AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2005
REGISTRATION NO. 333-122063
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PHIBRO ANIMAL HEALTH CORPORATION
PHILIPP BROTHERS NETHERLANDS III B.V.
(Exact name of Registrants as specified in their charters)
PHIBRO ANIMAL HEALTH CORPORATION
<Table>
NEW YORK 2819 13-1840497
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. employer
Incorporation or Organization) Classification Code Number) identification number)
65 CHALLENGER ROAD
RIDGEFIELD PARK, NEW JERSEY 07660
(201) 329-7300
</Table>
(Address, including zip code, and telephone number, including area code of
registrant's principal executive office)
PHILIPP BROTHERS NETHERLANDS III B.V.
<Table>
THE NETHERLANDS 2819 NOT APPLICABLE
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. employer
Incorporation or Organization) Classification Code Number) identification number)
ROKIN 55
1012 KK AMSTERDAM
THE NETHERLANDS
(201) 329-7300
</Table>
(Address, including zip code, and telephone number, including area code of
registrant's principal executive office)
SEE TABLE OF ADDITIONAL REGISTRANTS
JACK C. BENDHEIM,
PRESIDENT AND CHAIRMAN OF THE BOARD
PHIBRO ANIMAL HEALTH CORPORATION
65 CHALLENGER ROAD
RIDGEFIELD PARK, NEW JERSEY 07660
(201) 329-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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. [ ]
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
STATE OR OTHER JURISDICTION PRIMARY STANDARD
EXACT NAME OF REGISTRANT OF INCORPORATION OR INDUSTRIAL CLASSIFICATION I.R.S. EMPLOYER
AS SPECIFIED IN ITS CHARTER ORGANIZATION CODE NUMBER IDENTIFICATION NUMBER
- --------------------------- --------------------------- ------------------------- ---------------------
Prince Agriproducts, Inc. .......... Delaware 2819 23-1653576
One Prince Plaza
Quincy, Illinois 62305
(217) 222-8854
Phibro-Tech, Inc. .................. Delaware 2819 22-3060339
65 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 329-7300
Phibro Animal Health U.S., Inc. .... Delaware 2819 22-3743224
65 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 329-7300
Phibro Animal Health Holdings, Delaware 2819 22-3743221
Inc. .............................
65 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 329-7300
Phibrochem, Inc. ................... New Jersey 2819 22-2758614
65 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 329-7300
C P Chemicals, Inc. ................ New Jersey 2819 22-1548721
65 Challenger Road
Ridgefield Park, New Jersey 0766
(201) 329-7300
Phibro Chemicals, Inc. ............. New York 2819 22-2871784
65 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 329-7300
Western Magnesium Corp. ............ California 2819 13-2849569
65 Challenger Road
Ridgefield Park, New Jersey 07660
(201) 329-7300
Phibro Animal Health SA............. Belgium 2819 Not Applicable
Rue de L'Institut, 87A
B-1330 Rixensart, Belgium
(201) 329-7300
</Table>
PROSPECTUS
Phibro Animal Health Corporation
Philipp Brothers Netherlands III B.V.
OFFER TO EXCHANGE
127,491 Units
consisting of
$103,207,000 13% Senior Secured Notes Due 2007 of Phibro Animal Health
Corporation and
$24,284,000 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
$103,207,000 13% Senior Secured Notes Due 2007 of Phibro Animal Health
Corporation and
$24,284,000 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 MARCH 7, 2005, 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 154 for more information. See also
"Certain Dutch 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.
---------------------
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 February 4, 2005.
TABLE OF CONTENTS
<Table>
Prospectus Summary.......................................... 1
Risk Factors................................................ 15
Use of Proceeds............................................. 29
Capitalization.............................................. 30
Selected Consolidated Financial Data........................ 31
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Business.................................................... 55
Conditions in Israel........................................ 73
Management.................................................. 75
Principal Stockholders...................................... 82
Description of Capital Stock................................ 83
Certain Relationships and Related Party Transactions........ 85
Description of Certain Indebtedness......................... 88
The Exchange Offer.......................................... 90
Description of the New Units................................ 99
Description of the New Notes................................ 99
Certain United States Federal Income Tax Consequences....... 154
Certain Dutch Tax Consequences.............................. 158
Plan of Distribution........................................ 161
Legal Matters............................................... 162
Experts..................................................... 162
Where You Can Find More Information......................... 162
Service of Process and Enforcement of Liabilities........... 163
Philipp Brothers Netherlands III B.V........................ 163
Index to Consolidated Financial Statements.................. F-1
</Table>
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."
i
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 new unit or any of the global new 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); Cerditac(R); Cerdimix (R);
Rumatel(R).
ii
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:
- our substantial leverage and potential inability to service our debt
- our dependence on distributions from our subsidiaries
- risks associated with our international operations and significant
foreign assets
- our dependence on our Israeli operations
- competition in each of our markets
- potential environmental liability
- potential legislation affecting the use of medicated feed additives
- extensive regulation by numerous government authorities in the United
States and other countries
- our reliance on the continued operation and sufficiency of our
manufacturing facilities
- our reliance upon unpatented trade secrets
- the risks of legal proceedings and general litigation expenses
- potential operating hazards and uninsured risks
- the risk of work stoppages
- our dependence on key personnel
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.
