... 686 959
Insurance............................................. 341 440
Receivables allowances................................ 770 878
Inventory............................................. 4,588 4,490
Environmental remediation............................. 1,232 852
Alternative minimum tax............................... 163 158
Net operating loss carry forwards -- domestic......... 20,186 12,664
-- foreign.......... 1,290 1,695
Other................................................. 2,125 3,260
-------- --------
34,575 27,836
Valuation allowance................................... (32,954) (18,495)
-------- --------
1,621 9,341
-------- --------
Deferred tax liabilities
Property, plant and equipment......................... (2,354) (2,846)
Other................................................. (1,962) (1,872)
-------- --------
(4,316) (4,718)
-------- --------
Net deferred tax (liability) asset...................... $ (2,695) $ 4,623
======== ========
Deferred taxes are included in the following line items in the
consolidated balance sheets:
2003 2002
------- -------
Prepaid expenses and other current assets................ $ 690 $ 6,593
Accrued expenses, taxes and other current liabilities.... (111) (717)
Other assets............................................. 624 305
Other liabilities........................................ (3,898) (1,558)
------- -------
$(2,695) $ 4,623
======= =======
F-22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The Company has incurred domestic and foreign losses in recent years and
has reassessed the likelihood of recovering net deferred tax assets, resulting
in the recording of valuation allowances due to the uncertainty of future
profitability. The Company recorded income tax expense and increased the
valuation allowances by $5,610 and $12,154 during the fourth quarters of 2003
and 2002, respectively. The Company will continue to evaluate the likelihood of
recoverability of these deferred tax assets based upon actual and expected
operating performance.
The Company has domestic federal net operating loss carry forwards of
approximately $52,000 that expire in 2019 through 2023, state net operating loss
carry forwards of approximately $44,000 that expire over various periods
beginning in 2005 and foreign net operating loss carry forwards of approximately
$8,000 that expire over various periods beginning in 2010.
14. Commitments and Contingencies
(a) Leases:
The Company leases office, warehouse and manufacturing equipment and
facilities for minimum annual rentals (plus certain cost escalations) as
follows:
Capital Operating
Year Ended June 30 Leases Leases
----------------- ------ ---------
2004........................................................ $452 $1,970
2005........................................................ 125 1,357
2006........................................................ 34 732
2007........................................................ 32 452
2008........................................................ 17 370
Thereafter.................................................. -- 125
---- ------
Total minimum lease payments................................ $660 $5,006
==== ======
Amounts representing interest............................... 60
----
Present value of minimum lease payments..................... $600
====
Equipment under capitalized leases included in the consolidated balance
sheet at June 30, 2003 was $1,245, net of accumulated depreciation of $350.
Operating lease commitments include $1,375 with a related party controlled
by shareholders of the Company, as described in Related Party Transactions.
Rent expense under operating leases for 2003, 2002 and 2001 was $2,271,
$2,061 and $1,851, respectively.
(b) Litigation:
On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and
the Company were served with a complaint filed by Chevron U.S.A. Inc.
("Chevron") in the United States District Court for the District of New Jersey,
alleging that the operations of CP at its Sewaren plant affected adjoining
property owned by Chevron and alleging that the Company, as the parent of CP, is
also responsible to Chevron. In July 2002, a phased settlement agreement was
reached and a Consent Order entered by the Court. That settlement is in the
process of being implemented. The Company's and CP's portion of the settlement
for past costs and expenses through the entry of the Consent Order was $495 and
was included in selling, general and administrative expenses in the 2002
statement of operations and comprehensive income. Such amount was paid in 2003.
The Consent Order then provides for a period of due diligence investigation of
the property owned by Chevron. The investigation has been conducted and the
results are under review. The investigation costs are being split with one other
defendant, Vulcan Materials Company. Upon completion of the review of the
results of the investigation, a decision will be made whether to opt out of the
settlement or proceed. If no party opts out of the settlement, the Company and
CP will take title to the adjoining Chevron property, probably through the use
of a three-member New Jersey limited liability company. The third member of the
limited liability company will be Vulcan
F-23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Materials Company. The Company also has commenced negotiations with Chevron
regarding its allocation of responsibility and associated costs under the
Consent Order. While the costs cannot be estimated with any degree of certainty
at this time, the Company believes that insurance recoveries will be available
to offset some of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under CERCLA by
the EPA, involving a former third-party fertilizer manufacturing site in
Jericho, South Carolina. An agreement has been reached under which such
subsidiary agreed to contribute up to $900 of which $635 has been paid as of
June 30, 2003. Some recovery from insurance and other sources is expected. The
Company also has accrued its best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
oral agreement to pay $425 over six years.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 of the
settlement amount.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company is investigating the
matter, which relates to events in the 1950's and 1960's.
By notice dated August 14, 2003, the Company's Phibro-Tech subsidiary's
Santa Fe Springs, California facility was notified by the California Department
of Toxic Substances Control that it was deemed a potentially responsible party
in connection with a third-party site in Wilmington, California. The Company is
investigating this matter, but believes it relates to matters that took place
before Phibro-Tech acquired the Santa Fe Springs, California operations. The
Company does not believe it will have any material liability in this matter.
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.
(c) 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.
F-24
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO 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.
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 $2,791, which is included in current
and long-term liabilities in the June 30, 2003 consolidated balance sheet
(approximately $2,834 in 2002). Environmental provisions were $1,630, $2,164 and
$1,252 for 2003, 2002 and 2001, respectively, and were included in selling,
general and administrative expenses in the consolidated statements of
operations.
15. Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and cash equivalents and trade receivables. The
Company places its cash and cash equivalents with high quality financial
institutions in various countries. The Company sells to customers in a variety
of industries, markets and countries. Concentrations of credit risk with respect
to receivables arising from these sales are limited due to the large number of
customers comprising the Company's customer base. Ongoing credit evaluations of
customers' financial conditions are performed and, generally, no collateral is
required. The Company maintains appropriate reserves for uncollectible
receivables.
The carrying amounts of cash and cash equivalents, trade receivables,
trade payables and short-term debt is considered to be representative of their
fair value because of their short maturities. The fair value of the Company's
Senior Subordinated Notes is estimated based on quoted market prices. At June
30, 2003 and 2002, the fair value of the Company's Senior Subordinated Notes was
$40,000 and $51,000, respectively, and the related carrying amount was $100,000.
At June 30, 2003 and 2002, the fair value of the Company's other long-term debt
does not differ materially from its carrying amount based on the variable
interest rate structure of these obligations.
The Company obtains third-party letters of credit in connection with
certain inventory purchases and insurance obligations. The contract values of
the letters of credit at June 30, 2003 and 2002 were $2,593 and $1,793,
respectively. The difference between the carrying values and fair values of
these letters of credit was not material.
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world and utilizes certain financial
instruments to manage its foreign currency and commodity exposures, primarily
related to forecasted transactions. To qualify a derivative as a hedge at
inception and throughout the hedge period, the Company formally documents the
nature and relationships between hedging instruments and hedged items, as well
as its risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected
terms of a forecasted transaction must be specifically identified, and it must
be probable that each forecasted transaction would occur. If it were deemed
probable that the forecasted transaction would not occur, the gain or loss would
be recognized in operations currently. Financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the
hedging instrument
F-25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
and the item being hedged, both at inception and throughout the hedged period.
The Company hedges forecasted transactions for periods not exceeding the next
twelve months. The Company does not engage in trading or other speculative uses
of financial instruments.
From time to time, the Company uses forward contracts and options to
mitigate its exposure to changes in foreign currency exchange rates and as a
means of hedging forecasted operating costs. When using options as a hedging
instrument, the Company excludes the time value from the assessment of
effectiveness. Pursuant to SFAS No. 133, all cumulative changes in a foreign
currency option's fair value are deferred as a component of accumulated other
comprehensive income until the underlying hedged transactions are reported on
the Company's consolidated statement of operations and comprehensive income. The
Company also utilizes, on a limited basis, certain commodity derivatives,
primarily on copper used in its manufacturing process, to hedge the cost of its
anticipated production requirements. The Company's foreign currency options and
forward contracts and commodity futures contracts were designated as cash flow
hedges and qualified for hedge accounting treatment. The Company deferred $81
and $1,062 of cumulative gains (net of losses) on various foreign exchange
options, forward contracts and copper futures contracts designated as cash flow
hedges as of June 30, 2003 and 2002, respectively.
The fair value associated with foreign currency contracts has been
estimated by valuing the net position of the contracts using the applicable spot
rates and forward rates as of the reporting date.
The fair value of commodity contracts is estimated based on quotes from
the market makers of these instruments and represents the estimated amounts that
the Company would expect to receive or pay to terminate the agreements as of the
reporting date.
16. Business Segments
The Company's reportable segments are Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets more than 500 formulations
and concentrations of medicated feed additives and nutritional feed additives
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products. The Industrial Chemicals segment manufactures and markets a number of
chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, and aerospace industries. The Distribution segment
markets and distributes a variety of industrial, specialty and fine organic
chemicals and intermediates produced primarily by third parties. The All Other
segment manufactures and markets a variety of specialty custom chemicals and
copper-based fungicides. Intersegment sales and transfers were not significant.
The following segment data includes information only for continuing operations.
Animal
Health & Industrial Corporate
2003 Segment Data Nutrition Chemicals Distribution All Other & Other Total
- ----------------- --------- --------- ------------ --------- --------- -----
Net Sales............................... $250,706 $48,797 $30,072 $25,650 $ -- $355,225
Operating income (loss)................. 38,472 (1,855) 3,207 261 (14,948) 25,137
Depreciation and amortization........... 7,690 2,904 12 723 1,554 12,883
Identifiable assets..................... 190,864 33,191 9,154 12,735 12,811 258,755
Capital expenditures.................... 5,669 2,836 -- 538 2 9,045
Animal
Health & Industrial Corporate
2002 Segment Data Nutrition Chemicals Distribution All Other & Other Total
- ----------------- --------- ---------- ------------ --------- --------- -----
Net Sales............................... $239,602 $50,854 $27,852 $22,241 $ -- $340,549
Operating income (loss)................. 28,298 (7,324) 2,345 252 (13,854) 9,717
Depreciation and amortization........... 7,438 3,535 12 646 1,049 12,680
Identifiable assets..................... 186,118 38,985 8,059 14,385 10,393 257,940
Capital expenditures.................... 5,915 2,328 12 303 119 8,677
F-26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Animal
Health & Industrial Corporate
2001 Segment Data Nutrition Chemicals Distribution All Other & Other Total
- ----------------- --------- ---------- ------------ --------- --------- -----
Net Sales............................... $197,806 $55,111 $34,074 $32,673 $ -- $319,664
Operating income (loss)................. 17,562 664 3,057 (5,763) (10,086) 5,434
Depreciation and amortization........... 5,089 3,334 42 1,158 782 10,405
Identifiable assets..................... 169,870 51,199 10,948 18,604 21,723 272,344
Capital expenditures.................... 2,669 3,383 18 289 251 6,610
17. Geographic Information
The following is information about the Company's geographic operations.
Information is attributed to the geographic areas based on the location of the
Company's subsidiaries.
2003 2002 2001
-------- -------- --------
Net Sales:
United States........................................................ $233,942 $219,981 $209,848
Europe............................................................... 30,122 23,877 25,133
Israel............................................................... 44,383 45,266 52,746
Latin America........................................................ 25,235 28,970 19,603
Asia/Pacific......................................................... 21,543 22,455 12,334
-------- -------- --------
Total................................................................ $355,225 $340,549 $319,664
======== ======== ========
2003 2002 2001
------- ------- -------
Property, Plant and Equipment, Net:
United States........................................................ $16,720 $19,370 $20,641
Europe............................................................... 22,998 19,618 16,745
Israel............................................................... 10,990 12,647 14,219
Latin America........................................................ 15,396 13,772 16,426
Asia/Pacific......................................................... 336 258 290
------- ------- -------
Total................................................................ $66,440 $65,665 $68,321
======= ======= =======
18. Valuation and Qualifying Accounts
The allowance for doubtful accounts was:
2003 2002 2001
------ ------ ------
Balance at beginning of period......................................... $1,485 $1,769 $ 677
Provision for bad debts................................................ 348 994 1,164
Bad debt write-offs.................................................... (388) (1,278) (72)
------ ------ ------
Balance at end of period............................................... $1,445 $1,485 $1,769
====== ====== ======
19. Divestitures
On May 4, 2001, the Company sold its Agtrol U.S. business to Nufarm, Inc.
("Nufarm"). On June 14, 2001, the Company sold its Agtrol international business
to Nufarm. The sale included inventory and intangible assets but did not include
the manufacturing facilities. The Company entered into agreements to supply
copper fungicide products to Nufarm from its Sumter, South Carolina plant for
five years, and from its Bordeaux, France plant for three years.
The sales price was cash of $27,139. The Company recorded a pre-tax gain
of $1,457. Approximately $1,484 of additional gain was deferred and is being
recognized over the period of the related supply agreements. Revenues for the
Agtrol business amounted to $31,333 for 2001. Operating (losses) for the Agtrol
business were ($6,444) for 2001.
F-27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
20. Consolidating Financial Statements
The units of Senior Secured Notes due 2007 (issued subsequent to fiscal
year end), consisting of US Senior Notes issued by the Company (the "Parent
Issuer") and Dutch Senior Notes issued by Philipp Brothers Netherlands III B.V.
(the "Dutch Issuer"), are guaranteed by certain subsidiaries. The Company and
its U.S. subsidiaries ("U.S. Guarantor Subsidiaries"), excluding The Prince
Manufacturing Company, Prince MFG, LLC and Mineral Resource Technologies, Inc.
(the "Unrestricted Subsidiaries", as defined in the indenture), fully and
unconditionally guarantee all of the Senior Secured Notes on a joint and several
basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of
Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally
guarantee the Dutch Senior Notes. The Dutch issuer and the Belgium Guarantor do
not guarantee the US Senior Notes. Other foreign subsidiaries ("Non-Guarantor
Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S.
Guarantor Subsidiaries include all domestic subsidiaries of the Company other
than the Unrestricted Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech,
Inc., Prince Agriproducts, Inc., Phibrochem, Inc., Phibro Chemicals, Inc.,
Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal
Health U.S., Inc.
The Senior Subordinated Notes due 2008, issued by the Company, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc., The Prince Manufacturing Company, Prince MFG, LLC, Mineral
Resource Technologies, Inc. (until divested), Phibrochem, Inc., Phibro
Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc.,
and Phibro Animal Health U.S., Inc.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent Issuer,
Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium
Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S.
Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor
Subsidiaries are directly or indirectly wholly owned as to voting stock by the
Company.
Investments in subsidiaries are accounted for by the Parent 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. Separate financial
statements of the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries are
not presented because management has determined that such financial statements
would not be material to investors.