iii
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, and on December 21, 2004 the US
issuer and Dutch issuer issued and sold, under the same indenture as such
105,000 units, 22,491 additional units, consisting of $18.207 million principal
amount of 13% Senior Secured Notes due 2007 of the US issuer and $4.284 million
principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer. The
units and notes issued and sold on October 21, 2003 and on December 21, 2004 are
collectively referred to as the old units and the old notes. The units and notes
issued and sold on December 21, 2004 are referred to separately as the
additional old units and additional old notes. In connection with each of those
sales, we entered into a registration rights agreement, the terms of each of
which are substantially similar, 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 agreements,
we are offering to exchange an aggregate of 127,491 new units, consisting of
$103.207 million principal amount of new 13% Senior Secured Notes due 2007 of
the US issuer and $24.284 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 16 countries around the world and sell our animal health and nutrition
products and specialty chemicals products into over 40 countries. Approximately
76% of our fiscal 2004 net sales were from our Animal Health and Nutrition
business, and approximately 24% of our fiscal 2004 net sales were from our
Specialty Chemicals business.
1
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 to produce a copper-based solution
for one of the leading new products for manufacturing pressure-treated wood will
represent our largest growth opportunity in our Specialty Chemicals business.
Over 39% of our fiscal 2004 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 our subsidiaries, Mineral Resource Technologies,
Inc. ("MRT") and The Prince Manufacturing Company ("PMC"). In addition, we
closed our operations in Odda, Norway ("Odda") and Bordeaux, France ("La
Cornubia").
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 21 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 EFSA/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 semduramicin, 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. Semduramicin, sold under the
brand name Aviax(R), and salinomycin, sold under the brand name Coxistac(R), are
also leading poultry anticoccidials. In fiscal 2004, branded MFAs accounted for
approximately 50% of our total Animal Health and Nutrition sales.
Established Global Network and Customer Base. From our 23 facilities in 16
countries, we manufacture and market our products, which are sold through
multiple distribution channels to over 2,800 customers in a wide variety of end
use markets. We sell our products through an established global sales, marketing
and
2
distribution network to customers in over 40 countries. In fiscal 2004, no
single customer accounted for more than 5% of total revenues and our top 10
customers accounted for less than 22% of total revenues.
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 and semduramicin 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. We are actively working with the FDA and other regulators to
obtain additional registrations and cross-clearances so that our MFA products
can continue to be used in situations where another MFA is also in use. In the
United States, we obtained from the FDA a zero-day withdrawal registration for
the use of our oxytetracycline product in cattle and recently obtained a cross
clearance for Mecadox(R) and Terramycin(R) in swine. We have 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 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
incent 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. 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
3
Latin American markets offer growth opportunities. In China, we are seeking to
partner with local distributors, to leverage our existing local sales force.
RECENT DEVELOPMENTS
The Offering. On December 21, 2004, we completed a private placement (the
"2004 Offering") under Rule 144A and Regulation S of the Securities Act,
pursuant to which the US issuer and the Dutch issuer issued and sold $22.491
million of additional old units, from which we received gross proceeds of
approximately $23.4 million. We used the proceeds from the 2004 Offering to
refinance indebtedness outstanding under our domestic senior credit facility.
Such additional old units were issued under the same indenture as the 105,000
old units issued on October 21, 2003. See "Description of Certain
Indebtedness -- Domestic Senior Credit Facility" for more information.
Consent Solicitation. In connection with the completion of the 2004
Offering, we solicited consents with regard to our outstanding old notes to
amendments to the indenture governing such old notes to permit the sale of
substantially all of the facilities owned by Phibro Animal Health SA (formerly
Phibro Animal Health (Belgium) SPRL) ("PAH Belgium"), a wholly owned subsidiary
of the Dutch issuer, in Rixensart, Belgium (the "Belgium Plant"), to reduce
excess manufacturing capacity and to reduce operating expenses and, in
furtherance thereof, to permit the maximum amount of indebtedness under our
domestic senior credit facility permitted under the indenture governing the
notes to be increased from $15.0 million to $37.5 and to permit the related
transactions described herein. The requisite consents were obtained and the
indenture was amended pursuant to the Second Supplemental Indenture, dated as of
December 8, 2004. The amendments became effective on December 21, 2004 in
connection with the 2004 Offering.
Sale of Belgium Plant. On December 16, 2004, we entered into an agreement
to sell the Belgium Plant to Glaxosmithkline Biologicals S.A. ("GSK") and to
transfer to GSK a majority of the employees of PAH Belgium. GSK was a previous
owner of the Rixensart plant, and sold it to Pfizer SA in 1995, which sold it to
PAH Belgium in 2000. Such sale, when completed, would include the following
elements: (i) the transfer of substantially all of the land and buildings and
certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial
activities and intellectual property relating to certain solvent technology of
Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing;
(ii) the transfer to GSK of a majority of the employees of PAH Belgium and the
corresponding responsibility for statutory severance obligations; (iii) GSK
agreeing to be responsible for costs of cleaning-up, by demolition or otherwise,
certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up
to a maximum of EUR 0.7 million for such clean-up costs; (iv) in recognition of
the benefits to us from the proposed transaction, PAH Belgium agreeing to pay to
GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million
within eighteen months from the closing date, EUR 1.5 million within thirty
months from the closing date, and EUR 0.5 million within forty-two months from
the closing date; (v) PAH Belgium retaining certain excess land (valued at
approximately EUR 0.4 million) and being able to sell such land for its own
account; (vi) PAH Belgium being responsible for certain plant closure costs and
legally required severance indemnities in connection with workforce reductions,
estimated in total to be EUR 7.7 million of which an amount estimated to be
approximately EUR 4.1 million would be payable at or around the closing and an
aggregate amount so estimated to be approximately EUR 3.6 million would be
payable over periods up to thirteen years; and (vii) PAH Belgium retaining
certain equipment at the Belgium Plant, and being able to sell such equipment
for the account of PAH Belgium or transfer such equipment, together with other
assets and rights related to the production of virginiamycin, to our subsidiary
in Brazil that owns the facility in Guarulhos or in connection with alternative
production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur no earlier than July 1, 2005 nor later than June 30, 2006.
The carrying value of the Belgium Plant and related assets at September 30,
2004 is EUR 13.9 million. The Company is in the process of evaluating the
accounting for this transaction and will record an impairment loss, if required,
in the second quarter ended December 31, 2004. In addition, the Company will
expense severance, plant closure and other related costs in the period in which
such liabilities are incurred in
4
accordance with Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". As of the date of this
filing, estimates of such costs are in process of being determined.
The Dutch notes and related guaranties are secured by a mortgage on the
Belgium Plant which is to be released in connection with the closing of the sale
of the Belgium Plant to GSK.
Refinancing of Domestic Senior Credit Facility with Proceeds of the
Additional Units. To provide the necessary funds to build inventory of
virginiamycin until the Brazil plant or alternative supplier is able to produce
production quantities of virginiamycin and to finance the purchase of capital
equipment to fit out the Brazilian plant with equipment to produce
virginiamycin, other than equipment transferred from the Belgium Plant, the
maximum amount of indebtedness under our domestic senior credit facility
permitted under the indenture governing the old notes was increased from $15.0
million to $37.5 million, pursuant to the Second Supplemental Indenture, and we
increased our borrowing to $22.5 million. The proceeds of the 2004 Offering were
used to refinance $22.5 million of borrowing under the domestic senior credit
facility. The issuance of the additional old units had the effect of reducing
the maximum amount of indebtedness under our domestic senior credit facility
permitted under the indenture governing the notes by the principal amount of the
additional old units issued. Borrowings under the domestic senior credit
facility continue to be subject to a borrowing base formula based on percentages
of eligible domestic receivables and domestic inventory.
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 PAH Belgium, which owns
and operates our Rixensart, Belgium plant. Such plant uses fermentation
processes to produce the active ingredients semduramicin and virginiamycin and
conducts all of our fermentation development activities. For the fiscal year
ended June 30, 2004, the Dutch issuer and its consolidated subsidiaries,
including PAH Belgium, had revenue of $34.7 million and operating income of $6.7
million. As of September 30, 2004, the Dutch issuer and its consolidated
subsidiaries, including PAH Belgium, had cash and cash equivalents of $0.2
million, net trade accounts receivable of $2.0 million, inventory of $29.1
million, net property, plant and equipment of $17.3 million, total assets of
$51.1 million, total accounts payable and other current liabilities of $17.2
million, total debt of $31.7 million and total liabilities of $49.8 million.
---------------------
We are a New York corporation and our principal executive offices are
located at 65 Challenger Road, Ridgefield Park, New Jersey 07660 and our phone
number is (201) 329-7300.
5
SUMMARY OF THE EXCHANGE OFFER
On October 21, 2003, we completed a private offering of 105,000 old units
consisting of:
- $85.0 million principal amount of 13% Senior Secured Notes due 2007 of
the US issuer, referred to as old US notes; and
- $20.0 million principal amount of 13% Senior Secured Notes due 2007 of
the Dutch issuer, referred to as old Dutch notes.
On December 21, 2004, we completed a private offering of 22,491 additional
old units consisting of:
- $18.207 million principal amount of 13% Senior Secured Notes due 2007 of
the US issuer, also referred to as old US notes; and
- $4.284 million principal amount of 13% Senior Secured Notes due 2007 of
the Dutch issuer, also referred to as old Dutch notes.
In connection with each of those sales, we entered into a registration
rights agreement, the terms of each of which are substantially similar, 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............. 127,491 new units consisting of:
$103.207 million principal amount of 13% Senior
Secured Notes due 2007 of the US issuer,
referred to as the new US notes; and
$24.284 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:
- 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
6
- 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.
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 March 7, 2005, 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 Netherlands'
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."
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
7
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, National Association 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
Dutch 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:
- the new units are acquired in the ordinary course of the holders'
business;
- the holders have no arrangement or understanding with any person to
participate in a distribution of the new units; and
- 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 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.
8
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............ 127,491 new units consisting of $103.207
million principal amount of 13% senior secured
notes due 2007 of Phibro Animal Health
Corporation, the new US notes, and $24.284
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 new notes will be payable semi-annually in
cash in arrears on June 1 and December 1 of
each year, beginning on June 1, 2005.
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.