F-28
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING BALANCE SHEET
As of June 30, 2003
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash
equivalents ............ $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ 11,179
Trade receivables ........ 2,759 2,452 22,071 -- 1,542 26,847 55,671
Other receivables ........ 957 3 733 -- 518 1,431 3,642
Inventory ................ 2,612 4,278 41,266 -- 13,460 27,151 88,767
Prepaid expenses
and other .............. 3,267 458 981 -- 1,551 3,931 10,188
Current assets
from discontinued
operations ............. -- 4,942 -- -- -- -- 4,942
--------- --------- --------- ------ --------- --------- --------- ---------
Total current
assets ............... 9,638 12,252 67,218 -- 17,256 68,025 -- 174,389
--------- --------- --------- ------ --------- --------- --------- ---------
Property, plant &
equipment, net ........... 153 3,269 13,297 -- 17,049 32,672 66,440
Intangibles ................. -- -- -- -- 1,818 6,851 8,669
Investment in
subsidiaries ............. 96,672 -- 3,619 -- -- -- (100,291) --
Intercompany ................ 35,186 (19,431) 59,765 -- 6,731 (9,268) (72,983) --
Other assets ................ 11,516 710 1,122 -- -- 851 14,199
Other assets from
discontinued
operations ............... -- 10,650 -- -- -- -- 10,650
--------- --------- --------- ------ --------- --------- --------- ---------
$ 153,165 $ 7,450 $ 145,021 $ -- $ 42,854 $ 99,131 $(173,274) $ 274,347
========= ========= ========= ====== ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft ........... $ 350 $ 286 $ 1,041 $ -- $ -- $ 9 $ 1,686
Loan payable to
banks .................. 32,147 -- -- -- -- 6,767 38,914
Current portion of
long-term debt ......... 21,599 66 381 -- -- 2,078 24,124
Accounts payable ......... 3,304 2,350 25,926 -- 12,115 13,220 56,915
Accrued expenses
and other .............. 6,924 1,151 9,931 -- 6,653 16,950 41,609
Current liabilities
from discontinued
operations ............. -- 2,051 -- -- -- -- 2,051
--------- --------- --------- ------ --------- --------- --------- ---------
Total current
liabilities .......... 64,324 5,904 37,279 -- 18,768 39,024 -- 165,299
--------- --------- --------- ------ --------- --------- --------- ---------
Long-term debt .............. 100,073 213 149 -- -- 1,956 102,391
Intercompany debt ........... -- -- -- -- 22,302 50,681 (72,983) --
Other liabilities ........... 4,397 114 13,289 -- 1,256 3,032 22,088
Other liabilities from
discontinued
operations ............... -- 198 -- -- -- -- 198
--------- --------- --------- ------ --------- --------- --------- ---------
Total liabilities ...... 168,794 6,429 50,717 -- 42,326 94,693 (72,983) 289,976
--------- --------- --------- ------ --------- --------- --------- ---------
Redeemable securities:
Series B and C
preferred stock ........ 68,881 -- -- -- -- -- 68,881
--------- --------- --------- ------ --------- --------- --------- ---------
Stockholders'
(deficit):
Series A preferred
stock .................. 521 -- -- -- -- -- 521
Common stock ............. 2 1 31 -- -- -- (32) 2
Paid-in capital .......... 860 -- 110,883 -- -- 5,179 (116,062) 860
Accumulated (deficit) .... (79,489) 1,020 (16,499) -- (1,359) 7,438 9,400 (79,489)
Accumulated other
comprehensive
Income (loss):
Gain on derivative
instruments ............ 81 -- 81 -- -- -- (81) 81
Cumulative currency
translation
adjustment ............. (6,485) -- (192) -- 1,887 (8,179) 6,484 (6,485)
--------- --------- --------- ------ --------- --------- --------- ---------
Total stockholders'
(deficit) ............ (84,510) 1,021 94,304 -- 528 4,438 (100,291) (84,510)
--------- --------- --------- ------ --------- --------- --------- ---------
$ 153,165 $ 7,450 $ 145,021 $ -- $ 42,854 $ 99,131 $(173,274) $ 274,347
========= ========= ========= ====== ========= ========= ========= =========
F-29
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended June 30, 2003
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
Net sales ................... $ 23,982 $ 22,332 $ 187,628 $ -- $ 6,625 $ 114,658 $ -- $ 355,225
Net sales--intercompany ..... 1,338 4,244 151 -- 26,994 6,812 (39,539) --
Cost of goods sold .......... 20,083 20,422 143,919 -- 31,435 87,408 (39,539) 263,728
--------- --------- --------- ---- --------- --------- --------- ---------
Gross profit ............. 5,237 6,154 43,860 -- 2,184 34,062 -- 91,497
Selling, general and
administrative
expenses ................. 18,064 2,575 26,632 -- 1,868 17,221 66,360
--------- --------- --------- ---- --------- --------- --------- ---------
Operating income
(loss) ................... (12,827) 3,579 17,228 -- 316 16,841 -- 25,137
Other:
Interest expense ......... 15,050 86 1 -- 62 1,143 16,342
Interest (income) ........ (2) -- -- -- -- (84) (86)
Other (income)
expense, net ........... 3,283 -- (3,481) -- 1,283 65 1,150
Intercompany interest
and other .............. (33,819) 4,952 18,997 -- 2,849 7,021 --
(Profit) loss
relating to
subsidiaries ........... 4,082 -- (4,082) --
--------- --------- --------- ---- --------- --------- --------- ---------
Income (loss) from
continuing
operations before
income taxes ........... (1,421) (1,459) 1,711 -- (3,878) 8,696 4,082 7,731
Provision (benefit) for
Income taxes ............. 924 52 570 -- (1,358) 9,888 10,076
--------- --------- --------- ---- --------- --------- --------- ---------
Income (loss) from
continuing
operations ............. (2,345) (1,511) 1,141 -- (2,520) (1,192) 4,082 (2,345)
Discontinued operations:
Profit (loss)
relating to
Discontinued
operations ............. 14,805 -- -- -- -- -- (14,805) --
(Loss) from
discontinued
operations (net of
income taxes) .......... -- (3,454) -- -- -- (11,077) (14,531)
Gain (loss) from
disposal of
discontinued
operations (net of
income taxes) ............ (30,019) -- -- -- -- 29,336 (683)
--------- --------- --------- ---- --------- --------- --------- ---------
Net income (loss) ........ $ (17,559) $ (4,965) $ 1,141 $ -- $ (2,520) $ 17,067 $ (10,723) $ (17,559)
========= ========= ========= ==== ========= ========= ========= =========
F-30
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended June 30, 2003
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
Operating activities:
Net income (loss) ........ $(17,559) $ (4,965) $ 1,141 $ -- $ (2,520) $ 17,067 $(10,723) $(17,559)
Adjustment for
discontinued
operation .............. 15,214 3,454 -- -- -- (18,259) 14,805 15,214
-------- -------- -------- ----- -------- -------- -------- --------
Income (loss) from
continuing
operations ............. (2,345) (1,511) 1,141 -- (2,520) (1,192) 4,082 (2,345)
Adjustments to
reconcile income
(loss) from
continuing
operations to net
cash provided
(used) by operating
activities:
Depreciation and
amortization ......... 1,554 956 2,900 -- 2,689 4,784 12,883
Deferred income
taxes ................ -- -- -- -- -- 7,228 7,228
(Gain) from sale
of asset ............. -- -- (118) -- -- (9) (127)
Unrealized foreign
currency (gains)
losses and other ..... 218 13 141 -- 1,268 (1,171) 469
Changes in operating
assets and
liabilities:
Accounts receivable .... 301 245 1,489 -- (322) 1,295 3,008
Inventory .............. 95 (61) (3,658) -- 2,270 832 (522)
Prepaid expenses
and other ............ (702) (195) 558 -- (1,111) (1,727) (3,177)
Other assets ........... (3,171) -- 1,131 -- -- (592) (2,632)
Intercompany ........... 13,064 2,717 (11,763) -- 4,909 (4,845) (4,082) --
Accounts payable ....... 2,280 714 12,542 -- 3,523 1,489 20,548
Accrued expenses
and other ............ 1,415 95 2,326 -- (9,308) 4,010 (1,462)
Cash provided (used)
by discontinued
operations ............. (238) (1,928) -- -- -- 2,952 786
-------- -------- -------- ----- -------- -------- -------- --------
Net cash provided
by operating
activities ........... 12,471 1,045 6,689 -- 1,398 13,054 -- 34,657
-------- -------- -------- ----- -------- -------- -------- --------
Investing activities:
Capital expenditures ..... (2) (350) (2,573) -- (1,885) (4,235) (9,045)
Proceeds from sale
of assets .............. -- -- 2,530 -- -- 36 2,566
Other investing .......... -- -- -- -- -- 724 724
Discontinued
operations ............. -- (493) -- -- -- 2,277 1,784
-------- -------- -------- ----- -------- -------- -------- --------
Net cash (used) by
Investing
activities ........... (2) (843) (43) -- (1,885) (1,198) -- (3,971)
-------- -------- -------- ----- -------- -------- -------- --------
Financing activities:
Cash overdraft ........... (226) (24) (4,151) -- -- (1,680) (6,081)
Net (decrease) in
short-term debt ........ (5,844) -- -- -- -- (416) (6,260)
Proceeds from
long-term debt ......... -- -- -- -- -- 2,000 2,000
Payments of
long-term debt ......... (6,813) (111) (415) -- -- (8,698) (16,037)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash (used) by
financing
activities ........... (12,883) (135) (4,566) -- -- (8,794) -- (26,378)
-------- -------- -------- ----- -------- -------- -------- --------
Effect of exchange rate
changes on cash .......... -- -- 9 -- 54 389 452
-------- -------- -------- ----- -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents .............. (414) 67 2,089 -- (433) 3,451 -- 4,760
Cash and cash
equivalents at
beginning of period ...... 457 52 78 -- 618 5,214 6,419
-------- -------- -------- ----- -------- -------- -------- --------
Cash and cash
equivalents at
end of period ............ $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ -- $ 11,179
======== ======== ======== ===== ======== ======== ======== ========
F-31
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING BALANCE SHEET
As of June 30, 2002
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash
equivalents ............ $ 457 $ 52 $ 78 $ -- $ 618 $ 5,214 $ 6,419
Trade receivables ........ 3,150 2,710 22,783 -- 1,017 28,319 57,979
Other receivables ........ 392 3 743 -- 369 1,568 3,075
Inventory ................ 2,707 4,217 39,183 -- 13,653 25,636 85,396
Prepaid expenses
and other .............. 3,010 263 2,002 -- 332 9,718 15,325
Current assets from
discontinued
operations ............. -- 5,011 -- -- -- 11,769 16,780
--------- --------- --------- ----- --------- --------- --------- ---------
Total current
assets ............. 9,716 12,256 64,789 -- 15,989 82,224 -- 184,974
--------- --------- --------- ----- --------- --------- --------- ---------
Property, plant &
equipment, net ........... 409 3,704 15,246 -- 14,399 31,907 65,665
Intangibles ................. -- -- -- -- 1,978 7,655 9,633
Investment in
subsidiaries ............. 82,540 -- 3,619 -- -- -- (86,159) --
Intercompany ................ 73,359 (16,714) 48,503 -- 8,288 (12,315) (101,121) --
Other assets ................ 9,770 880 2,072 -- -- 1,726 14,448
Other assets from
discontinued
operations ............... -- 11,292 -- -- -- 10,432 21,724
--------- --------- --------- ----- --------- --------- --------- ---------
$ 175,794 $ 11,418 $ 134,229 $ -- $ 40,654 $ 121,629 $(187,280) $ 296,444
========= ========= ========= ===== ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft ........... $ 576 $ 310 $ 5,192 $ -- $ -- $ 1,689 $ 7,767
Loan payable to banks .... 37,991 -- -- -- -- 3,544 41,535
Current portion of
long-term debt ......... 3,216 128 402 -- -- 5,105 8,851
Accounts payable ......... 1,024 1,636 21,523 -- 7,055 6,920 38,158
Accrued expenses and
other .................. 7,579 801 7,290 -- 8,555 5,588 29,813
Current liabilities
from discontinued
operations ............. -- 1,729 -- -- -- 6,660 8,389
--------- --------- --------- ----- --------- --------- --------- ---------
Total current
liabilities ........ 50,386 4,604 34,407 -- 15,610 29,506 -- 134,513
--------- --------- --------- ----- --------- --------- --------- ---------
Long-term debt .............. 125,246 262 543 -- -- 10,590 136,641
Intercompany debt ........... 2,397 -- -- -- 18,155 80,569 (101,121) --
Other liabilities ........... 2,352 368 5,590 -- 4,352 15,737 28,399
Other liabilities from
discontinued
operations ............... -- 198 -- -- -- 1,280 1,478
--------- --------- --------- ----- --------- --------- --------- ---------
Total liabilities .... 180,381 5,432 40,540 -- 38,117 137,682 (101,121) 301,031
--------- --------- --------- ----- --------- --------- --------- ---------
Redeemable securities:
Series B and C
preferred stock ........ 56,602 -- -- -- -- -- 56,602
--------- --------- --------- ----- --------- --------- --------- ---------
Stockholders' (deficit):
Series A preferred
stock .................. 521 -- -- -- -- -- 521
Common stock ............. 2 1 31 -- -- -- (32) 2
Paid-in capital .......... 740 -- 110,883 -- -- 8,166 (119,049) 740
Accumulated
(deficit) .............. (49,652) 5,985 (17,640) -- 1,161 (9,629) 20,123 (49,652)
Accumulated other
comprehensive
income (loss):
Gain on derivative
instruments .......... 1,062 -- 384 -- -- 678 (1,062) 1,062
Cumulative currency
translation
adjustment ........... (13,862) -- 31 -- 1,376 (15,268) 13,861 (13,862)
Total stockholders'
(deficit) .......... (61,189) 5,986 93,689 -- 2,537 (16,053) (86,159) (61,189)
--------- --------- --------- ----- --------- --------- --------- ---------
$ 175,794 $ 11,418 $ 134,229 $ -- $ 40,654 $ 121,629 $(187,280) $ 296,444
========= ========= ========= ===== ========= ========= ========= =========
F-32
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended June 30, 2002
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
Net sales ................... $ 24,578 $ 21,451 $ 173,952 $ -- $ 4,196 $ 116,372 $ -- $ 340,549
Net sales--intercompany ..... 1,114 4,212 338 -- 21,509 9,594 (36,767) --
Cost of goods sold .......... 20,837 19,400 134,792 -- 20,555 99,738 (36,767) 258,555
--------- --------- --------- ----- --------- --------- --------- ---------
Gross profit ............. 4,855 6,263 39,498 -- 5,150 26,228 -- 81,994
Selling, general and
administrative
expenses ................. 16,786 2,623 32,959 -- 1,461 18,448 72,277
--------- --------- --------- ----- --------- --------- --------- ---------
Operating income
(loss) ................. (11,931) 3,640 6,539 -- 3,689 7,780 -- 9,717
Other:
Interest expense ......... 15,858 (29) (172) -- 364 2,137 18,158
Interest (income) ........ (15) -- -- -- -- (341) (356)
Other (income)
expense, net ........... (2,001) -- (839) -- 2,294 3,632 3,086
Intercompany interest
and other .............. (28,534) 5,210 12,467 -- 1,754 9,103 --
(Profit) loss
relating to
subsidiaries ........... 18,702 -- -- -- -- -- (18,702) --
--------- --------- --------- ----- --------- --------- --------- ---------
Income (loss) from
continuing
operations before
income taxes ........... (15,941) (1,541) (4,917) -- (723) (6,751) 18,702 (11,171)
Provision (benefit) for
income taxes ............. 10,059 (407) 4,636 -- (311) 852 14,829
--------- --------- --------- ----- --------- --------- --------- ---------
Income (loss) from
continuing operations .... (26,000) (1,134) (9,553) -- (412) (7,603) 18,702 (26,000)
Discontinued operations:
Profit (loss)
relating to
discontinued
operations ............. (25,770) -- -- -- -- -- 25,770 --
(Loss) from
discontinued
operations (net
of income taxes) ....... -- (2,930) -- -- -- (22,840) (25,770)
--------- --------- --------- ----- --------- --------- --------- ---------
Net income (loss) ........ $ (51,770) $ (4,064) $ (9,553) $ -- $ (412) $ (30,443) $ 44,472 $ (51,770)
========= ========= ========= ===== ========= ========= ========= =========
F-33
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended June 30, 2002
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
Operating activities:
Net income (loss) ........ $(51,770) $ (4,064) $ (9,553) $ -- $ (412) $(30,443) $ 44,472 $(51,770)
Adjustment for
discontinued
operation .............. 25,770 2,930 -- -- -- 22,840 (25,770) 25,770
-------- -------- -------- ----- -------- -------- -------- --------
Income (loss) from
continuing
operations ............. (26,000) (1,134) (9,553) -- (412) (7,603) 18,702 (26,000)
Adjustments to
reconcile income
(loss) from
continuing
operations to
net cash provided
by operating
activities:
Depreciation and
amortization ......... 1,049 966 3,434 -- 1,645 5,586 12,680
Deferred income
taxes ................ 9,297 (466) 5,356 -- -- (1,674) 12,513
(Gain) on sale
of asset ............. -- -- -- -- -- (18) (18)
Unrealized foreign
currency (gains)
losses and other ..... (421) 12 885 -- (213) 3,653 3,916
Changes in operating
assets and
liabilities:
Accounts receivable .... 1,299 278 1,932 -- 886 5,361 9,756
Inventory .............. 606 1,165 (2,915) -- (10,324) (2,385) (13,853)
Prepaid expenses
and other ............ 210 (157) (1,550) -- 923 (2,206) (2,780)
Other assets ........... (1,335) 1 2,519 -- 66 1,416 2,667
Intercompany ........... 1,262 4,753 2,164 -- 6,764 3,759 (18,702) --
Accounts payable ....... (719) (844) 1,460 -- 1,472 (9,427) (8,058)
Accrued expenses
and other ............ (119) (225) (3,248) -- 4,774 6,040 7,222
Cash (used) by
discontinued
operations ............. -- (2,437) -- -- -- (353) (2,790)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash provided
(used) by
operating
activities ........... (14,871) 1,912 484 -- 5,581 2,149 -- (4,745)
-------- -------- -------- ----- -------- -------- -------- --------
Investing activities:
Capital expenditures ..... (119) (192) (3,022) -- (1,939) (3,405) (8,677)
Acquisition of a
business ............... -- -- -- -- (4,421) (2,761) (7,182)
Proceeds from
insurance claim ........ -- -- 411 -- -- -- 411
Proceeds from sale
of assets .............. -- -- -- -- -- 80 80
Other investing .......... 613 -- -- -- -- (33) 580
Discontinued operations .. -- (1,832) -- -- -- (741) (2,573)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash provided
(used) by
investing
activities ........... 494 (2,024) (2,611) -- (6,360) (6,860) -- (17,361)
-------- -------- -------- ----- -------- -------- -------- --------
Financing activities:
Cash overdraft ........... 563 (116) 1,447 -- -- 1,544 3,438
Net increase
(decrease) in
short-term debt ........ 13,520 -- -- -- -- (864) 12,656
Proceeds from
long-term debt ......... 2,000 322 -- -- -- -- 2,322
Payments of
long-term debt ......... (2,541) (98) (396) -- -- (1,704) (4,739)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash provided
(used) by
financing
activities ........... 13,542 108 1,051 -- -- (1,024) -- 13,677
-------- -------- -------- ----- -------- -------- -------- --------
Effect of exchange
rate changes on cash ..... -- -- -- -- 128 (125) 3
-------- -------- -------- ----- -------- -------- -------- --------
Net (decrease) in cash
and cash
equivalents .............. (835) (4) (1,076) -- (651) (5,860) -- (8,426)
Cash and cash equivalents
at beginning of
period ................... 1,292 56 1,154 -- 1,269 11,074 14,845
-------- -------- -------- ----- -------- -------- -------- --------
Cash and cash
equivalents at end
of period ................ $ 457 $ 52 $ 78 $ -- $ 618 $ 5,214 $ -- $ 6,419
======== ======== ======== ===== ======== ======== ======== ========
F-34
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended June 30, 2001
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
Net sales ................... $ 31,813 $ 22,027 $ 156,008 $ -- $ 2,255 $ 107,561 $ -- $ 319,664
Net sales--intercompany ..... 1,537 4,666 2,864 -- 15,431 8,897 (33,395) --
Cost of goods sold .......... 27,359 20,369 126,080 -- 13,451 96,441 (33,395) 250,305
--------- --------- --------- ----- --------- --------- --------- ---------
Gross profit ............. 5,991 6,324 32,792 -- 4,235 20,017 -- 69,359
Selling, general and
administrative
expenses ................. 13,063 2,787 31,183 -- 1,093 15,799 63,925
--------- --------- --------- ----- --------- --------- --------- ---------
Operating income
(loss) ................. (7,072) 3,537 1,609 -- 3,142 4,218 -- 5,434
Other:
Interest expense ......... 15,978 (208) 142 -- -- 2,385 18,297
Interest (income) ........ (117) (1) (23) -- -- (425) (566)
Other (income)
expense, net ........... (5,093) -- (1,530) -- (775) 6,796 (602)
Intercompany interest
and other .............. (19,571) 5,283 7,329 -- 1,073 5,886 --
(Profit) loss
relating to
subsidiaries ........... 12,930 -- -- -- -- -- (12,930) --
--------- --------- --------- ----- --------- --------- --------- ---------
Income (loss) from
continuing
operations before
income taxes ........... (11,199) (1,537) (4,309) -- 2,844 (10,424) 12,930 (11,695)
Provision (benefit) for
income taxes ............. 115 453 (1,401) -- 1,271 (819) (381)
--------- --------- --------- ----- --------- --------- --------- ---------
Income (loss) from
continuing