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. In
addition, the new US notes and related
guarantees will be secured by 65% of the voting
stock and 100% of
9
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, as amended
in connection with the 2004 Offering, 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
domestic senior credit facility. Such security
interest will also be subordinated to 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 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 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:
<Table>
<Caption>
PERIOD PERCENTAGE
------ ----------
June 1, 2005................................... 114.0%
December 1, 2005............................... 109.0%
June 1, 2006................................... 105.0%
December 1, 2006, and thereafter............... 101.0%
</Table>
10
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.
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:
- incur additional indebtedness or issue
disqualified capital stock;
- make investments;
- pay dividends or make other restricted
payments;
11
- issue capital stock of certain subsidiaries;
- enter into transactions with affiliates;
- create or incur liens;
- transfer or sell assets;
- incur dividend or other payment restrictions
affecting certain subsidiaries; and
- 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."
REGISTRATION.................. We filed a registration statement with the SEC
on Form S-4 with respect to an exchange offer
for the 105,000 old units issued in October
2003, but due to pending confidential
acquisition negotiations, such registration
statement did not become effective, and the
Company caused a notice of withdrawal to be
submitted to the SEC on November 15, 2004. As a
result, a Registration Default exists with
respect to the old notes issued in October
2003, and such notes have borne additional
interest. However, the consummation of the
exchange offer of new units for old units is
expected to cure such Registration Default. In
such event, from and after such date, such old
notes will bear interest at the rate set forth
on the cover page of this prospectus and cease
to accrue such additional interest. See "The
Exchange Offer -- Registration Rights and
Additional Interest on Certain Old Units."
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.
12
SUMMARY HISTORICAL AND UNAUDITED CONSOLIDATED FINANCIAL DATA
The summary historical and unaudited consolidated financial data set forth
below reflect continuing operations. Our Odda, Carbide, MRT and La Cornubia
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. MRT was sold in August 2003. La Cornubia operations were terminated
in June 2004.
The summary consolidated financial data included in this prospectus have
been prepared by, and are the responsibility of, our management.
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
has neither examined nor reviewed the accompanying summary consolidated
financial data and, accordingly, PricewaterhouseCoopers LLP does not express an
opinion or any other form of assurance with respect thereto. The
PricewaterhouseCoopers LLP report included in this prospectus relates only to
our historical financial statements for the fiscal years ended June 30, 2004,
2003 and 2002. It does not extend to any other financial data and should not be
read to do so.
The following summary consolidated financial data set forth below should be
read in conjunction with, and are qualified in their entirety by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto appearing
elsewhere in this prospectus.
<Table>
<Caption>
3 MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------ -----------------
2002 2003 2004 2003 2004
-------- -------- -------------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
RESULTS OF OPERATIONS:
Net sales...................... $328,676 $341,746 $358,274 $84,950 $88,275
Gross profit................... 81,265 90,546 90,403 21,160 22,622
Selling, general and
administrative expenses...... 70,636 65,050 71,389 15,785 16,594
Operating income............... 10,629 25,496 19,014 5,375 6,028
</Table>
<Table>
<Caption>
AS OF SEPTEMBER 30,
AS OF JUNE 30, AS OF SEPTEMBER 30, 2004
-------------- ------------------------- ------------------------
2004 2003 2004 AS ADJUSTED
-------------- ----------- ----------- ------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:*
Cash and cash equivalents..... $ 5,568 $ 26,917 $ 5,778 $ 15,626
Fixed assets.................. 58,786 62,795 59,818 59,818
Total assets.................. 241,369 276,216 243,551 255,674
Total debt.................... 170,365 164,182 170,213 181,436
Series B and C redeemable
preferred stock............. 24,678 69,868 25,359 25,359
Total stockholders' deficit... (63,833) (84,784) (61,574) (61,574)
</Table>
- ---------------
* Adjusted balance sheet data give effect to the 2004 Offering and the
application of the proceeds as provided in "Recent Developments -- The
Offering."
13
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our historical consolidated ratio of
earnings to fixed charges for the periods indicated.
<Table>
<Caption>
3 MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- -------------
2000 2001 2002 2003 2004 2003 2004
---- ---- ---- ---- ---- ----- -----
Ratio of earnings to fixed charges(a).... 1.1 (b) (b) 1.4 2.2 1.5 1.1
</Table>
- ---------------
(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.
(b) The amounts by which earnings were inadequate to cover fixed charges were
$9,563 and $10,384 for the fiscal years ended June 30, 2001 and 2002
respectively.
The following table sets forth our consolidated ratio of earnings to fixed
charges for the periods indicated, adjusted to give effect to the 2004 Offering
and application of the proceeds as provided in "Recent Developments -- The
Offering.".
<Table>
<Caption>
FISCAL YEAR 3 MONTHS
ENDED ENDED
JUNE 30, 2004 SEPTEMBER 30, 2004
------------- ------------------
Ratio of earnings to fixed charges(a)................... 1.9 1.0
</Table>
- ---------------
(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.
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 "Prospectus 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
15
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 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 September 30, 2004, we had
approximately $170.2 million of total indebtedness outstanding and our ratio of
earnings to fixed charges was 1.1x. We had the ability to borrow, as of
September 30, 2004, an additional $6.2 million under the revolving portion of
our domestic senior credit facility, subject to the restrictions in the
indenture and in our domestic senior credit facility. As of such date, after
giving effect to the 2004 Offering and application of proceeds, we had $181.4
million of total indebtedness outstanding and our ratio of earnings to fixed
charges was 1.0x. We had the ability to borrow an additional $17.5 million under
the revolving portion of our domestic senior credit facility, subject to such
aforementioned restrictions. Additionally, subject to restrictions in the
indenture and our domestic senior credit facility, we may incur additional
indebtedness.
Our high level of indebtedness could have important consequences to you,
including the following:
- it may make it difficult for us to satisfy our obligations under the
notes and our other indebtedness and contractual and commercial
commitments;
- 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;
- all of the indebtedness outstanding under our domestic senior credit
facility will have a prior ranking claim on our assets and will mature
prior to the notes;
- our domestic senior credit facility has a variable rate of interest,
which exposes us to the risk of increased interest rates;
- our ability to obtain additional debt financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes
may be limited;
- 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;
- our high level of indebtedness could place us at a competitive
disadvantage to those of our competitors who operate on a less leveraged
basis; and
- if we fail to comply with the covenants in the indenture relating to the
notes, our domestic senior credit facility or in the instruments
governing our other indebtedness (including the indenture for our
outstanding senior subordinated notes due 2008), 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.
16
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 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 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 capital stock of PAH Belgium, the intercompany loan to PAH Belgium that
was previously funded with proceeds of the Dutch notes issued in October 2003
and the new intercompany loan to PAH Belgium, are and will be the only
significant assets of the Dutch issuer. Therefore the Dutch issuer will be
entirely dependent on payments on the intercompany loans 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 its indebtedness in respect of
the intercompany loans granted to it 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 dependence of the Dutch issuer
on payments from the US issuer and its domestic guarantors is likely to increase
after the sale of the Belgium Plant and the sale of the virginiamycin inventory
to be built up prior to a supply from a new source.
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.
17
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 our 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 our 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 our
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 our 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 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
18
"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 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 our domestic senior credit facility
contain covenants that restrict our ability to take various actions, such as:
- incur additional indebtedness or issue disqualified capital stock;
- make investments
- pay dividends or make other restricted payments;
- issue capital stock of certain subsidiaries;
- enter into transactions with affiliates;
- create or incur liens;
- transfer or sell assets;
- incur dividend or other payment restrictions affecting certain
subsidiaries; and
- 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.
19
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 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 domestic senior credit facility. See "Description of the New
Notes -- Change of Control" and "Description of Certain Indebtedness -- Domestic
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.
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.
20
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
September 30, 2004, our foreign subsidiaries had indebtedness for borrowed money
and had other liabilities of approximately $28 million reflected on our
consolidated balance sheet. For fiscal 2004, our foreign subsidiaries
contributed approximately 29% of our consolidated net sales.
In addition, distributions and intercompany transfers to us from our
subsidiaries will depend on:
- their earnings;
- covenants contained in our and their debt agreements, including our
domestic senior credit facility and the notes;
- covenants contained in other agreements to which we or our subsidiaries
are or may become subject;
- business and tax considerations; and
- 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. 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:
- our operating performance and financial condition;
- our ability to complete the offer to exchange the units for the exchange
units;
- the interest of securities dealers in making a market for them; and
- the market for similar securities.
21
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:
- 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.
- 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.
- 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, 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.
- 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 2004, we operated manufacturing and other facilities in over
16 countries and sold our products in over 40 countries. At September 30, 2004,
approximately 55% of our assets were located outside the United States,
representing manufacturing facilities in Belgium, Brazil, Israel and the United
Kingdom, and, for fiscal 2004, approximately 28% 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
22
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 17 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 September 30, 2004 and approximately 12% of our fiscal 2004 consolidated
net sales. 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."
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 therefore. 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
23
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.
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.
On November 23, 2004, the FDA's Center for Veterinary Medicine released a
draft for comment of its long awaited risk assessment of streptogramin
resistance for treatment of certain infections in humans attributable to the use
of streptogramins in animals (the "virginiamycin risk assessment"). The risk
assessment was initiated over three years ago after the 1999 approval of
Synercid for treating E. faecium infection in humans, which approval led to
increased attention to the use of streptogramins in animals. Synercid and
virginiamycin are both members of the streptogramin class of antimicrobial
drugs. The draft risk
24
assessment specifically addresses the risk of humans failing Synercid therapy
for E. faecium infections due to the acquisition of resistance as a result of
the ingestion of resistant strains of E. faecium present in food. The draft risk
assessment found that it is difficult to assess the extent of transfer of
streptogramin resistance from virginiamycin-exposed E. faecium infection to E.
faecium infection found in human infections based on the available data, and
that there are certain differences in the characteristics of E. faecium isolated
from animal and human sources. The risk assessment concluded that these two
findings, along with the current incomplete knowledge of the genetic basis of
streptogramin resistance, prevents the risk assessment from making firm
conclusions as to whether, and, if so, how much, the use of virginiamycin in
food animals contributes to the occurrence of virginiamycin-resistant infections
in humans via a foodborne pathway.
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.
The Australian Pesticides and Veterinary Medicines Authority (APPVMA) 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.
Codex Committee on Residues of Veterinary Drugs in Food (CCRVDF) has
recently endorsed the JECFA recommendation to withdraw the Codex MRL for
carbadox.
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.
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
25
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 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 all but four 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."