operations ............. (11,314) (1,990) (2,908) -- 1,573 (9,605) 12,930 (11,314)
Discontinued
operations:
Profit (loss)
relating to
discontinued
operations ............. (3,581) -- -- -- -- -- 3,581 --
(Loss) from
discontinued
operations (net of
income taxes) .......... -- (873) -- -- -- (2,708) (3,581)
--------- --------- --------- ----- --------- --------- --------- ---------
Net income (loss) ........ $ (14,895) $ (2,863) $ (2,908) $ -- $ 1,573 $ (12,313) $ 16,511 $ (14,895)
========= ========= ========= ===== ========= ========= ========= =========
F-35
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended June 30, 2001
----------------------------------------------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------- ------------ -------------- ------ --------- ------------- ------------- ------------
(In thousands)
Operating activities:
Net income (loss) ........ $(14,895) $ (2,863) $ (2,908) $ -- $ 1,573 $(12,313) $ 16,511 $(14,895)
Adjustment for
discontinued
operation .............. 3,581 873 -- -- -- 2,708 (3,581) 3,581
-------- -------- -------- ----- -------- -------- -------- --------
Income (loss) from
continuing
operations ............. (11,314) (1,990) (2,908) -- 1,573 (9,605) 12,930 (11,314)
Adjustments to
reconcile income
(loss) from
continuing
operations to net
cash provided
(used) by
operating
activities:
Depreciation and
amortization ......... 782 859 3,779 -- 388 4,597 10,405
Deferred income
taxes ................ (4,040) -- 233 -- -- (1,924) (5,731)
(Gain) on sale
of asset ............. -- -- (1,790) -- -- 333 (1,457)
Change in redeemable
common stock ......... (3,135) -- (356) -- -- -- (3,491)
Unrealized foreign
currency (gains)
Losses and other ....... 406 -- 1,113 -- 180 (915) 784
Changes in
operating assets
and liabilities:
Accounts receivable .... 1,549 (591) 10,156 -- (1,814) (10,907) (1,607)
Inventory .............. (25) 533 (12,434) -- (2,086) 12,442 (1,570)
Prepaid expenses
and other ............ 2,407 762 5,132 -- (1,226) (1,811) 5,264
Other assets ........... 1,281 (476) (50) -- (66) 2,093 2,782
Intercompany ........... 27,492 8,338 (34,639) -- 2,599 9,140 (12,930) --
Accounts payable ....... (397) (350) 8,181 -- 4,949 5,860 18,243
Accrued expenses
and other ............ (2,186) 168 389 -- 8,947 (3,882) 3,436
Cash provided by
discontinued
operations ............. -- (1,234) -- -- -- (1,369) (2,603)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash provided
(used) by
operating
activities ........... 12,820 6,019 (23,194) -- 13,444 4,052 -- 13,141
-------- -------- -------- ----- -------- -------- -------- --------
Investing activities:
Capital expenditures ..... (251) (1,072) (2,934) -- (12,100) 9,747 (6,610)
Acquisition of a
business ............... (51,700) -- -- -- -- -- (51,700)
Proceeds from sale
of assets .............. -- -- 25,418 -- -- -- 25,418
Other investing .......... (50) -- -- -- -- (270) (320)
Discontinued
operations ............. -- (5,195) -- -- -- (1,742) (6,937)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash provided
(used) by
investing
activities ........... (52,001) (6,267) 22,484 -- (12,100) 7,735 -- (40,149)
-------- -------- -------- ----- -------- -------- -------- --------
Financing activities:
Cash overdraft ........... (145) 253 2,652 -- -- (106) 2,654
Net (decrease) in
short-term debt ........ (3,969) -- -- -- -- (4,037) (8,006)
Proceeds from
redeemable
preferred stock ........ 45,000 -- -- -- -- -- 45,000
Proceeds from
long-term debt ......... 3,800 23 1 -- -- 5,539 9,363
Payments of
long-term debt ......... (32) (32) (830) -- -- (4,030) (4,924)
Other financing .......... (4,192) -- -- -- -- -- (4,192)
-------- -------- -------- ----- -------- -------- -------- --------
Net cash (used)
by financing
activities ........... 40,462 244 1,823 -- -- (2,634) -- 39,895
-------- -------- -------- ----- -------- -------- -------- --------
Effect of exchange
rate changes on cash ..... -- -- 2 -- (75) (372) (445)
-------- -------- -------- ----- -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents .............. 1,281 (4) 1,115 -- 1,269 8,781 -- 12,442
Cash and cash
equivalents at
beginning of period ...... 11 60 39 -- -- 2,293 2,403
-------- -------- -------- ----- -------- -------- -------- --------
Cash and cash
equivalents at end
of period ................ $ 1,292 $ 56 $ 1,154 $ -- $ 1,269 $ 11,074 $ -- $ 14,845
======== ======== ======== ===== ======== ======== ======== ========
F-36
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, June 30,
2003 2003
------------ --------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents ........................................................... $ 8,682 $ 11,179
Trade receivables, less allowance for doubtful accounts
of $1,431 at December 31, 2003 and $1,445 at June 30, 2003 ........................ 56,778 55,671
Other receivables ................................................................... 3,891 3,642
Inventories ......................................................................... 87,949 88,767
Prepaid expenses and other current assets ........................................... 8,719 10,188
Current assets from discontinued operations ......................................... -- 4,942
--------- ---------
Total current assets ............................................................ 166,019 174,389
Property, plant and equipment, net ..................................................... 63,327 66,440
Intangibles ............................................................................ 7,776 8,669
Other assets ........................................................................... 17,814 14,199
Other assets from discontinued operations .............................................. -- 10,650
--------- ---------
$ 254,936 $ 274,347
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft ...................................................................... $ 3,890 $ 1,686
Loans payable to banks .............................................................. 9,145 38,914
Current portion of long-term debt ................................................... 2,365 24,124
Accounts payable .................................................................... 45,450 56,915
Accrued expenses and other current liabilities ...................................... 44,804 41,609
Current liabilities from discontinued operations .................................... -- 2,051
--------- ---------
Total current liabilities ....................................................... 105,654 165,299
Long-term debt ......................................................................... 156,410 102,391
Other liabilities ...................................................................... 18,898 22,088
Other liabilities from discontinued operations ......................................... -- 198
--------- ---------
Total liabilities ............................................................... 280,962 289,976
--------- ---------
Commitments and contingencies
Redeemable securities:
Series B and C preferred stock ...................................................... 17,065 68,881
--------- ---------
Stockholders' deficit:
Series A preferred stock ............................................................ 521 521
Common stock ........................................................................ 2 2
Paid-in capital ..................................................................... 860 860
Accumulated deficit ................................................................. (40,661) (79,489)
Accumulated other comprehensive income (loss):
Gain on derivative instruments .................................................... 500 81
Cumulative currency translation adjustment ........................................ (4,313) (6,485)
--------- ---------
Total stockholders' deficit ..................................................... (43,091) (84,510)
--------- ---------
$ 254,936 $ 274,347
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
F-37
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (Unaudited)
Six Months Ended
December 31,
-----------------------------
2003 2002
--------- ---------
(In thousands)
Net sales .................................................................................. $ 183,213 $ 176,416
Cost of goods sold ......................................................................... 139,196 130,228
--------- ---------
Gross profit ............................................................................ 44,017 46,188
Selling, general and administrative expenses ............................................... 33,397 32,053
--------- ---------
Operating income ........................................................................ 10,620 14,135
Other:
Interest expense ........................................................................ 8,524 8,160
Interest (income) ....................................................................... (74) (96)
Other (income) expense, net ............................................................. (701) 1,205
Net (gain) on extinguishment of debt .................................................... (23,226) --
--------- ---------
Income from continuing operations before income taxes ................................... 26,097 4,866
Provision for income taxes ................................................................. 3,663 1,841
--------- ---------
Income from continuing operations ....................................................... 22,434 3,025
Discontinued operations:
(Loss) from discontinued operations (net of income taxes) ............................... (124) (11,017)
Gain on disposal of discontinued operations (net of income taxes) ....................... 231 --
--------- ---------
Net income (loss) ....................................................................... 22,541 (7,992)
Other comprehensive income (loss):
Derivative instruments .................................................................. 419 (1,241)
Currency translation adjustment ......................................................... 2,172 (3,654)
--------- ---------
Comprehensive income (loss) ............................................................. $ 25,132 $ (12,887)
========= =========
Net income (loss) ....................................................................... 22,541 (7,992)
Excess of the reduction of redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions ................... 20,138 --
Preferred dividends ........................................................................ (3,851) (4,244)
--------- ---------
Net income (loss) available to common shareholders ...................................... $ 38,828 $ (12,236)
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
F-38
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIT (Unaudited)
For the Six Months Ended December 31, 2003
----------------------------------------------------------------------------------
Accumulated
Preferred Common Stock Other
Stock -------------------- Paid-in Accumulated Comprehensive
Series A Class A Class B Capital Deficit Income (Loss) Total
-------- -------- -------- -------- ----------- ------------- ---------
(In thousands)
Balance, June 30, 2003 ....................... $ 521 $ 1 $ 1 $ 860 $(79,489) $ (6,404) $(84,510)
Excess of the reduction in
redeemable preferred stock over
total assets divested and costs
and liabilities incurred on the
Prince Transactions ........................ 20,138 20,138
Dividends on Series B and C
redeemable preferred stock ............... (4,801) (4,801)
Equity value accreted on Series B and
C redeemable preferred stock ............. 950 950
Derivative instruments ..................... 419 419
Foreign currency translation
adjustment ............................... 2,172 2,172
Net income ................................. 22,541 22,541
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 2003 ................... $ 521 $ 1 $ 1 $ 860 $(40,661) $ (3,813) $(43,091)
======== ======== ======== ======== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements
F-39
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended
------------------------------
December 31,
------------------------------
2003 2002
--------- ---------
(In thousands)
Operating activities:
Net income (loss) ..................................................................... $ 22,541 $ (7,992)
Adjustment for discontinued operations ................................................ (107) 11,017
--------- ---------
Income from continuing operations ..................................................... 22,434 3,025
Adjustments to reconcile income from continuing operations
to net cash provided (used) by operating activities:
Depreciation and amortization ....................................................... 6,745 6,687
Deferred income taxes ............................................................... 93 416
Net (gain) on extinguishment of debt ................................................ (23,226) --
Unrealized foreign currency (gains) and other ....................................... (820) (120)
Changes in operating assets and liabilities:
Accounts receivable ............................................................... (2,102) 2,890
Inventories ....................................................................... (1,985) (10,740)
Prepaid expenses and other current assets ......................................... 572 1,275
Other assets ...................................................................... 605 (821)
Accounts payable .................................................................. (7,071) 17,525
Accrued expenses and other liabilities ............................................ 4,504 3,506
Cash provided (used) by discontinued operations ....................................... (421) 3,799
--------- ---------
Net cash provided (used) by operating activities ................................ (672) 27,442
--------- ---------
Investing activities:
Capital expenditures .................................................................. (2,332) (5,385)
Proceeds from sale of assets .......................................................... 23 2,498
Discontinued operations ............................................................... 14,449 1,492
--------- ---------
Net cash provided (used) by investing activities ................................ 12,140 (1,395)
--------- ---------
Financing activities:
Cash overdraft ........................................................................ 2,204 (5,351)
Net (decrease) in short-term debt ..................................................... (30,049) (3,426)
Proceeds from long-term debt .......................................................... 107,500 1,660
Payments of long-term debt ............................................................ (34,033) (11,752)
Payments of Pfizer obligations ........................................................ (28,300) --
Payments relating to the Prince Transactions and fees ................................. (19,979) --
Debt refinancing costs ................................................................ (11,496) --
--------- ---------
Net cash (used) by financing activities ......................................... (14,153) (18,869)
--------- ---------
Effect of exchange rate changes on cash .................................................. 188 191
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................ (2,497) 7,369
Cash and cash equivalents at beginning of period ......................................... 11,179 6,419
--------- ---------
Cash and cash equivalents at end of period ............................................... $ 8,682 $ 13,788
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
F-40
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 ("PAHC"), the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly its financial position as of December 31, 2003 and its results of
operations and cash flows for the six months ended December 31, 2003 and 2002.
PAHC and/or its subsidiaries are referred to as the "Company".
The condensed consolidated balance sheet as of June 30, 2003 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles in the United States. Additionally,
it should be noted that 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 that the disclosures presented are adequate to make the information
contained herein not misleading, it is suggested that these financial statements
be read in conjunction with the Company's audited consolidated financial
statements for the year ended June 30, 2003.
The Company's Odda, Carbide, and MRT businesses have been classified as
discontinued operations, as discussed in Note 7. These footnotes present
information only for continuing operations, unless otherwise indicated.
The results of operations for the six months ended December 31, 2003 may
not be indicative of results for the full year.
New Accounting Pronouncements:
The Company adopted the following new accounting pronouncements in fiscal
2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS
No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS
No. 149 amends and clarifies accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS
No. 149 did not result in a material impact on the Company's financial
statements.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a
financial instrument, that is within its scope, as a liability (or an asset in
some circumstances). SFAS No. 150 also revises the definition of liabilities to
encompass certain obligations that can, or must, be settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 did not result in an impact
on the Company's financial statements.
The Company will adopt the following new accounting pronouncement in
fiscal 2004:
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits (revised 2003)"
("SFAS No. 132"). This revision to SFAS No. 132 relates to employers'
disclosures about pension plans and other postretirement benefit plans. SFAS No.
132 now requires additional disclosures to describe the types of plan assets,
investment strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods. SFAS
No. 132 is effective for financial statements with fiscal years ending after
December 15, 2003. The interim-period disclosures required by SFAS No. 132 are
effective for interim periods beginning after December 15, 2003. The adoption of
this revision to SFAS No. 132 will not result in a material impact on the
Company's financial statements.
F-41
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. FIN No. 46 is effective for financial statements
for periods ending after March 15, 2004. The adoption of FIN No. 46 will not
result in an impact on the Company's financial statements.
2. Risks and Uncertainties
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and subsidiaries are subject to a
wide variety of complex and stringent federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials and wastes, the remediation of contaminated soil and
groundwater, the manufacture, sale and use of pesticides and the health and
safety of employees. As such, the nature of the Company's current and former
operations and those of its subsidiaries exposes the Company and its
subsidiaries to the risk of claims with respect to such matters.
3. Refinancing
On October 21, 2003, the Company issued 105,000 units consisting of
$85,000 of 13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and
$20,000 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III
B.V. (the "Dutch Senior Notes" and, together with the US Senior Notes, the
"Senior Secured Notes"), an indirect wholly-owned subsidiary of PAHC (the "Dutch
issuer"). The Company used the proceeds from the issuance to: (i) repurchase
$51,971 of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal to 60%
of the principal amount thereof, plus accrued and unpaid interest; (ii) repay
its senior credit facility of $34,888 outstanding at the repayment date; (iii)
satisfy, for a payment of approximately $29,315, certain of its outstanding
obligations to Pfizer Inc., including: (a) $20,075 aggregate principal amount of
its promissory note plus accrued and unpaid interest, (b) $9,748 of accounts
payable, (c) $9,040 of accrued expenses, and (d) future contingent purchase
price obligations under its agreements with Pfizer Inc. by which the Company
acquired Pfizer's medicated feed additive business; and (iv) pay fees and
expenses relating to the above transactions.
F-42
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
A net gain on extinguishment of debt is included in the Company's
condensed consolidated statement of operations, calculated as follows:
Net Gain on Repurchase of 9 7/8% Senior Subordinated Notes due 2008:
Principal amount of repurchased notes..................... $ 51,971
Repurchased at 60% of principal amount.................... (31,183)
Transaction costs......................................... (4,107)
--------
Net gain on repurchase of notes.............................. 16,681
--------
Loss on repayment of senior credit facility.................. (1,018)
--------
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note.......................................... 20,075
-accrued interest on promissory note...................... 1,015
-accounts payable and accrued expenses.................... 18,788
--------
Total obligations paid.................................... 39,878
Cash payment to Pfizer.................................... (29,315)
Transaction costs......................................... (3,000)
--------
Net gain on payment of Pfizer obligations.................... 7,563
--------
Net gain on extinguishment of debt........................... $ 23,226
========
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of PAHC (the "US Issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all PAHC's domestic restricted subsidiaries, and the
Dutch Senior Notes are guaranteed on a senior secured basis by PAHC and by the
restricted subsidiaries of the Dutch issuer, including Phibro Animal Health SA.
The US Senior Notes and related guarantees are secured by substantially all of
PAHC's assets and the assets of its domestic restricted subsidiaries, other than
real property and interests therein, including a pledge of all the capital stock
of such domestic restricted subsidiaries. The Dutch Senior Notes and related
guarantees are secured by a pledge of all the accounts receivable, a security
interest or floating charge on the inventory to the extent permitted by
applicable law, and a mortgage on substantially all of the real property of the
Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the
capital stock of each subsidiary of the Dutch issuer, a pledge of the
intercompany loans made by the Dutch issuer to its restricted subsidiaries and
substantially all of the assets of the U.S. guarantors, other than real property
and interests therein. The indenture governing the Senior Secured Notes provides
for optional make-whole redemptions at any time prior to June 1, 2005, optional
redemption on or after June 1, 2005, and requires the Company to make certain
offers to purchase Senior Secured Notes upon a change of control, upon certain
asset sales and from fifty percent (50%) of excess cash flow (as such terms are
defined in the indenture).
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("senior credit facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities may not exceed $25,000, including aggregate
borrowings under the working capital facility up to $15,000.
Borrowings under the senior credit facility are subject to a borrowing
base formula based on percentages of eligible domestic receivables and domestic
inventory. Under the replacement credit facility, the Company may choose between
two interest rate options: (i) the applicable base rate as defined plus 0.50%
and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior
credit facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the
F-43
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
senior credit facility are available until, and are repayable no later than,
October 31, 2007, although borrowings must be repaid by June 30, 2007 if the
maturity of the Senior Secured Notes has not been extended, as required by the
senior credit facility, by that date.
Pursuant to the terms of an intercreditor agreement, the security interest
securing the Senior Secured Notes and the guarantees made by the Company's
domestic restricted subsidiaries are subordinated to a lien securing the senior
credit facility.
The Company believes that, through the refinancings referred to above, the
liquidity issues mentioned in the Company's June 30, 2003 consolidated financial
statements have been resolved. The Company's replaced senior credit facility and
its note payable to Pfizer were to mature in November 2003 and March 2004,
respectively.
The Company's ability to fund its operating plan relies upon its ability
to continue to successfully implement its efforts to improve its overall
liquidity (through cost reduction activities, working capital improvement plans,
shutdown of unprofitable operations and sales of certain business operations and
other assets) and the continued availability of borrowing under the senior
credit facility. The Company believes that it will be able to comply with the
terms of its covenants under the 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 consents on favorable terms, if at all.
4. Prince Transactions
Effective December 26, 2003 (the "Closing Date"), the Company completed
the divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72,184 to $16,517 (accreted through the
Closing Date) by means of the redemption of all of its shares of Series B
Preferred Stock and a portion of its Series C Preferred Stock; (iii) the
termination of $2,250 in annual management advisory fees payable by the Company
to Palladium; (iv) a cash payment of $10,000 to the Palladium Investors in
respect of the portion of the Company's Preferred Stock not exchanged in
consideration of the business and assets of PMC; (v) the agreement of the Buyer
to pay the Company for advisory fees for the next three years of $1,000, $500,
and $200, respectively (which were pre-paid at closing by the Buyer and
satisfied for $1,300, the net present value of such payments); and (vi) the
Buyer agreed to supply manganous oxide and red iron oxide products and to
provide certain mineral blending services to the Company's Prince Agriproducts
subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer
with certain laboratory, MIS and telephone services, all on terms substantially
consistent with the historic relationship between Prince Agri and PMC, and to
lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an
understanding to receive certain treasury services from Palladium for $100 per
year. Pursuant to definitive agreements, the Company made customary
representations, warranties and environmental and other indemnities, agreed to a
post-closing working capital adjustment, paid $3,958 in full satisfaction of all
intercompany debt owed to PMC, paid a closing fee to Palladium of $500, made
certain capital expenditure adjustments included as part of the intercompany
settlement amount, and agreed to pay for certain out-of-pocket transaction
expenses. PMC retained $414 of its accounts receivable. The Company established
a $1,000 letter of credit escrow for two years to secure its working capital
adjustment and certain indemnification obligations. The Company agreed to
indemnify the Palladium Investors for a portion, at the rate of $0.65 for every
dollar, of
F-44
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
the amount they receive in respect of the disposition of Buyer for less than
$21,000, up to a maximum payment by the Company of $4,000 (the "Backstop
Indemnification Amount"). The Backstop Indemnification Amount would be payable
on the earlier to occur of July 1, 2008 or six months after the redemption date
of all of the Company's Senior Secured Notes due 2007 if such a disposition
closes prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5. The
amount of consideration paid and payable in connection with the Prince
Transactions and all matters in connection therewith were determined pursuant to
arm's length negotiations.
The excess of the reduction in redeemable preferred stock over total
assets divested and costs and liabilities incurred on the Prince Transactions
was recorded as a decrease to accumulated deficit on the Company's condensed
consolidated balance sheet at December 31, 2003, and was calculated as follows:
Series B & C Redeemable Preferred Stock:
Accreted value pre-transaction................................. $ 72,184
Accreted value post-transaction................................ 16,517
--------
Amount of redeemable preferred stock reduction................. 55,667
--------
Assets Divested and Costs Incurred:
PMC net assets divested........................................ 7,430
Cash paid to Palladium Investors for:
-reduction of redeemable preferred stock...................... 10,000
-settlement of PMC intercompany debt.......................... 3,958
-working capital adjustment................................... 1,331
-closing fee.................................................. 500
Transaction costs.............................................. 8,310
Contingent Backstop Indemnification Amount accrued............. 4,000
--------
Total assets divested and costs and liabilities incurred....... 35,529
--------
Excess amount recorded as a decrease to accumulated deficit.... $ 20,138
========
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC for the six months ended December 31, 2003 and 2002 were:
Six Months Ended
December 31,
-------------------
2003 2002
-------- --------
Net sales........................................... $ 11,118 $ 11,041
Operating income.................................... 2,278 2,028
Depreciation and amortization....................... 487 471
The divestiture of PMC has not been reflected as a discontinued operation
due to the existence of the Backstop Indemnification and continuing supply and
service agreements.
F-45
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
5. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average methods; however
certain of the Company's subsidiaries used the last-in, first-out (LIFO) method
of valuing inventories. Obsolete and unsaleable inventories are reflected at
estimated net realizable value. Inventory costs include materials, direct labor
and manufacturing overhead. Inventories consisted of the following as of:
December 31, 2003 June 30, 2003
----------------- -------------
Raw materials............................ $ 20,959 $ 22,277
Work-in-process.......................... 1,768 1,765
Finished goods........................... 65,222 65,357
Excess of FIFO cost over LIFO cost....... -- (632)
-------- --------
Total inventory.......................... $ 87,949 $ 88,767
======== ========
6. Intangibles
Product intangibles cost arising from the acquisition of the medicated
feed additives business of Pfizer Inc. was $10,163 and $10,449 at December 31,
2003 and June 30, 2003, respectively and accumulated amortization was $2,387 and
$1,780 at December 31, 2003 and June 30, 2003, respectively. Amortization
expense was $608 and $624 for the six months ended December 31, 2003 and 2002,
respectively.
7. Debt
Loans Payable to Banks
At December 31, 2003, loans payable to banks included $5,684 under the
senior credit facility with Wells Fargo Foothill, Inc., and $3,461 under foreign
revolving lines of credit.
On October 21, 2003, the Company entered into a new senior credit facility
with Wells Fargo Foothill, Inc., providing for a working capital facility plus a
letter of credit facility. The aggregate amount of borrowings under such working
capital and letter of credit facilities may not exceed $25,000, and the
aggregate amount of borrowings under the working capital facility may not exceed
$15,000.
Borrowings under the senior credit facility are subject to a borrowing
base formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
As of December 31, 2003, the Company was in compliance with the financial
covenants of the senior credit facility. The 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 a
material adverse event (as defined in the agreement) occur. In addition, there
are certain restrictions on additional borrowings, additional liens on the
Company's assets, guarantees, dividend payments, redemption or purchase of the
Company's stock, sale of subsidiaries' stock, disposition of assets,
investments, and mergers and acquisitions.
F-46
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
The senior credit facility contains a lock-box requirement and an
acceleration 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.
Long-Term Debt
As of
----------------------------------
December, 31, 2003 June 30, 2003
------------------ -------------
Senior secured notes due
December 1, 2007.................... $ 105,000 --
Senior subordinated notes
due June 1, 2008.................... 48,029 $ 100,000
Foreign bank loans.................... 5,328 3,750
Pfizer promissory note................ -- 20,075
Bank capital expenditure facility..... -- 1,496
Capitalized lease obligations
and other........................... 418 1,194
--------- ---------
158,775 126,515
Less: current maturities.............. 2,365 24,124
--------- ---------
$ 156,410 $ 102,391
========= =========
Senior Secured Notes due 2007
In October 2003 the Company issued 105,000 units, consisting of $85,000 of
13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and $20,000 of
13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the
"Dutch Senior Notes" and, together with the US Senior Notes, the "Senior Secured
Notes"), an indirect wholly--owned subsidiary of PAHC (the "Dutch issuer").
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of PAHC and the Dutch issuer, respectively. The US Senior
Notes and the Dutch Senior Notes are guaranteed on a senior secured basis by all
PAHC's domestic restricted subsidiaries, and the Dutch Senior Notes are
guaranteed on a senior secured basis by PAHC and by the restricted subsidiaries
of the Dutch issuer, including Phibro Animal Health SA. The US Senior Notes and
related guarantees are secured by substantially all of PAHC's assets and the
assets of its domestic restricted subsidiaries, other than real property and
interests therein, including a pledge of all the capital stock of such domestic
restricted subsidiaries. The Dutch Senior Notes and related guarantees are
secured by a pledge of all the accounts receivable, a security interest or
floating charge on the inventory to the extent permitted by applicable law, and
a mortgage on substantially all of the real property of the Dutch issuer and
each of its restricted subsidiaries, a pledge of 100% of the capital stock of
each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by
the Dutch issuer to its restricted subsidiaries and substantially all of the
assets of the U.S. guarantors, other than real property and interests therein.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires the Company to make certain offers to
purchase Senior Secured Notes upon a change of control, upon certain asset sales
and from fifty percent (50%) of excess cash flow (as such terms are defined in
the indenture).
The indenture contains certain covenants with respect to the Company and
the guarantors, which restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of dividends and other restricted
payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain
payment restrictions affecting subsidiaries, and (f) transactions with
affiliates. The Indenture restricts the Company's ability to consolidate, or
merge with or into, or to transfer all or substantially all of its assets to,
another person.
Senior Subordinated Notes due 2008
The Company issued $100 million aggregate principal amount of 9-7/8%
Senior Subordinated Notes due 2008 ("Senior Subordinated Notes") of which
$51,971 principal amount was repurchased with proceeds of the Senior Secured
Notes. The Senior Subordinated Notes are general unsecured obligations of the
Company and are subordinated in right of payment to all existing and future
senior debt (as defined in the indenture agreement
F-47
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
of the Company) and rank pari passu in right of payment with all other existing
and future senior subordinated indebtedness of the Company. The Senior
Subordinated Notes are unconditionally guaranteed on a senior subordinated basis
by the domestic restricted subsidiaries of the Company. Additional future
domestic subsidiaries may become guarantors under certain circumstances.
The indenture contains certain covenants with respect to the Company and
the Guarantors, which restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of dividends and other restricted
payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain
payment restrictions affecting subsidiaries, and (f) transactions with
affiliates. The Indenture restricts the Company's ability to consolidate, or
merge with or into, or to transfer all or substantially all of its assets to,
another person.
Foreign bank loans
The foreign bank loans are collateralized by the receivables and inventory
of the Company's Koffolk Ltd. (Israel) subsidiary, accrue interest at LIBOR plus
1.25%, and are repayable in equal quarterly payments through 2005.
8. Discontinued Operations
The Company shutdown Odda Smelteverk (Norway) ("Odda") and divested
Carbide Industries (U.K.) ("Carbide"), during the 2003 fiscal year, and sold
Mineral Resource Technologies, Inc. ("MRT") in August 2003. These businesses
have been classified as discontinued operations. The Company's consolidated
financial statements have been reclassified to report separately the operating
results, financial position and cash flows of the discontinued operations.
F-48
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
Odda and Carbide
Operating results of Odda and Carbide were:
Six Months Ended
December 31, 2002
-----------------
OPERATING RESULTS:
Net sales.............................................. $ 9,284
Cost of goods sold..................................... 12,100
Selling, general and administrative expenses........... 2,292
Asset writedown........................................ 7,781
Other income........................................... 2,386
--------
Loss before income taxes.............................. (10,503)
Provision for income taxes............................ 26
--------
Loss from operations.................................. $(10,529)
========
Depreciation and amortization......................... $ 702
========
Mineral Resource Technologies, Inc.
The Company sold MRT on August 28, 2003 for net proceeds, after
transaction costs, of approximately $13,836, subject to certain post-closing
adjustments and escrow requirements. Based upon its assessment of likely
outcomes, the Company does not anticipate a material effect from post-closing
adjustments. Operating results and gain on sale of MRT were:
Six Months Ended
December 31,
------------------
2003 2002
------ -------
OPERATING RESULTS:
Net sales............................................. $3,327 $10,459
Cost of goods sold.................................... 3,135 9,894
Selling, general and administrative expenses.......... 316 1,053
------ -------
Loss before income taxes.............................. (124) (488)
Provision for income taxes............................ -- --
------ -------
Income (loss) from operations......................... $ (124) $ (488)
====== =======
Depreciation and amortization......................... $ -- $ 636
====== =======
Six Months Ended
December 31,
2003
----------------
GAIN ON SALE:
Current assets........................................... $ 5,813
Property, plant & equipment-- net and other assets....... 10,703
Current liabilities...................................... (2,511)
Other liabilities........................................ (400)
Net proceeds of sale..................................... (13,836)
--------
(Gain) on sale........................................... $ (231)
========
F-49
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
Balance sheet items of MRT were:
As of
June 30, 2003
-------------
BALANCE SHEET:
Trade receivables......................................... $ 2,633
Other receivables......................................... 304
Inventories............................................... 1,643
Prepaid expenses and other current assets ................ 362
--------
Current assets from discontinued operations............... $ 4,942
========
Property, plant and equipment - net....................... $ 9,999
Other assets.............................................. 651
--------
Other assets from discontinued operations................. $ 10,650
========
Accounts payable.......................................... $ 1,466
Accrued expenses and other current liabilities............ 585
--------
Current liabilities from discontinued operations.......... $ 2,051
========
Other liabilities......................................... $ 198
--------
Other liabilities from discontinued operations............ $ 198
========
9. Contingencies
Litigation
On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and
the Company were served with a complaint filed by Chevron U.S.A. Inc.
("Chevron") in the United States District Court for the District of New Jersey,
alleging that the operations of CP at its Sewaren plant affected adjoining
property owned by Chevron and alleging that the Company, as the parent of CP, is
also responsible to Chevron. In July 2002, a phased settlement agreement was
reached and a Consent Order entered by the Court. That settlement is in the
process of being implemented. The Company's and CP's portion of the settlement
for past costs and expenses through the entry of the Consent Order was $495 and
was included in selling, general and administrative expenses in fiscal 2002 and
was paid in fiscal 2003. The Consent Order then provides for a period of due
diligence investigation of the property owned by Chevron. The investigation has
been conducted and the results are under review. The investigation costs are
being split with one other defendant, Vulcan Materials Company. Upon completion
of the review of the results of the investigation, a decision will be made
whether to opt out of the settlement or proceed. If no party opts out of the
settlement, the Company and CP will take title to the adjoining Chevron
property, probably through the use of a three-member New Jersey limited
liability company. The third member of the limited liability company will be
Vulcan Materials Company. The Company also has commenced negotiations with
Chevron regarding its allocation of responsibility and associated costs under
the Consent Order. While the costs cannot be estimated with any degree of
certainty at this time, the Company believes that insurance recoveries will be
available to offset some of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency ("the EPA"),
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which such subsidiary agreed to
contribute up to $900 of which $635 has been paid as of June 30, 2003. Some
recovery from insurance and other sources is expected. The Company also has
accrued its best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
oral agreement to pay $425 over six years.
F-50
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 of the
settlement amount.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company is investigating the
matter, which relates to events in the 1950's and 1960's, but management does
not believe that the Company has any liability in this matter.
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.