26
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 2004 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
27
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
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 September 30, 2004, approximately 16 of our domestic employees were
covered by a collective bargaining agreement which expires in 2006. Most of our
employees in Israel 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."
28
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 issued in October 2003 were
approximately $97.3 million, after deducting fees and expenses from the
offering. 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. The
proceeds of the 2004 Offering were used to refinance $22.5 million of
indebtedness outstanding under our domestic senior credit facility.
29
CAPITALIZATION
The following table sets forth our capitalization at September 30, 2004,
and as adjusted to give effect to the 2004 Offering and the application of the
proceeds therefrom as described under "Prospectus Summary -- The
Company -- Recent Developments -- The Offering." This presentation should be
read in conjunction with our historical financial statements and the related
notes thereto included elsewhere in this prospectus.
<Table>
<Caption>
AT SEPTEMBER 30, 2004
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 5,778 $ 15,626
======== ========
Debt:
Domestic senior credit facility(1)........................ 11,268 $ --
Foreign bank loans........................................ 5,912 5,912
Senior secured notes due 2007............................. 105,000 127,491
Senior subordinated notes due 2008........................ 48,029 48,029
Other..................................................... 4 4
-------- --------
Total debt........................................... 170,213 181,436
Series C redeemable preferred stock......................... 25,359 25,359
Shareholders' deficit....................................... (61,574) (61,574)
-------- --------
Total capitalization................................... $133,998 $145,221
======== ========
</Table>
- ---------------
(1) Borrowings under our domestic senior credit facility were approximately
$22.5 million at the closing of the 2004 Offering. See "Prospectus
Summary -- The Company -- Recent Developments -- Refinancing of Domestic
Senior Credit Facility with Proceeds of Additional Units."
(2) Adjusted financial data give effect to the outstanding senior secured notes,
including the 2004 Offering, and the application of the proceeds as provided
in the "Prospectus Summary -- The Company -- Recent Developments -- The
Offering."
30
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for fiscal
years ended June 30, 2000, 2001, 2002, 2003 and 2004 have been derived from our
audited annual consolidated financial statements. The following selected
consolidated financial data as of and for the three months ended September 30,
2004 and 2003 have been derived from our unaudited interim consolidated
financial statements. The selected consolidated financial data reflect our Odda,
Carbide, MRT and La Cornubia businesses as discontinued operations for all
periods presented. You should read the information set forth below in
conjunction with our "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.
<Table>
<Caption>
3 MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------- -------------------
2000 2001 2002 2003 2004 2003 2004
-------- -------- -------- -------- -------- -------- --------
(2)(3) (7) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
RESULTS OF OPERATIONS:
Net sales.............................. $261,769 $302,328 $328,676 $341,746 $358,274 $ 84,950 $ 88,275
Cost of goods sold..................... 201,320 234,784 247,411 251,200 267,871 63,790 65,653
-------- -------- -------- -------- -------- -------- --------
Gross profit........................... 60,449 67,544 81,265 90,546 90,403 21,160 22,622
Selling, general and administrative
expenses(5).......................... 47,528 61,624 70,636 65,050 66,128 15,785 16,594
Curtailment of operations at
manufacturing facility............... (1,481)
Costs of non-completed transaction..... 5,261
-------- -------- -------- -------- -------- -------- --------
Operating income....................... 14,402 5,920 10,629 25,496 19,014 5,375 6,028
Interest expense....................... 14,520 17,919 18,070 16,281 18,618 3,933 5,246
Interest (income)...................... (600) (566) (346) (85) (130) (242) (25)
Other expense (income), net............ (506) 327 3,354 1,666 (89) (585) 25
(Gain) from property damage claim...... (946)
(Gain) from sale of assets............. (1,790) (5) (127) (692) (1)
Net (gain) on extinguishment of
debt(6).............................. (23,226)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes....... 1,934 (9,970) (10,444) 7,761 24,533 2,269 783
Provision (benefit) for income
taxes(4)............................. 1,143 (24) 14,767 10,060 7,969 783 924
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations........................... 791 (9,946) (25,211) (2,299) 16,564 1,486 (141)
Income (loss) from discontinued
operations(1)........................ 9,262 (4,949) (26,559) (14,577) (1,625) (462)
Income (loss) on disposal of
discontinued operations(1)........... (683) (2,089) 231
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...................... 10,053 (14,895) (51,770) (17,559) 12,850 1,255 (141)
Change in derivative instruments....... 1,062 (981) (72) 317 75
Change in foreign currency translation
adjustment........................... 55 (5,146) (6,125) 7,377 (776) (859) 3,007
-------- -------- -------- -------- -------- -------- --------
Comprehensive income (loss)............ $ 10,108 $(20,041) $(56,833) $(11,163) $ 12,002 $ 713 $ 2,941
======== ======== ======== ======== ======== ======== ========
Net income (loss)...................... $ 10,053 $(14,895) $(51,770) $(17,559) $ 12,850 $ 1,255 $ (141)
Excess of the reduction of redeemable
preferred stock over total assets
divested and costs and liabilities
incurred on the Prince Transaction... -- -- -- -- 20,138 -- --
Dividends and equity value accreted on
series B and C redeemable preferred
stock................................ -- (8,172) (7,623) (12,278) (11,463) (987) (682)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders......................... $ 10,053 $(23,067) $(59,393) $(29,837) $ 21,525 $ 268 $ (823)
======== ======== ======== ======== ======== ======== ========
</Table>
31
<Table>
<Caption>
3 MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------- -------------------
2000 2001 2002 2003 2004 2003 2004
-------- -------- -------- -------- -------- -------- --------
(2)(3) (7) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
OTHER FINANCIAL DATA:
Depreciation and amortization.......... $ 7,931 $ 10,063 $ 12,355 $ 12,524 $ 13,183 $ 3,168 $ 3,355
Capital expenditures................... 11,033 6,437 8,518 8,636 6,244 852 1,748
Ratio of earnings to fixed
charges(8)........................... 1.1 -- -- 1.4 2.2 1.6 1.1
(Deficiency) in earnings necessary to
cover fixed charges(9)............... -- (9,156) (10,061) -- -- -- --
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 2,403 $ 14,845 $ 6,419 $ 11,179 $ 5,568 $ 26,917 $ 5,778
Total assets........................... 258,450 330,019 296,444 274,347 241,369 276,216 243,551
Long-term debt......................... 139,685 139,455 136,641 102,263 158,018 102,756 157,992
Series B and C redeemable preferred
stock................................ -- 48,980 56,602 68,881 24,678 69,868 25,359
Total stockholders' equity (deficit)... 31,618 3,405 (61,189) (84,510) (63,833) (84,784) (61,574)
</Table>
- ---------------
(1) The Company's Odda Smelteverk (Norway) ("Odda"), Carbide Industries (U.K.)