Environmental Remediation
The Company's operations, properties and subsidiaries are subject to a
wide variety of complex and stringent federal, state, local and foreign
environmental laws and regulations, including those governing the use, storage,
handling, generation, treatment, emission, release, discharge and disposal of
certain materials and wastes, the remediation of contaminated soil and
groundwater, the manufacture, sale and use of pesticides and the health and
safety of employees. As such, the nature of the Company's current and former
operations and those of its subsidiaries exposes the Company and its
subsidiaries to the risk of claims with respect to such matters. Under certain
circumstances, the Company or any of its subsidiaries might be required to
curtail operations until a particular problem is remedied. Known costs and
expenses under environmental laws incidental to ongoing operations are generally
included within operating results. Potential costs and expenses may also be
incurred in connection with the repair or upgrade of facilities to meet existing
or new requirements under environmental laws or to investigate or remediate
potential or actual contamination and from time to time the Company establishes
reserves for such contemplated investigation and remediation costs. In many
instances, the ultimate costs under environmental laws and the time period
during which such costs are likely to be incurred are difficult to predict.
The Company's subsidiaries have, from time to time, implemented procedures
at their facilities designed to respond to obligations to comply with
environmental laws. The Company believes that its operations are currently in
material compliance with such environmental laws, although at various sites its
subsidiaries are engaged in continuing investigation, remediation and/or
monitoring efforts to address contamination associated with their historic
operations.
The nature of the Company's and its subsidiaries' current and former
operations exposes the Company and its subsidiaries to the risk of claims with
respect to environmental matters and the Company cannot assure it will not incur
material costs and liabilities in connection with such claims. Based upon its
experience to date, the Company believes that the future cost of compliance with
existing environmental laws, and liability for known environmental claims
pursuant to such environmental laws, will not have a material adverse effect on
the Company's financial position.
Based upon information available, the Company estimates the cost of
litigation proceedings described above and the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, and closure costs for closed sites to be
approximately $2,193, which is included in current and long-term liabilities in
the December 31, 2003 condensed consolidated balance sheet (approximately $2,791
at June 30, 2003).
F-51
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
10. Guarantees
As part of the Prince Transaction, as is usual for such transactions, the
Company has agreed to indemnify the Palladium Investors for losses arising out
of breach of representations, warranties and covenants. The Company's maximum
liability under such indemnifications is limited to $15,000.
The Company agreed to indemnify the Palladium Investors for a portion, at
the rate of $0.65 for every dollar, of the amount they receive in respect of the
disposition of Buyer for less than $21,000, up to a maximum payment by the
Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop
Indemnification Amount would be payable on the earlier to occur of July 1, 2008
or six months after the redemption date of all of the Company's Senior Secured
Notes due 2007 if such a disposition closes prior to such redemption and six
months after the closing of any such disposition if the disposition closes after
any such redemption. The Company's obligations with respect to the Backstop
Indemnification Amount will cease if the Palladium Investors do not close the
disposition of Buyer by January 1, 2009. The Backstop Indemnification Amount is
included in other liabilities on the Company's condensed consolidated balance
sheet at December 31, 2003.
The Company established a $1,000 letter of credit escrow for two years to
secure its working capital adjustment and certain other indemnification
obligations relating to the Prince Transactions.
11. Business Segments
The Company's reportable segments are Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets more than 500 formulations
and concentrations of medicated feed additives and nutritional feed additives
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products. The Industrial Chemicals segment manufactures and markets a number of
chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, and aerospace industries. The Distribution segment
markets and distributes a variety of industrial, specialty and fine organic
chemicals and intermediates produced primarily by third parties. The All Other
segment manufactures and markets a variety of specialty custom chemicals and
copper-based fungicides. Intersegment sales and transfers were not significant.
The following segment data includes information only for continuing operations.
Animal
Health & Industrial Corporate
Six Months Ended December 31, 2003 Nutrition Chemicals Distribution All Other & Other Total
- ---------------------------------- --------- --------- ------------ --------- --------- --------
Net sales ............................... $128,528 $ 23,661 $ 15,595 $ 15,429 -- $183,213
Operating income/(loss) ................. 14,555 1,600 1,533 846 $ (7,914) 10,620
Depreciation and amortization ........... 4,088 1,288 7 414 948 6,745
Animal
Health & Industrial Corporate
Six Months Ended December 31, 2002 Nutrition Chemicals Distribution All Other & Other Total
- ---------------------------------- --------- --------- ------------ --------- --------- --------
Net sales ............................... $126,626 $ 25,125 $ 15,293 $ 9,372 -- $176,416
Operating income/(loss) ................. 21,013 (822) 1,552 (130) $ (7,478) 14,135
Depreciation and amortization ........... 3,812 1,757 6 362 750 6,687
Animal
Identifiable Assets of Health & Industrial Corporate
Continuing Operations Nutrition Chemicals Distribution All Other & Other Total
- ---------------------- --------- --------- ------------ --------- --------- --------
At December 31, 2003 .................... $192,030 $ 24,504 $ 8,414 $ 13,472 $ 16,516 $254,936
At June 30, 2003 ........................ 190,864 33,191 9,154 12,735 12,811 258,755
F-52
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
12. Consolidating Financial Statements
The units of Senior Secured Notes due 2007 (issued subsequent to fiscal
year end), consisting of US Senior Notes issued by the Company (the "Parent
Issuer") and Dutch Senior Notes issued by Philipp Brothers Netherlands III B.V.
(the "Dutch Issuer"), are guaranteed by certain subsidiaries. The Company and
its U.S. subsidiaries ("U.S. Guarantor Subsidiaries"), excluding The Prince
Manufacturing Company, Prince MFG, LLC and Mineral Resource Technologies, Inc.
(the "Unrestricted Subsidiaries", as defined in the indenture), fully and
unconditionally guarantee all of the Senior Secured Notes on a joint and several
basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of
Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally
guarantee the Dutch Senior Notes. The Dutch issuer and the Belgium Guarantor do
not guarantee the US Senior Notes. Other foreign subsidiaries ("Non-Guarantor
Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S.
Guarantor Subsidiaries include all domestic subsidiaries of the Company other
than the Unrestricted Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech,
Inc., Prince Agriproducts, Inc., Phibrochem, Inc., Phibro Chemicals, Inc.,
Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal
Health U.S., Inc.
The Senior Subordinated Notes due 2008, issued by the Company, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc., The Prince Manufacturing Company, Prince MFG, LLC, Mineral
Resource Technologies, Inc. (until divested), Phibrochem, Inc., Phibro
Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc.,
and Phibro Animal Health U.S., Inc.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent Issuer,
Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium
Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S.
Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor
Subsidiaries are directly or indirectly wholly owned as to voting stock by the
Company.
Investments in subsidiaries are accounted for by the Parent 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. Separate financial
statements of the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries are
not presented because management has determined that such financial statements
would not be material to investors.
F-53
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of December 31, 2003
-------------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium
Issuer Subsidiaries Subsidiaries Issuer Guarantor
------ ------------ -------------- ------ ---------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,997 $ 26 $ 126 $ 21 $ 547
Trade receivables........... 2,569 7 26,043 -- 1,358
Other receivables........... 835 414 1,017 -- 112
Inventory................... 2,942 -- 41,701 -- 16,995
Prepaid expenses and other 1,569 32 1,293 -- 303
-------- ------- -------- ------- -------
Total current assets....... 10,912 479 70,180 21 19,315
-------- ------- -------- ------- -------
Property, plant & equipment,
net......................... 98 197 12,815 -- 18,067
Intangibles.................... -- -- -- -- 1,208
Investment in subsidiaries..... 129,186 -- 3,619 (270) --
Intercompany................... (21,433) 22,343 64,604 20,510 6,810
Other assets................... 15,990 -- 954 -- --
-------- ------- -------- ------- -------
$134,753 $23,019 $152,172 $20,261 $45,400
======== ======= ======== ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft.............. $ -- $ -- $ 3,890 $ -- $ --
Loan payable to banks....... 5,684 -- -- -- --
Current portion of long-term
debt...................... -- -- 287 -- --
Accounts payable............ 890 -- 31,171 -- 1,537
Accrued expenses and other . 12,809 1,553 9,484 506 10,372
-------- ------- -------- ------- -------
Total current liabilities 19,383 1,553 44,832 506 11,909
-------- ------- -------- ------- -------
Long-term debt................. 133,029 -- 4 20,000 --
Intercompany debt.............. -- -- -- 57 32,385
Other liabilities.............. 8,367 -- 6,036 -- 1,376
-------- ------- -------- ------- -------
Total liabilities......... 160,779 1,553 50,872 20,563 45,670
-------- ------- -------- ------- -------
Redeemable securities:
Series C preferred stock.... 17,065 -- -- -- --
-------- ------- -------- ------- -------
Stockholders' (deficit):
Series A preferred stock.... 521 -- -- -- --
Common stock................ 2 1 31 -- --
Paid-in capital............. 860 -- 108,363 23 57
Accumulated (deficit)....... (40,661) 21,465 (7,360) (5,448) (5,450)
Accumulated other
comprehensive --
income (loss):
Gain on derivative
instruments............. 500 -- 500 -- --
Cumulative currency
translation adjustment . (4,313) -- (234) 5,123 5,123
-------- ------- -------- ------- -------
Total stockholders'
(deficit)............. (43,091) 21,466 101,300 (302) (270)
-------- ------- -------- ------- -------
$134,753 $23,019 $152,172 $20,261 $45,400
======== ======= ======== ======= =======
As of December 31, 2003
--------------------------------------------
Non-Guarantor Consolidation Consolidated
Subsidiaries Adjustments Balance
------------- ------------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents .. $ 4,965 $ 8,682
Trade receivables........... 26,801 56,778
Other receivables........... 1,513 3,891
Inventory................... 26,311 87,949
Prepaid expenses and other . 5,522 8,719
------- --------- --------
Total current assets....... 65,112 -- 166,019
------- --------- --------
Property, plant & equipment,
net......................... 32,150 63,327
Intangibles.................... 6,568 7,776
Investment in subsidiaries..... -- (132,535) --
Intercompany................... (14,234) (78,600) --
Other assets................... 870 17,814
------- --------- --------
$90,466 $(211,135) $254,936
======= ========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft.............. $ -- $ 3,890
Loan payable to banks.... 3,461 9,145
Current portion of long-term
debt...................... 2,078 2,365
Accounts payable............ 11,852 45,450
Accrued expenses and other . 10,080 44,804
------- --------- --------
Total current liabilities 27,471 -- 105,654
------- --------- --------
Long-term debt................. 3,377 156,410
Intercompany debt.............. 46,158 (78,600) --
Other liabilities.............. 3,119 18,898
------- --------- --------
Total liabilities......... 80,125 (78,600) 280,962
------- --------- --------
Redeemable securities:
Series C preferred stock.... -- 17,065
------- --------- --------
Stockholders' (deficit):
Series A preferred stock.... -- 521
Common stock................ -- (32) 2
Paid-in capital............. 5,176 (113,619) 860
Accumulated (deficit)....... 14,366 (17,573) (40,661)
Accumulated other
comprehensive --
income (loss):
Gain on derivative
instruments............. -- (500) 500
Cumulative currency
translation adjustment . (9,201) (811) (4,313)
------- --------- --------
Total stockholders'
(deficit)............. 10,341 (132,535) (43,091)
------- --------- --------
$90,466 $(211,135) $254,936
======= ========= ========
F-54
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Six Months Ended December 31, 2003
----------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium
Issuer Subsidiaries Subsidiaries Issuer Guarantor
(In thousands)
Net sales...................... $ 11,219 $13,716 $103,089 -- $15,236
Cost of goods sold............. 8,819 10,139 77,219 -- 13,971
-------- ------- -------- ------ -------
Gross profit................ 2,400 3,577 25,870 -- 1,265
Selling, general and
administrative expenses..... 10,068 1,299 12,375 2 1,084
-------- ------- -------- ------ -------
Operating income (loss) .... (7,668) 2,278 13,495 (2) 181
Other:
Interest expense............ 7,741 18 -- 506 19
Interest (income)........... (3) -- -- -- --
Other (income) expense,
net....................... 528 -- (276) -- (412)
Net (gain) on extinguishment
of debt................... (23,226) -- -- -- --
Intercompany interest and
other..................... (11,745) 1,892 5,488 (510) 1,446
Loss (profit) relating to
subsidiaries.............. (5,348) 532
-------- ------- -------- ------ -------
Income (loss) from
continuing operations
before income taxes...... 24,385 368 8,283 (530) (872)
Provision (benefit) for income
taxes....................... 1,951 96 672 -- (340)
-------- ------- -------- ------ -------
Income (loss) from continuing
operations.................. 22,434 272 7,611 (530) (532)
Discontinued operations:
Profit (loss) relating to
discontinued operations .. (124) -- -- -- --
(Loss) from discontinued
operations (net of income
taxes).................... -- (124) -- -- --
Gain from disposal of
discontinued operations
(net of income taxes)....... 231 -- -- -- --
-------- ------- -------- ------ -------
Net income (loss)........... $ 22,541 $ 148 $ 7,611 $ (530) $ (532)
======== ======= ======== ====== =======
For The Six Months Ended December 31, 2003
------------------------------------------
Non-Guarantor Consolidation Consolidated
Subsidiaries Adjustments Balance
------------ ------------- ------------
Net sales...................... $58,212 $(18,259) $183,213
Cost of goods sold............. 47,307 (18,259) 139,196
------- -------- --------
Gross profit................ 10,905 -- 44,017
Selling, general and
administrative expenses..... 8,569 33,397
------- -------- --------
Operating income (loss) .... 2,336 -- 10,620
Other:
Interest expense............ 240 8,524
Interest (income)........... (71) (74)
Other (income) expense,
net....................... (541) (701)
Net (gain) on extinguishment
of debt................... -- (23,226)
Intercompany interest and
other..................... 3,429 --
Loss (profit) relating to
subsidiaries.............. 4,816 --
------- -------- --------
Income (loss) from
continuing operations
before income taxes...... (721) (4,816) 26,097
Provision (benefit) for income
taxes....................... 1,284 3,663
------- -------- --------
Income (loss) from continuing
operations.................. (2,005) (4,816) 22,434
Discontinued operations:
Profit (loss) relating to
discontinued operations .. -- 124 --
(Loss) from discontinued
operations (net of income
taxes).................... -- (124)
Gain from disposal of
discontinued operations
(net of income taxes)....... -- 231
------- -------- --------
Net income (loss)........... $(2,005) $ (4,692) $ 22,541
======= ======== ========
F-55
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For The Six Months Ended December 31, 2003
----------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium
Issuer Subsidiaries Subsidiaries Issuer Guarantor
------ ------------ -------------- ------ ---------
(In thousands)
Operating activities:
Net income (loss).......... $22,541 $ 148 $ 7,611 $ (530) $ (532)
Adjustment for discontinued
operation................ (107) 124 -- -- --
------- ------ ------- ------ ------
Income (loss) from continuing
operations............... 22,434 272 7,611 (530) (532)
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used)
by operating activities:
Depreciation and amortization 948 487 1,248 -- 1,857
Deferred income taxes.... -- -- -- -- --
Net (gain) on extinguishment
of debt................ (23,226) -- -- -- --
Unrealized foreign currency
(gains) losses and other 259 -- 225 -- (1,380)
Changes in operating assets
and liabilities:
Accounts receivable...... 185 329 (3,590) -- 308
Inventory................ (330) (543) 25 -- (2,250)
Prepaid expenses and other 1,340 273 (892) -- 289
Other assets............. 605 -- (4) -- --
Intercompany............. 2,458 16,879 (13,879) (19,955) 9,912
Accounts payable......... (2,414) (337) 366 -- (2,647)
Accrued expenses and
other.................. 2,076 (128) 5,515 506 3,647
Cash provided (used) by
discontinued operations.. 231 (652) -- -- --
------- ------ ------- ------ ------
Net cash provided (used)
by operating activities 4,566 16,580 (3,375) (19,979) 9,204
------- ------ ------- ------ ------
Investing activities:
Capital expenditures....... -- (62) (648) -- (659)
Proceeds from sale of assets -- -- -- -- --
Discontinued operations.... 13,849 -- -- -- --
------- ------ ------- ------ ------
Net cash provided (used)
by investing activities 13,849 (62) (648) -- (659)
------- ------ ------- ------ ------
Financing activities:
Cash overdraft............. (350) (286) 2,849 -- --
Net increase (decrease) in
short-term debt.......... (32,194) -- -- -- --
Proceeds from long-term debt 85,000 -- -- 20,000 --
Payments of long-term debt (32,679) (13) (867) -- --
Payments of Pfizer obligations (20,075) -- -- -- (8,225)
Payments relating to the Prince
Transactions and fees.... (3,667) (16,312) -- -- --
Debt refinancing costs..... (11,496) -- -- -- --
------- ------ ------- ------ ------
Net cash provided (used)
by financing activities (15,461) (16,611) 1,982 20,000 (8,225)
------- ------ ------- ------ ------
Effect of exchange rate changes
on cash.................... -- -- -- -- 42
------- ------ ------- ------ ------
Net increase (decrease) in cash
and cash equivalents....... 2,954 (93) (2,041) 21 362
Cash and cash equivalents at
beginning of period........ 43 119 2,167 -- 185
------- ------ ------- ------ ------
Cash and cash equivalents at end
of period.................. $ 2,997 $ 26 $ 126 $ 21 $ 547
======= ====== ======= ====== ======
For The Six Months Ended December 31, 2003
------------------------------------------
Non-Guarantor Consolidation Consolidated
Subsidiaries Adjustments Balance
------------ ------------- ------------
Operating activities:
Net income (loss).......... $ (2,005) $ (4,692) $ 22,541
Adjustment for discontinued
operation................ -- (124) (107)
-------- -------- --------
Income (loss) from continuing
operations............... (2,005) (4,816) 22,434
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used)
by operating activities:
Depreciation and amortization 2,205 6,745
Deferred income taxes.... 93 93
Net (gain) on extinguishment
of debt................ -- (23,226)
Unrealized foreign currency
(gains) losses and other 76 (820)
Changes in operating assets
and liabilities:
Accounts receivable...... 666 (2,102)
Inventory................ 1,113 (1,985)
Prepaid expenses and other (438) 572
Other assets............. 4 605
Intercompany............. (231) 4,816 --
Accounts payable......... (2,039) (7,071)
Accrued expenses and
other.................. (7,112) 4,504
Cash provided (used) by
discontinued operations.. -- (421)
-------- -------- --------
Net cash provided (used)
by operating activities (7,668) -- (672)
-------- -------- --------
Investing activities:
Capital expenditures....... (963) (2,332)
Proceeds from sale of assets 23 23
Discontinued operations.... 600 14,449
-------- -------- --------
Net cash provided (used)
by investing activities (340) -- 12,140
-------- -------- --------
Financing activities:
Cash overdraft............. (9) 2,204
Net increase (decrease) in
short-term debt.......... 2,145 (30,049)
Proceeds from long-term debt 2,500 107,500
Payments of long-term debt (474) (34,033)
Payments of Pfizer obligations -- (28,300)
Payments relating to the Prince
Transactions and fees.... -- (19,979)
Debt refinancing costs..... -- (11,496)
-------- -------- --------
Net cash provided (used)
by financing activities 4,162 -- (14,153)
-------- -------- --------
Effect of exchange rate changes
on cash.................... 146 188
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents....... (3,700) -- (2,497)
Cash and cash equivalents at
beginning of period........ 8,665 11,179
-------- -------- --------
Cash and cash equivalents at end
of period.................. $ 4,965 $ -- $ 8,682
======== ======== ========
F-56
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
As of June 30, 2003
----------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium
Issuer Subsidiaries Subsidiaries Issuer Guarantor
------ ------------ -------------- ------ ---------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 43 $ 119 $ 2,167 -- $ 185
Trade receivables........ 2,759 2,452 22,071 -- 1,542
Other receivables........ 957 3 733 -- 518
Inventory................ 2,612 4,278 41,266 -- 13,459
Prepaid expenses and other 3,267 458 981 -- (68)
Current assets from
discontinued operations -- 4,942 -- -- --
-------- ------- -------- --- -------
Total current assets. 9,638 12,252 67,218 -- 15,636
-------- ------- -------- --- -------
Property, plant & equipment,
net...................... 153 3,269 13,297 -- 17,049
Intangibles................. -- -- -- -- 1,818
Investment in subsidiaries.. 96,672 -- 3,619 -- --
Intercompany................ 35,186 (19,431) 59,765 -- 6,881
Other assets................ 11,516 710 1,122 -- --
Other assets from
discontinued
operations............... -- 10,650 -- -- --
-------- ------- -------- --- -------
$153,165 $ 7,450 $145,021 -- $41,384
======== ======= ======== === =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft........... $ 350 $ 286 $ 1,041 -- --
Loan payable to banks.... 32,147 -- -- -- --
Current portion of
long-term debt......... 21,599 66 381 -- --
Accounts payable......... 3,304 2,350 25,926 -- $12,115
Accrued expenses and
other ................. 6,924 1,151 9,931 -- 6,715
Current liabilities
from discontinued
operations ............ -- 2,051 -- -- --
-------- ------- -------- --- -------
Total current
liabilities ....... 64,324 5,904 37,279 -- 18,830
-------- ------- -------- --- -------
Long-term debt.............. 100,073 213 149 -- --
Intercompany debt........... -- -- -- -- 22,302
Other liabilities........... 4,397 114 13,289 -- 1,256
Other liabilities from
discontinued operations.. -- 198 -- -- --
-------- ------- -------- --- -------
Total liabilities...... 168,794 6,429 50,717 -- 42,388
-------- ------- -------- --- -------
Redeemable securities:
Series B and C preferred
stock.................. 68,881 -- -- -- --
-------- ------- -------- --- -------
Stockholders' (deficit):
Series A preferred stock. 521 -- -- -- --
Common stock............. 2 1 31 -- --
Paid-in capital.......... 860 -- 110,883 -- --
Accumulated (deficit)... (79,489) 1,020 (16,499) -- (4,781)
Accumulated other
comprehensive
income (loss):
Gain on derivative
instruments.......... 81 -- 81 -- --
Cumulative currency
translation adjustment (6,485) -- (192) -- 3,777
Total stockholders'
(deficit).......... (84,510) 1,021 94,304 -- (1,004)
-------- ------- -------- --- -------
$153,165 $ 7,450 $145,021 -- $41,384
======== ======= ======== === =======
------------------------------------------
Non-Guarantor Consolidation Consolidated
Subsidiaries Adjustments Balance
------------ ------------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 8,665 $ 11,179
Trade receivables........ 26,847 55,671
Other receivables........ 1,431 3,642
Inventory................ 27,152 88,767
Prepaid expenses and other 5,550 10,188
Current assets from
discontinued operations -- 4,942
-------- --------- --------
Total current assets. 69,645 -- 174,389
-------- --------- --------
Property, plant & equipment,
net...................... 32,672 66,440
Intangibles................. 6,851 8,669
Investment in subsidiaries.. -- (100,291) --
Intercompany................ (9,418) (72,983) --
Other assets................ 851 14,199
Other assets from
discontinued
operations............... -- 10,650
-------- --------- --------
$100,601 $(173,274) $274,347
======== ========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft........... $ 9 1,686
Loan payable to banks.... 6,767 38,914
Current portion of
long-term debt......... 2,078 24,124
Accounts payable......... 13,220 56,915
Accrued expenses
and other ............. 16,888 41,609
Current liabilities
from discontinued
operations ............ -- 2,051
-------- --------- --------
Total current
liabilities ....... 38,962 -- 165,299
-------- --------- --------
Long-term debt.............. 1,956 102,391
Intercompany debt........... 50,681 (72,983) --
Other liabilities........... 3,032 22,088
Other liabilities from
discontinued operations.. -- 198
-------- --------- --------
Total liabilities...... 94,631 (72,983) 289,976
-------- --------- --------
Redeemable securities:
Series B and C preferred
stock.................. -- 68,881
-------- --------- --------
Stockholders' (deficit):
Series A preferred
stock.................. -- 521
Common stock............. -- (32) 2
Paid-in capital.......... 5,179 (116,062) 860
Accumulated (deficit).... 10,860 9,400 (79,489)
Accumulated other
comprehensive
income (loss):
Gain on derivative
instruments.......... -- (81) 81
Cumulative currency
translation adjustment (10,069) 6,484 (6,485)
Total stockholders'
(deficit).......... 5,970 (100,291) (84,510)
-------- --------- --------
$100,601 $(173,274) $274,347
======== ========= ========
F-57
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
For The Six Months Ended December 31, 2002
----------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium
Issuer Subsidiaries Subsidiaries Issuer Guarantor
------ ------------ -------------- ------ ---------
(In thousands)
ASSETS
Net sales................... $ 13,143 $13,132 $ 93,785 -- $18,496
-------- ------- --------- ---- -------
Cost of goods sold.......... 10,540 9,819 72,134 -- 15,442
-------- ------- --------- ---- -------
Gross profit............. 2,603 3,313 21,651 -- 3,054
Selling, general and
administrative expenses.. 9,183 1,285 12,583 -- 946
-------- ------- --------- ---- -------
Operating income (loss) (6,580) 2,028 9,068 -- 2,108
Other:
Interest expense......... 7,437 48 1 -- --
Interest (income)........ (1) -- -- -- (19)
Other expense, net....... 309 -- -- -- 522
Intercompany interest and
other.................. (15,406) 2,477 7,296 -- 1,402
Loss (profit) relating to
subsidiaries........... (2,100) -- -- -- --
-------- ------- --------- ---- -------
Income (loss) from
continuing operations
before income taxes.... 3,181 (497) 1,771 -- 203
Provision for income taxes.. 156 20 206 -- 81
-------- ------- --------- ---- -------
Income (loss) from continuing
operations............... 3,025 (517) 1,565 -- 122
Discontinued operations:
Profit (loss) relating to
discontinued operations (11,017) -- -- -- --
(Loss) from discontinued
operations (net of
income taxes)......... -- (488) -- -- --
-------- ------- --------- ---- -------
Net income (loss)........... $ (7,992) $(1,005) $ 1,565 -- $ 122
======== ======= ========= ==== =======
For The Six Months Ended December 31, 2002
------------------------------------------
Non-Guarantor Consolidation Consolidated
Subsidiaries Adjustments Balance
------------ ------------- ------------
(In thousands)
ASSETS
Net sales................... $ 60,372 $(22,512) $176,416
-------- -------- --------
Cost of goods sold.......... 44,805 (22,512) 130,228
-------- -------- --------
Gross profit............. 15,567 -- 46,188
Selling, general and
administrative expenses.. 8,056 32,053
-------- -------- --------
Operating income (loss) 7,511 -- 14,135
Other:
Interest expense......... 674 8,160
Interest (income)........ (76) (96)
Other expense, net....... 374 1,205
Intercompany interest and
other.................. 4,231 --
Loss (profit) relating to
subsidiaries........... -- 2,100 --
-------- -------- --------
Income (loss) from
continuing operations
before income taxes.... 2,308 (2,100) 4,866
Provision for income taxes.. 1,378 1,841
-------- -------- --------
Income (loss) from continuing
operations............... 930 (2,100) 3,025
Discontinued operations:
Profit (loss) relating to
discontinued operations -- 11,017 --
(Loss) from discontinued
operations (net of
income taxes)......... (10,529) (11,017)
-------- -------- --------
Net income (loss)........... $ (9,599) $ 8,917 $ (7,992)
======== ======== ========
F-58
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- (continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For The Six Months Ended December 31, 2002
---------------------------------------------------------
Parent Unrestricted U.S. Guarantor Dutch Belgium
Issuer Subsidiaries Subsidiaries Issuer Guarantor
------ ------------ -------------- ------ ---------
(In thousands)
ASSETS
Operating Activities:
Net income (loss)......... $ (7,992) $(1,005) $ 1,565 -- $ 122
Adjustment for discontinued
operation................ 11,017 488 -- -- --
-------- ------- ------- ---- -----
Income (loss) from continuing
operations............... 3,025 (517) 1,565 -- 122
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided by
operating activities:
Depreciation and
amortization.......... 750 471 1,752 -- 1,219
Deferred income taxes.... -- -- -- -- --
Unrealized foreign
currency (gains) losses
and other.............. 189 6 (93) -- (1,248)
Changes in operating
assets and liabilities:
Accounts receivable.... 383 577 1,755 -- (906)
Inventory.............. (723) (1,017) (7,945) -- (2,968)
Prepaid expenses and
other................ 1,500 213 1,342 -- 88
Other assets........... (849) (1) 15 -- --
Intercompany........... 4,896 (391) (6,527) -- (596)
Accounts payable....... 722 1,063 15,143 -- (133)
Accrued expenses and
other................ (1,740) (98) (1,958) -- 5,617
Cash provided by
discontinued operations.. -- 554 -- -- --
-------- ------- ------- ---- -----
Net cash provided by
operating activities... 8,153 860 5,049 -- 1,195
-------- ------- ------- ---- -----
Investing Activities:
Capital expenditures....... -- (310) (1,911) -- (1,216)
Proceeds from sale of assets -- -- 2,472 -- --
Discontinued operations.... -- (385) -- -- --
-------- ------- ------- ---- -----
Net cash provided (used)
by investing activities -- (695) 561 -- (1,216)
-------- ------- ------- ---- -----
Financing Activities:
Cash overdraft............. 479 (96) (4,045) -- --
Net (decrease) in
short-term debt.......... (4,616) -- -- -- --
Proceeds from
long-term debt........... -- -- -- -- --
Payments of long-term debt. (4,342) (70) (192) -- --
-------- ------- ------- ---- -----
Net cash (used) by
financing activities... (8,479) (166) (4,237) -- --
-------- ------- ------- ---- -----
Effect of exchange rate
changes on cash............ -- -- (19) -- 38
-------- ------- ------- ---- -----
Net increase (decrease)
in cash and cash
equivalents................ (326) (1) 1,354 -- 17
Cash and cash equivalents
at beginning of period..... 457 52 600 -- 618
-------- ------- ------- ---- -----
Cash and cash equivalents at
end of period.............. $ 131 $ 51 $ 1,954 -- $ 635
======== ======= ======= ==== =====
For The Six Months Ended December 31, 2002
------------------------------------------
Non-Guarantor Consolidation Consolidated
Subsidiaries Adjustments Balance
------------ ------------- ------------
(In thousands)
ASSETS
Operating Activities:
Net income (loss)......... $ (9,599) $ 8,917 $ (7,992)
Adjustment for discontinued
operation................ 10,529 (11,017) 11,017
-------- -------- --------
Income (loss) from
continuing
operations............... 930 (2,100) 3,025
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided by
operating activities:
Depreciation and
amortization.......... 2,495 6,687
Deferred income taxes.... 416 416
Unrealized foreign
currency (gains) losses
and other.............. 1,026 (120)
Changes in operating
assets and liabilities:
Accounts receivable.... 1,081 2,890
Inventory.............. 1,913 (10,740)
Prepaid expenses and
other................ (1,868) 1,275
Other assets........... 14 (821)
Intercompany........... 518 2,100 --
Accounts payable....... 730 17,525
Accrued expenses and
other................ 1,685 3,506
Cash provided by
discontinued operations.. 3,245 3,799
-------- -------- --------
Net cash provided by
operating activities... 12,185 -- 27,442
-------- -------- --------
Investing Activities:
Capital expenditures....... (1,948) (5,385)
Proceeds from sale of
assets .................. 26 2,498
Discontinued operations.... 1,877 1,492
-------- -------- --------
Net cash provided (used)
by investing activities (45) -- (1,395)
-------- -------- --------
Financing Activities:
Cash overdraft............. (1,689) (5,351)
Net (decrease) in
short-term debt.......... 1,190 (3,426)
Proceeds from
long-term debt........... 1,660 1,660
Payments of long-term
debt..................... (7,148) (11,752)
-------- -------- --------
Net cash (used) by
financing activities... (5,987) -- (18,869)
-------- -------- --------
Effect of exchange rate
changes on cash............ 172 191
-------- -------- --------
Net increase (decrease) in
cash and cash
equivalents................ 6,325 -- 7,369
Cash and cash equivalents
at beginning of period..... 4,692 6,419
-------- -------- --------
Cash and cash equivalents at
end of period.............. $ 11,017 -- $ 13,788
======== ======== ========
F-59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The following summaries are subject to the complete text of the statutes
and organizational documents of the Registrants described below and are
qualified in their entirety by reference thereto.
Phibro Animal Health Corporation and Phibro Chemicals, Inc. are New York
corporations. Phibro-Tech, Inc., Prince Agriproducts, Inc., Phibro Animal Health
Holdings, Inc., and Phibro Animal Health U.S., Inc. are Delaware corporations.
Phibrochem, Inc. and C P Chemicals, Inc. are New Jersey Corporations. Western
Magnesium Corp. is a California corporation.
1. Phibro Animal Health Corporation and Phibro Chemicals, Inc., each a New
York corporation.
Under Sections 721 through 725 of the New York Business Corporation Law
(the "NYBCL"), a corporation has broad powers to indemnify its directors,
officers and other employees. These sections (i) provide that the statutory
indemnification and advancement of expenses provisions of the NYBCL are not
exclusive, provided that no indemnification may be made to or on behalf of any
director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his or her acts were committed in bad faith
or were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or that he or she personally gained in fact a
financial profit or other advantage to which he or she was not legally entitled,
(ii) establish procedures for indemnification and advancement of expenses that
may be contained in the certificate of incorporation or by-laws, or, when
authorized by either of the foregoing, set forth in a resolution of the
shareholders or directors or an agreement providing for indemnification and
advancement of expenses, (iii) apply a single standard for statutory
indemnification for third-party and derivative suits by providing that
indemnification for third-party and derivative suits by providing that
indemnification is available if the director or officer acted in good faith, for
a purpose which he or she reasonably believed to be in the best interests of the
corporation, and in criminal actions, had no reasonable cause to believe that
his or her conduct was unlawful and (iv) permit the advancement of litigation
expenses upon receipt of an undertaking to repay such advance if the director or
officer is ultimately determined not to be entitled to indemnification or to the
extent the expenses advanced exceed the indemnification to which the director or
officer is entitled. Section 726 of the NYBCL permits the purchase of insurance
to indemnify a corporation or its officers and directors to the extent
permitted.
Article Sixth of the Certificate of Incorporation of Phibro Animal Health
Corporation provides that each and every person who may become a director of the
corporation shall be relieved from any liability that might exist through
contracting or dealing with the corporation for the benefit of himself or any
firm, association or corporation in which he is or may be in any manner
interested, provided that the interest in any such contract or transaction of
any such director shall be fully disclosed. Article Sixth further provides that
the corporation shall indemnify each director and officer against expenses
reasonably incurred by him in connection with any action, suit, or proceeding to
which he may be made a party by reason of his being or having been a director or
officer of the corporation, to the fullest extent permitted by the NYBCL.