("Carbide"), Mineral Resource Technologies, Inc. ("MRT"), and La Cornubia
S.A. (France) ("La Cornubia") businesses have been classified as
discontinued operations as discussed in the notes to consolidated financial
statements contained in this prospectus. The Company's selected consolidated
financial data have been reclassified to report separately the operating
results, financial position and cash flows of the discontinued operations.
(2) On November 30, 2000, the Company purchased the Medicated Feed Additives
("MFA") business of Pfizer, Inc. The operating results, financial position
and cash flows of this business are included in the Company's selected
consolidated financial data from the date of acquisition. The acquisition
was financed through the issuance of a note payable to Pfizer, Inc. and the
issuance of the Series B and C redeemable preferred stock.
(3) During May and June 2001, the Company sold its Agtrol crop protection
business to Nufarm, Inc. The sale included inventory and intangible assets,
but did not include manufacturing facilities. The results of operations,
financial position and cash flows of the Agtrol business are included in the
Company's selected consolidated financial data through the dates of
divestiture.
(4) The Company's fiscal 2002 provision for income taxes includes a charge of
$12,200 for an increased valuation allowance for deferred tax assets
recorded in previous years and a charge of $13,600 for a full valuation
allowance for deferred tax assets relating to fiscal 2002 operating losses.
The Company' fiscal 2003 provision for income taxes includes a charge of
$5,600 for increased valuation allowances for deferred tax assets in foreign
jurisdictions.
(5) The Company's selling, general and administrative expenses include
litigation income of $742 in fiscal 2002 and $3,040 in fiscal 2003 relating
to a class action suit brought against various vitamin manufacturers.
(6) The Company recorded a net gain on extinguishment of debt relating to its
refinancing activities in fiscal 2004 as discussed in the notes to
consolidated financial statements contained in this prospectus.
(7) 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") as discussed in the notes to consolidated
financial statements contained in this prospectus. The results of
operations, financial position and cash flows of PMC are included in the
Company's selected consolidated financial data through the date of
divestiture.
(8) For purposes of computing the consolidated ratio of earnings to fixed
charges, earnings represents earnings from continuing operations before
income taxes and fixed charges. Fixed charges include interest expense 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.
(9) For periods in which earnings before fixed charges were insufficient to
cover fixed charges, the dollar amount of coverage deficiency, instead of
the ratio, is disclosed.
32
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. The
Company's Odda, Carbide, MRT and La Cornubia businesses have been classified as
discontinued operations. This discussion presents information only for
continuing operations, unless otherwise indicated. The Company presents its
annual consolidated financial statements on the basis of its fiscal year ending
June 30.
GENERAL
The Company is a leading diversified global manufacturer and marketer of a
broad range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which are sold
throughout the world predominantly to the poultry, swine and cattle markets.
MFAs are used preventatively and therapeutically in animal 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.
In August 2003, the Company completed the sale of MRT for net proceeds
after transaction costs of approximately $13.8 million. In December 2003, the
Company completed the divestiture of substantially all of the assets of The
Prince Manufacturing Company (see discussion below under "Prince Transactions").
On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA
("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The
Company believes that, as a result of the bankruptcy filing by La Cornubia, it
is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding
company with no assets except for its investment in La Cornubia, may also file
for bankruptcy in France. The Company does not believe that La Cornubia's
bankruptcy filing, nor the possible bankruptcy filing by LC Holding, will have a
material adverse effect on its financial condition or results of operations.
During 2004, the Company incurred $5.3 million of costs in connection with
a potential acquisition transaction that was not completed. The Company has
charged the costs to expense in its 2004 results. The costs primarily consisted
of professional fees for services in connection with the transaction.