Article Eighth provides that, to the fullest extent permitted by the NYBCL, the
personal liability of directors of the corporation to the corporation or its
shareholders for damages for any breach of duty in such capacity is eliminated.
Article VI of the By-Laws of Phibro Chemicals, Inc. provides that, to the
fullest extent permitted by the laws of the State of New York, a director of the
corporation shall not be liable to the corporation or the shareholders for
monetary damages for breach of fiduciary duty as director. Article VI further
provides that each person who was or is made a party or is threatened to be made
a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the laws of the State of New
York, as the same exists or may hereafter be amended (but, in the case of any
such amendment,
II-1
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than said law permitted the corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith and such indemnification shall continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however that the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the Board of Directors of the corporation.
Such right to indemnification shall be a contract right and shall include the
right to be paid by the corporation the expense incurred in defending any such
proceeding in advance of its final disposition; provided, however, that if the
laws of the State of New York require, the payment of such expenses incurred by
a director or officer in advance of the final disposition of a proceeding shall
be made only upon delivery to the corporation of an undertaking, by or on behalf
of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified by the corporation. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the laws of the State of New York.
2. Phibro-Tech, Inc., Prince Agriproducts, Inc., Phibro Animal Health
Holdings, Inc., and Phibro Animal Health U.S., Inc., each a Delaware
corporation.
Section 145 of the Delaware General Corporation Law ("DGCL") provides
generally and in pertinent part that a Delaware corporation may indemnify its
directors and officers who are or were party or are threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, other than an action
by or in the right of the corporation, by reason of the fact that they are or
were a director, officer, employee or agent of the corporation, or are or were
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by them in
connection with such action, suit or proceeding if they acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
Section 145 further provides that a Delaware corporation may indemnify its
directors and officers who were or are a party or are threatened to be a made
party to any threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
they are or were a director, officer, employee or agent of the corporation, or
are or were serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by them in connection with the defense or settlement of such
action or suit if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) or
(iv) for any transaction from which the director derived an improper personal
benefit.
II-2
Phibro-Tech, Inc.
Article Nine of the Certificate of Incorporation of Phibro-Tech, Inc.
provides that the corporation shall indemnify, to the full extent permitted by
Section 145 of the DGCL, as amended from time to time, all persons whom it may
indemnify pursuant thereto.
Article V of the By-Laws of Phibro-Tech, Inc. provides that the
corporation, to the full extent permitted by the laws of the State of Delaware,
shall indemnify any person who, was or is made a party to or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(including any appeal thereof), whether civil, criminal, administrative or
investigative in nature (other than an action by or in the right of the
corporation), by reason of the fact that such person is or was a director or
officer of the corporation, or it at a time when he was a director or officer of
the corporation, is or was serving at the request of, or to represent the
interests of, the corporation as a director, officer, partner, fiduciary,
employee or agent (a "Subsidiary Officer") of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise (and "Affiliated
Entity"), against expenses (including attorneys' fees and disbursements), costs,
judgment, fines, penalties and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interest of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful; provided, however,
that the corporation shall not be obligated to indemnify against any amount paid
in settlement unless the corporation has consented to such settlement, which
consent shall not be unreasonably withheld. The termination or any action suit
or proceeding by judgment, order, settlement or conviction or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, that such
person had reasonable cause to believe that his or her conduct was unlawful.
Article V further provides that the corporation, to the full extent permitted by
the laws of the State of Delaware, shall indemnify any person who was or is made
a party to or is threatened to be made a party to any threatened, pending or
completed action or suit (including any appeal thereof) brought in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director or officer of the corporation, or, if at a time
when he was a director or officer to the corporation, is or was serving at the
request or, or to represent the interests of, the corporation as a Subsidiary
Officer of an Affiliated Entity against expenses (including attorneys' fees and
disbursements) and costs actually and reasonably incurred by such person in
connection with such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to the corporation unless, and except to the extent that, the Court of
Chancery of the State of Delaware or the court in which such judgment was
rendered shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses and costs as the
Court of Chancery of the State of Delaware or such other court shall deem
proper. Any indemnification described in the preceding paragraph shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification is proper under the circumstances because such person has
met the applicable standard as set forth above. Such determination shall be made
(a) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding in respect of
which indemnification is sought or by majority vote of the members of a
committee of the Board of Directors composed of at least three members each of
whom is not a party to such action, suit or proceeding, or (b) if such quorum is
not obtainable and/or such a committee is not established or obtainable, or,
even if obtainable, if a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (c) by the stockholders.
Expenses and costs incurred by an officer or director in defending any such
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt or an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the corporation. In addition, the corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of, or to
represent the interests of, the corporation as a Subsidiary Officer of any
Affiliated Entity, against any liability
II-3
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under the
provisions of Article V or applicable law.
Prince Agriproducts, Inc.
Article IX of the Certificate of Incorporation of Prince Agriproducts,
Inc. provides that the corporation shall indemnify each director and officer
thereof against all costs and expenses reasonably incurred by or imposed upon
him in connection with or arising out of any action, suit or proceeding in which
he may be involved or to which he may be made a party by reason of his being or
having been a director of officer of the corporation, except in relation to
matters as to which he shall be finally adjudged in any such action, suit or
proceeding to be liable for negligence or misconduct in the performance of his
duty as such director or officer. In the case of settlement of any such action,
suit or proceeding, such director or officer shall be indemnified by the
corporation against the cost and expense of such settlement, including any
amount paid to the corporation or to such other corporation, reasonably incurred
by him, after and only after (a) the corporation shall have been advised by
independent counsel that such director or officer is not liable for negligence
or misconduct in the performance of his duty as such director or officer in
relation to the matters covered by such action, suit or proceeding, and that
such cost and expense does not substantially exceed the expense which might
reasonably be incurred by such director or officer in conducting such action,
suit or proceeding to a final conclusion, or (b) the holders of a majority of
the shares of the capital stock of the corporation issued and outstanding in the
hands of disinterested persons and entitled to vote shall by vote at any annual
meeting of the stockholders, or at any special meeting called for the purpose,
approve such settlement and the indemnification of such director or officer.
"Disinterested persons" as used therein shall mean any (w) person other than a
director or officer who, at the time, is or may, as such director or officer, be
entitled to indemnification pursuant to the foregoing provisions, (x) any
corporation or organization of which any such person owns of record or
beneficially five per cent (5%) or more of the voting stock, (y) any firm or
association of which any such person is a member, and (z) any spouse, child,
parent, brother or sister or any such stockholder.
Phibro Animal Health Holdings, Inc.
Article Eighth of the Certificate of Incorporation of Phibro Animal Health
Holdings, Inc. provides that the corporation shall, to the fullest extent
permitted by law, as the same is now or may hereafter be in effect, indemnity
each person (including the heirs, executors, administrators and other personal
representatives of such person) against expenses, including attorneys' fees,
judgements, fines and amounts paid in settlement, actually and reasonably
incurred by such person in connection with any threatened, pending or completed
suit, action or proceeding (whether civil, criminal, administrative or
investigative in nature or otherwise) in which such person may be involved by
reason of the fact that he or she is or was a director or officer of the
corporation or is or was serving any other incorporated or unincorporated
enterprise in such capacity at the request of the corporation.
Section 6 of the By-Laws of Phibro Animal Health Holdings, Inc. provides
that Each person who was or is a party or is threatened to be made a party to or
is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he,
or a person of whom he is the legal representative, is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action or inaction in an official capacity or in any other capacity
while serving as director, officer, employee or agent, shall be indemnified and
held harmless by the corporation to the fullest extent permitted by the General
Corporation Law of Delaware, as amended from time to time, against all costs,
charges, expenses, liabilities and losses (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and that indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his heirs, executors and administrators; provided, however, that, except as
provided in section 6.2, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
that person, only if that proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in these by-laws shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in
II-4
advance of its final disposition; provided, however, that, if the General
Corporation Law of Delaware, as amended from time to time, requires, the payment
of such expenses incurred by a director or officer in his capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
that person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a proceeding
shall be made only upon delivery to the corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced, if it
shall ultimately be determined that such director or officer is not entitled to
be indemnified under these by-laws or otherwise. The corporation may, by action
of its Board, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
Phibro Animal Health U.S., Inc.
Article Eighth of the Certificate of Incorporation of Phibro Animal Health
U.S., Inc. provides that the corporation shall, to the fullest extent permitted
by law, as the same is now or may hereafter be in effect, indemnity each person
(including the heirs, executors, administrators and other personal
representatives of such person) against expenses, including attorneys' fees,
judgements, fines and amounts paid in settlement, actually and reasonably
incurred by such person in connection with any threatened, pending or completed
suit, action or proceeding (whether civil, criminal, administrative or
investigative in nature or otherwise) in which such person may be involved by
reason of the fact that he or she is or was a director or officer of the
corporation or is or was serving any other incorporated or unincorporated
enterprise in such capacity at the request of the corporation.
Section 6 of the By-Laws of Phibro Animal Health U.S., Inc. provides that
Each person who was or is a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he,
or a person of whom he is the legal representative, is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action or inaction in an official capacity or in any other capacity
while serving as director, officer, employee or agent, shall be indemnified and
held harmless by the corporation to the fullest extent permitted by the General
Corporation Law of Delaware, as amended from time to time, against all costs,
charges, expenses, liabilities and losses (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and that indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his heirs, executors and administrators; provided, however, that, except as
provided in section 6.2, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
that person, only if that proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in these by-laws shall be a
contract right and shall include the right to be paid by the corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the General Corporation Law of
Delaware, as amended from time to time, requires, the payment of such expenses
incurred by a director or officer in his capacity as a director or officer (and
not in any other capacity in which service was or is rendered by that person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a proceeding shall
be made only upon delivery to the corporation of an undertaking, by or on behalf
of such director or officer, to repay all amounts so advanced, if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under these bylaws or otherwise. The corporation may, by action of
its Board, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
3. C P Chemicals, Inc. and Phibrochem, Inc, each a New Jersey corporation
Section 14A:3-5 of the New Jersey Business Corporation Act ("NJBCA")
provides that a New Jersey business corporation shall have the power to
indemnify a corporate agent against expenses and liabilities in connection with
any proceeding involving such persons by reason of his serving or having served
in such capacity or for such person's acts taken in such capacity as a director,
officer, employee or agent of the corporation if such actions were taken in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal
proceeding, if he had no
II-5
reasonable cause to believe his conduct was unlawful, provided that any such
proceeding is not by or in the right of the corporation. Section 14A:3-5 further
provides that a New Jersey corporation shall have the power to indemnify its
corporate agent against expenses incurred in connection with any proceeding by
or in the right of the corporation to procure a judgment in its favor which
involves such person by reason of his serving or having served in such capacity,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. However, in such proceeding no
indemnification shall be provided in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Superior Court or the court in which such
proceeding was brought shall determine upon application that despite the
adjudication of liability, but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnification for such expenses as
the Superior Court or such other court shall deem proper. Section 14A:3-5
defines a "corporate agent" as any person who is or was a director, officer,
employee or agent of the indemnifying corporation or of any constituent
corporation absorbed by the indemnifying corporation in a consolidation or
merger and any person who is or was a director, officer, trustee, employee or
agent of any other enterprise, serving as such at the request of the
indemnifying corporation, or of any such constituent corporation, or the legal
representative of any such director, officer, trustee, employee or agent.
Section 14A:2-7(3) of the NJBCA enables a corporation in its certificate of
incorporation to limit the liability of directors and officers of the
corporation to the corporation or its shareholders. Specifically, the
certificate of incorporation may provide that directors and officers of the
corporation will not be personally liable for money damages for breach of a duty
as a director or an officer, except for any breach of duty based upon an act or
omission (i) in breach of the director's or officer's duty of loyalty to the
corporation or its shareholders, (ii) not in good faith or involving a knowing
violation of law, or (iii) resulting in the receipt by such director of an
improper personal benefit.
C P Chemicals, Inc.
Article VII, Section 7 of the By-Laws of C P Chemicals, Inc. provides that
the corporation shall indemnify its officers, directors, employees and agents to
the extent permitted by the General Corporation Law of New Jersey.
Phibrochem, Inc.
Article VII of the By-Laws of Phibrochem, Inc. provides that, to the
fullest extent permitted by the NJBCA as the same exists or may be amended, a
director of the corporation shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as director.
Article VII further provides that each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the NJBCA, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the corporation to provide broader indemnification rights than said law
permitted the corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however that the corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding or part thereof initiated by such person only if such proceeding or
part thereof was authorized by the Board of Directors of the corporation. Such
right to indemnification shall be a contract right and shall include the right
to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that if the
NJBCA requires, the payment of such expenses incurred by a director or officer
in his or her capacity as a director or officer (and not in any other capacity
in which service
II-6
was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding shall be made only upon delivery to the
corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified by the corporation The
corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
Article VII further provides that the corporation may maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the NJBCA.
4. Western Magnesium Corp., a California corporation.
Section 317 of the California General Corporation Law provides generally
and in pertinent part that a California corporation may indemnify its directors
and officers against expenses, judgments, fines and settlements actually and
reasonably incurred in connection with any threatened, pending or completed
civil, criminal, administrative or investigative action, other than an action by
or in the right of the corporation, if, in connection with the matters in issue,
they acted in good faith and in a manner the person reasonably believed to be in
the best interests of the corporation and, in the case of a criminal proceeding,
had no reasonable cause to believe the conduct of the person was unlawful.
Section 317 further provides that, in connection with the defense or settlement
of any action by or in the right of the corporation, a California corporation
may indemnify its directors and officers against expenses actually and
reasonably incurred by that person in connection with the defense or settlement
of the action if the person acted in good faith, in a manner the person believed
to be in the best interest of the corporation and its shareholders. Section 317
further provides that a California corporation may grant its directors and
officer additional rights of indemnification through Articles of Incorporation
and By-Laws provisions, and otherwise.
II-7
Item 21. Exhibits and Financial Statement Schedules.
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Composite Certificate of Incorporation of Phibro Animal Health
Corporation(14)
3.2 By-laws of Phibro Animal Health Corporation(1)
3.3 Certificate of Incorporation of Phibro-Tech, Inc.(1)
3.4 By-Laws of Phibro-Tech, Inc.(1)
3.5 Certificate of Incorporation of C P Chemicals, Inc.(1)
3.6 By-Laws of C P Chemicals, Inc.(1)
3.7 Certificate of Incorporation of Prince Agriproducts, Inc.(1)
3.8 By-Laws of Prince Agriproducts, Inc.(1)
3.9 Certificate of Incorporation of Phibro Animal Health Holdings,
Inc.(15)
3.10 By-Laws of Phibro Animal Health Holdings, Inc.(15)
3.11 Certificate of Incorporation of Phibro Animal Health U.S.,
Inc.(15)
3.12 By-Laws of Phibro Animal Health U.S., Inc.(15)
3.13 Certificate of Incorporation of Phibrochem, Inc.(1)
3.15 By-Laws of Phibrochem, Inc.(1)
3.16 Certificate of Incorporation of Phibro Chemicals, Inc.(1)
3.17 By-Laws of Phibro Chemicals, Inc.(1)
3.18 Certificate of Incorporation of Western Magnesium Corp.(1)
3.19 By-Laws of Western Magnesium Corp.(1)
3.20 Deed of Incorporation Articles of Association of Philipp Brothers
Netherlands III B.V.(16)
3.21 Articles of Association of Phibro Animal Health SA.(15)
4.1 Indenture, dated as of June 11, 1998, among Registrant, the
Guarantors named therein and The Chase Manhattan Bank, as
trustee, relating to the
9 7/8% Senior Subordinated Notes due 2008 of Registrant, and
exhibits thereto, including Form of 9 7/8% Senior Subordinated
Note due 2008 of Company.(1)
4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among
Registrant, the Guarantors named therein and The Chase Manhattan
Bank, as trustee, relating to the 9 7/8% Senior Subordinated
Notes due 2008 of Registrant.(10)
4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among
Registrant, the Guarantors named therein and JPMorgan Chase Bank,
as trustee, relating to the 9 7/8% Senior Subordinated Notes due
2008 of Registrant.(10)
4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among
Registrant, the Guarantors named therein and JPMorgan Chase Bank,
as trustee, relating to the 9 7/8% Senior Subordinated Notes due
2008 of Registrant.(10)
4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among
Phibro Animal Health Corporation, the Guarantors named therein
and JPMorgan Chase Bank, as trustee, relating to the 9 7/8%
Senior Subordinated Notes due 2008 of Registrant.(11)
4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among
Phibro Animal Health Corporation, the Guarantors named therein
and JPMorgan Chase Bank, as trustee, relating to the 9 7/8%
Senior Subordinated Notes due 2008 of Registrant.(13)
4.2 Indenture, dated as of October 21, 2003, by and among Phibro
Animal Health Corporation and Philipp Brothers Netherlands III
B.V., as Issuers, the Guarantors named therein, and HSBC Bank
USA, as Trustee and Collateral Agent.(12)
Certain instruments which define the rights of holders of long-term debt
of Registrant and its consolidated subsidiaries have not been filed as Exhibits
to this Report since the total amount of securities authorized under any such
instrument does not exceed 10% of the total assets of Registrant and its
subsidiaries on a consolidated basis, as of June 30, 2003. For a description of
such indebtedness, see Note 8 of Notes to Consolidated Financial Statements.
Registrant hereby agrees to furnish copies of such instruments to the Securities
and Exchange Commission upon its request.
II-8
5.1 Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP.(16)
5.2 Opinion of Allen & Overy.(16)
5.3 Opinion of Allen & Overy.(16)
10.1 Manufacturing Agreement, dated May 15, 1994, by and between Merck
& Co., Inc., Koffolk, Ltd., and Registrant.(1)+
10.2 Lease, dated July 25, 1986, between Registrant and 400 Kelby
Associates, as amended December 1, 1986 and December 30, 1994.(1)
10.3 Lease, dated June 30, 1995, between First Dice Road Co. and
Phibro-Tech, Inc., as amended May 1998.(1)
10.4 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and
Israel Land Administration.(1)
10.5 Master Lease Agreement, dated February 27, 1998, between General
Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1)
10.6 Stockholders Agreement, dated December 29, 1987, by and between
Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S.
Sussman.(1)
10.7 Employment Agreement, dated December 29, 1987, by and between
Registrant and Marvin S. Sussman.(1)++
10.8 Stockholders Agreement, dated February 21, 1995, between James O.
Herlands and Phibro-Tech, Inc., as amended as of June 11,
1998.(1)
10.9 Form of Severance Agreement, dated as of February 21, 1995,
between Registrant and James O. Herlands.(1)++
10.10 Agreement of Limited Partnership of First Dice Road Company,
dated June 1, 1985, by and among Western Magnesium Corp., Jack
Bendheim, Marvin
S. Sussman and James O. Herlands, as amended November 1985.(1)
10.11 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred
Compensation Plan Trust, dated as of January 1, 1994, by and
between Registrant on its own behalf and on behalf of C P
Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder;
Philipp Brothers Chemicals,
Inc. Retirement Income and Deferred Compensation Plan, dated
March 18, 1994 "Retirement Income and Deferred Compensation
Plan").(1)++
10.11.1 First, Second and Third Amendments to Retirement Income and
Deferred Compensation Plan.(2)++
10.12 Form of Executive Income Deferred Compensation Agreement, each
dated March 11, 1990, by and between Registrant and each of Jack
Bendheim, James Herlands and Marvin Sussman.(1)++
10.13 Form of Executive Income Split Dollar Agreement, each dated March
1, 1990, by and between Registrant and each of Jack Bendheim,
James Herlands and Marvin Sussman.(1)++
10.14 Administrative Consent Order, dated March 11, 1991, issued by the
State of New Jersey Department of Environmental Protection,
Division of Hazardous Waste Management, to C.P. Chemicals,
Inc.(1)
10.15 Agreement for Transfer of Ownership, dated as of June 8, 2000,
between C. P. Chemicals, Inc. ("CP") and the Township of
Woodbridge ("Township"), and related Environmental
Indemnification Agreement, between CP and Township, and Lease,
between Township and CP.(2)
10.16 Stockholders' Agreement, dated as of January 5, 2000, among
shareholders of Penick Holding Company ("PHC"), and Certificate
of Incorporation of PHC and Certificate of Designation,
Preferences and Rights of Series A Redeemable Cumulative
Preferred Stock of PHC.(2)
10.17 Separation Agreement among Registrant, Phibro Tech, Inc. and
Nathan Bistricer dated as of October 4, 2000.(3)
10.18 Stock Purchase Agreement between Phibro Tech, Inc. and Nathan
Bistricer dated as of October 4, 2000.(3)
10.19 Asset Purchase Agreement, dated as of September 28, 2000, among
Pfizer, Inc., the Asset Selling Corporations (named therein) and
Registrant, and various exhibits and certain Schedules
thereto.(3)+
10.19.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement,
dated as of September 28, 2000, among Pfizer, Inc., the Asset
Selling Corporations (named therein) and Registrant.(10)
10.20 Stock Purchase Agreement, dated as of November 30, 2000, between
Registrant and the Purchasers (as defined therein).(4)
II-9
10.21 Stockholders' Agreement, dated as of November 30, 2000, among
Registrant, the Investor Stockholders (as defined therein) and
Jack C. Bendheim.(4)
10.22 United States Asset Purchase Agreement between Phibro-Tech, Inc.
and Nufarm, Inc. dated as of May 1, 2001.(5)
10.22.1 Amendment No. 1 to United States Asset Purchase Agreement between
Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001.(6)
10.23 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated
as of May 1, 2001.(5)
10.24 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001.(5)
10.25 Management and Advisory Services Agreement dated November 30,
2000 between Registrant and Palladium Equity Partners,
L.L.C.(7)++
10.26 Employment Agreement, dated May 28, 2002, by and between
Registrant and Gerald K. Carlson.(8)++
10.27 Agreement dated as of May 2, 2003, by and between PAH Management
Company, Ltd. and David McBeath.(10) ++
10.28 Stock Purchase Agreement, dated August 14, 2003, by and between
Registrant and Cemex, Inc.(9)!
10.29 Loan and Security Agreement, dated October 21, 2003, by and
among, the lenders identified on the signature pages thereto,
Wells Fargo Foothill, Inc., and Phibro Animal Health Corporation
("Parent), and each of Parent's Subsidiaries identified on the
signature pages thereto.(13)
10.30 Amendment Number One to Loan and Security Agreement dated
November 14, 2003.(13)
10.31 Intercreditor and Lien Subordination Agreement, dated as of
October 21, 2003, made by and among Wells Fargo Foothill, Inc.,
HSBC Bank USA, Phibro Animal Health Corporation ("Parent") and
those certain subsidiaries of the Parent party thereto.(13)
10.32 Purchase and Sale Agreement dated as of December 26, 2003 by and
among Phibro Animal Health Corporation ("PAHC"), Prince MFG, LLC
("Prince MFG"), The Prince Manufacturing Company ("Prince" and
together with PAHC and Prince MFG, the "Phibro Parties"),
Palladium Equity Partners II, L.P.("PEP II"), Palladium Equity
Partners II-A, L.P.,("PEP II-A"), Palladium Equity Investors II,
L.P.("PEI II", and together with PEP II and PEP II-A, the
"Investor Stockholders" , and Prince Mineral Company,
Inc.("Buyer")(14)
10.33 Environmental Indemnification Agreement dated as of December 26,
2003 between the Phibro Parties and Buyer.(14)
10.34 Amendment to Stockholders Agreement dated as of December 26, 2003
between PAHC, the Investor Stockholders and Jack Bendheim.(14)
10.35 Advisory Fee Agreement dated as of December 26, 2003 between
Buyer and PAHC.(14)
10.36 Amended and Restated Management Services Agreement dated as of
October 21, 2003 between Palladium Capital Management, L.L.C and
PAHC.(14)
12 Computation of Ratio of Earnings to Fixed Charges.(15)
21 List of Subsidiaries.(15)
23.1 Consent of PricewaterhouseCoopers LLP.(16)
23.2 Consent of Golenbock Eiseman Assor Bell & Peskoe LLP (included in
Exhibit 5.1).(16)
23.3 Consent of Allen & Overy (included in Exhibit 5.2).(16)
23.4 Consent of Allen & Overy (included in Exhibit 5.3).(16)
24.1 Powers of Attorney (included on signature pages hereof).
25.1 Statement of Eligibility of HSBC Bank USA on Form T-1.(16)
99.1 Form of Letter of Transmittal.(16)
99.2 Form of Notice of Guaranteed Delivery.(16)
99.3 Form of Letter to Holders of Units consisting of $850 Principal
Amount of 13% Senior Secured Notes due 2007 of Phibro Animal
Health Corporation and $200 Principal Amount of 13% Senior
Secured Notes due 2007 of Philip Brothers Netherlands III B.V. in
exchange for Units consisting of $850 Principal Amount of 13%
Senior Secured Notes due 2007 of Phibro Animal Health Corporation
and $200 Principal Amount of 13% Senior Secured Notes due 2007 of
Philipp Brothers Netherlands III B.V. Which Have Been Registered
Under the Securities Act of 1933, as amended.(16)
II-10
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees Concerning Offer For All Outstanding
Units consisting of $850 Principal Amount of 13% Senior Secured
Notes due 2007 of Phibro Animal Health Corporation and $200
Principal Amount of 13% Senior Secured Notes due 2007 of Philip
Brothers Netherlands III B.V. in exchange for Units consisting of
$850 Principal Amount of 13% Senior Secured Notes due 2007 of
Phibro Animal Health Corporation and $200 Principal Amount of 13%
Senior Secured Notes due 2007 of Philipp Brothers Netherlands III
B.V. Which Have Been Registered Under the Securities Act of 1933,
as amended.(16)
99.5 Form of Letter to Clients Concerning Offer For All Outstanding
Units consisting of $850 Principal Amount of 13% Senior Secured
Notes due 2007 of Phibro Animal Health Corporation and $200
Principal Amount of 13% Senior Secured Notes due 2007 of Philip
Brothers Netherlands III B.V. in exchange for Units consisting of
$850 Principal Amount of 13% Senior Secured Notes due 2007 of
Phibro Animal Health Corporation and $200 Principal Amount of 13%
Senior Secured Notes due 2007 of Philipp Brothers Netherlands III
B.V. Which Have Been Registered Under the Securities Act of 1933,
as amended.(16)
99.6 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.(16)
- ----------
1 Filed as an Exhibit to the Registrant's Registration Statement on Form S-4,
No. 333-64641.
2 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
3 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2000.
4 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
5 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2001.
6 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
7 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
8 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
9 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
September 11, 2003.
10 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003.
11 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 2, 2003.
12 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 31, 2003.
13 Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2003.
14 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
January 12, 2004.
15 Filed herewith.
16 To be filed by amendment.
+ A request for confidential treatment has been granted for portions of such
document. Confidential portions have been omitted and furnished separately
to the SEC in accordance with Rule 406(b).
! A request for confidential treatment has been furnished to the SEC for
portions of such document. Confidential portions have been omitted and
furnished separately to the SEC in accordance with Rule 406(b).
++ This Exhibit is a management compensatory plan or arrangement.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from
II-11
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this registration statement to be signed by the undersigned,
thereunto duly authorized, in the city of Fort Lee, State of New Jersey on
February 18, 2004.
PHIBRO ANIMAL HEALTH CORPORATION
By: /s/ Jack C. Bendheim By: /s/ Gerald K. Carlson
------------------------------------ -------------------------------
Jack C. Bendheim Gerald K. Carlson
Chairman of the Board Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Jack C. Bendheim and Gerald K. Carlson,
severally, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place or stead, in any
and all capacities, to sign the within Registration Statement and any and all
amendments thereto, and to file the same, and all exhibits thereto, and any
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
------------------------------------ ----- ----
/s/ Gerald K. Carlson
------------------------------------ Chief Executive Officer February 18, 2004
Gerald K. Carlson (Principal Executive Officer)
/s/ Jack C. Bendheim
------------------------------------ Director, Chairman of the Board February 18, 2004
Jack C. Bendheim (Principal Executive Officer)
/s/ Richard G. Johnson
------------------------------------ Chief Financial Officer February 18, 2004
Richard G. Johnson (Principal Financial Officer
and Principal Accounting Officer)
/s/ Marvin S. Sussman
------------------------------------ Director February 18, 2004
Marvin S. Sussman
------------------------------------ Director
James O. Herlands
/s/ Sam Gejdenson
------------------------------------ Director February 18, 2004
Sam Gejdenson
------------------------------------ Director
Peter Joseph
II-13
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this registration statement to be signed by the undersigned,
thereunto duly authorized, in the city of Fort Lee, State of New Jersey on
February 18, 2004.
PHILIPP BROTHERS NETHERLANDS III B.V.
By: Philipp Brothers Netherlands II B.V.
------------------------------------
By: /s/ Jack C. Bendheim
------------------------------------
Jack C. Bendheim
Managing Director
/s/ Joseph Katzenstein
------------------------------------
Joseph Katzenstein
Managing Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. Bendheim his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement and any and all amendments thereto, and to file
the same, and all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- ----------------------- ----- ----
/s/ Jack C. Bendheim Managing Director February 18, 2004
- ----------------------- (Principal Executive
Jack C. Bendheim Officer, Principle
Financial Officer and
Pricipal Accounting
Officer)
/s/ Joseph Katzenstein Managing Director February 18, 2004
- -----------------------
Joseph Katzenstein
II-14
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this registration statement to be signed by the undersigned,
thereunto duly authorized, in the city of Fort Lee, State of New Jersey on
February 18, 2004.
PHIBRO-TECH, INC.
By: /s/ Jack C. Bendheim
------------------------------------
Jack C. Bendheim
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. Bendheim, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement and any and all amendments thereto, and to file
the same, and all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
------------------ ----- ----
/s/ Jack C. Bendheim Director and Chief Executive
------------------------------------ Officer (Principal Executive February 18, 2004
Jack C. Bendheim Officer)
/s/ Marvin S. Sussman Director
------------------------------------ February 18, 2004
Marvin S. Sussman
Director
------------------------------------
James O. Herlands
/s/ W. Dwight Glover President
------------------------------------ February 18, 2004
W. Dwight Glover
/s/ David C. Storbeck Vice President, Chief Financial
------------------------------------ Officer (Principal Financial February 18, 2004
David C. Storbeck Officer and Principal Accounting
Officer)
II-15
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this registration statement to be signed by the undersigned,
thereunto duly authorized, in the city of Fort Lee, State of New Jersey on
February 18, 2004.
PRINCE AGRIPRODUCTS, INC.
By: /s/ Jack C. Bendheim
-----------------------------------
Jack C. Bendheim
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. Bendheim, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement and any and all amendments thereto, and to file
the same, and all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
------------------ ----- ----
/s/ Jack C. Bendheim Director, President and
------------------------------------ Chief Executive Officer February 18, 2004
Jack C. Bendheim (Principal Executive Officer)
/s/ Marvin S. Sussman Director and President
------------------------------------ February 18, 2004
Marvin S. Sussman
Director
------------------------------------
James O. Herlands
/s/ David C. Storbeck Vice President, Chief Financial
------------------------------------ Officer (Principal Financial February 18, 2004
David C. Storbeck Officer and Principal Accounting
Officer)
II-16
Pursuant to the requirements of the Securities Act of 1933, the
registrants have caused this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Fort Lee, State of New
Jersey on February 18, 2004.
PHIBRO ANIMAL HEALTH HOLDINGS, INC.
PHIBRO ANIMAL HEALTH U.S., INC.
By: /s/ Jack C. Bendheim
------------------------------------
Jack C. Bendheim
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. Bendheim, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement and any and all amendments thereto, and to file
the same, and all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
------------------ ----- ----
/s/ Jack C. Bendheim Director and Chief Executive
------------------------------------ Officer (Principal Executive February 18, 2004
Jack C. Bendheim Officer)
/s/ Marvin S. Sussman Director
------------------------------------ February 18, 2004
Marvin S. Sussman
Director
------------------------------------
James O. Herlands
/s/ David C. Storbeck Vice President, Chief Financial
------------------------------------ Officer (Principal Financial February 18, 2004
David C. Storbeck Officer and Principal Accounting
Officer)
II-17
Pursuant to the requirements of the Securities Act of 1933, the
registrants have caused this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Fort Lee, State of New
Jersey on February 18, 2004.
C P CHEMICALS, INC.
PHIBRO CHEMICALS, INC.
PHIBRO CHEM, INC.
WESTERN MAGNESIUM CORP.
By: /s/ Jack C. Bendheim
-----------------------------------------
Jack C. Bendheim
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. Bendheim, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement and any and all amendments thereto, and to file
the same, and all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
------------------ ----- ----
/s/ Jack C. Bendheim Director and Chief Executive
------------------------------------ Officer (Principal Executive February 18, 2004
Jack C. Bendheim Officer)
/s/ Marvin S. Sussman Director
------------------------------------ February 18, 2004
Marvin S. Sussman
Director
------------------------------------
James O. Herlands
/s/ David C. Storbeck Vice President, Chief Financial
------------------------------------ Officer (Principal Financial February 18, 2004
David C. Storbeck Officer and Principal Accounting
Officer)
II-18
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this registration statement to be signed by the undersigned,
thereunto duly authorized, in the city of Fort Lee, State of New Jersey on
February 18, 2004.
PHIBRO ANIMAL HEALTH SA
By: /s/ Jack C. Bendheim
--------------------
Jack C. Bendheim
Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. Bendheim, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place or stead, in any and all capacities, to sign the
within Registration Statement and any and all amendments thereto, and to file
the same, and all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
------------------ -------- ---------
/s/ Jack C. Bendheim Director
------------------------------------ (Principal Executive February 18, 2004
Jack C. Bendheim Officer, Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Marvin S. Sussman Director
------------------------------------ February 18, 2004
Marvin S. Sussman
Director
------------------------------------
James O. Herlands
II-19
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ---------- ----------------------
3.9 Certificate of Incorporation of Phibro Animal Health Holdings, Inc.(15)
3.10 By-Laws of Phibro Animal Health Holdings, Inc.(15)
3.11 Certificate of Incorporation of Phibro Animal Health U.S., Inc.(15)
3.12 By-Laws of Phibro Animal Health U.S., Inc.(15)
3.21 Articles of Association of Phibro Animal Health SA.(15)
12 Computation of Ratio of Earnings to Fixed Charges.(15)
21 List of Subsidiaries.(15)
- ----------
15 Filed herewith.