The Company's ability to fund its operating plan depends upon the continued
availability of borrowing under its domestic senior credit facility. The Company
believes that it will be able to comply with the terms of its covenants under
its domestic senior credit facility based on its forecasted operating plan. In
the event of adverse operating results and/or violation of covenants under this
facility, there can be no assurance that the Company would be able to obtain
waivers or amendments on favorable terms, if at all. The Company's fiscal 2005
operating plan projects adequate liquidity throughout the year, with periods of
reduced availability around the dates of the semi-annual interest payments due
December 1, 2004 and June 1, 2005 related to its senior secured and senior
subordinated notes. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that likely would be available. The Company also has undertaken a
strategic review of its manufacturing capabilities, and is currently increasing
inventory levels of certain products to enhance future supply flexibility and
reduce cost. The Company intends to sell its manufacturing facility in
Rixensart, Belgium and will continue to increase inventory levels of
virginiamycin to ensure an adequate supply until a new production source is
operational (see discussion below under "Sale of Belgium Plant and Related
Consent Solicitation." There can be no assurance the Company will be successful
in any of the above-noted actions.
33
THE OFFERING
On December 21, 2004, we completed a private placement (the "2004
Offering") under Rule 144A and Regulation S of the Securities Act, pursuant to
which the US issuer and the Dutch issuer issued and sold $22.491 million of
additional old units, from which we received net proceeds of $21.1 million. We
used the proceeds from the 2004 Offering to refinance $22.5 million of
indebtedness outstanding under our domestic senior credit facility. See
"Description of Certain Indebtedness -- Domestic Senior Credit Facility" for
more information.
SALE OF BELGIUM PLANT AND RELATED CONSENT SOLICITATION
Consent Solicitation. In connection with the completion of the 2004
Offering, we solicited consents with regard to our outstanding senior secured
notes to amendments to the indenture governing such notes to permit the sale of
substantially all of the facilities owned by Phibro Animal Health SA (formerly
Phibro Animal Health (Belgium) SPRL) ("PAH Belgium"), a wholly owned subsidiary
of the Dutch issuer, in Rixensart, Belgium (the "Belgium Plant"), to reduce
excess manufacturing capacity and to reduce operating expenses and, in
furtherance thereof, to permit the maximum amount of indebtedness under our
domestic senior credit facility permitted under the indenture governing the
notes to be increased from $15.0 million to $37.5 and to permit the related
transactions described herein. The requisite consents were obtained and the
indenture was amended pursuant to the Second Supplemental Indenture dated as of
December 8, 2004. The amendments became effective on December 21, 2004 in
connection with the 2004 Offering.
Sale of Belgium Plant. On December 16, 2004 we entered into an agreement
to sell the Belgium Plant to Glaxosmithkline Biologicals S.A. ("GSK") and to
transfer to GSK a majority of the employees of PAH Belgium. GSK was a previous
owner of the Rixensart plant, and sold it to Pfizer SA in 1995, which sold it to
PAH Belgium in 2000. Such sale, when completed, would include the following
elements: (i) the transfer of substantially all of the land and buildings and
certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial
activities and intellectual property relating to certain solvent technology of
Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing;
(ii) the transfer to GSK of a majority of the employees of PAH Belgium and the
corresponding responsibility for statutory severance obligations; (iii) GSK
agreeing to be responsible for costs of cleaning-up, by demolition or otherwise,
certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up
to a maximum of EUR 0.7 million for such clean-up costs; (iv) in recognition of
the benefits to us from the proposed transaction, PAH Belgium agreeing to pay to
GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million
within eighteen months from the closing date, EUR 1.5 million within thirty
months from the closing date, and EUR 0.5 million within forty-two months from
the closing date; (v) PAH Belgium retaining certain excess land (valued at
approximately EUR 0.4 million) and being able to sell such land for its own
account; (vi) PAH Belgium being responsible for certain plant closure costs and
legally required severance indemnities in connection with workforce reductions,
estimated in total to be EUR 7.7 million of which an amount estimated to be
approximately EUR 4.1 million would be payable at or around the closing and an
aggregate amount so estimated to be approximately EUR 3.6 million would be
payable over periods up to thirteen years; and (vii) PAH Belgium retaining
certain equipment at the Belgium Plant, and being able to sell such equipment
for the account of PAH Belgium or transfer such equipment, together with other
assets and rights related to the production of virginiamycin, to our subsidiary
in Brazil that owns the facility in Guarulhos or in connection with alternative
production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur no earlier than July 1, 2005 nor later than June 30, 2006.
The carrying value of the Belgium Plant and related assets at September 30,
2004 is EUR 13.9 million. The Company is in the process of evaluating the
accounting for this transaction and will record an impairment loss, if required,
in the second quarter ended December 31, 2004. In addition, the Company will
expense severance, plant closure and other related costs in the period in which
such liabilities are incurred in accordance with Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". As of the date of this filing, estimates of such costs are
in process of being determined.
34
The Dutch notes and related guaranties are secured by a mortgage on the
Belgium Plant which will be released in connection with the closing of the sale
of the Belgium Plant to GSK.
Refinancing of Domestic Senior Credit Facility with Proceeds of the
Additional Units. To provide the necessary funds to build inventory of
virginiamycin until the Brazil plant or alternative supplier is able to produce
production quantities of virginiamycin and to finance the purchase of capital
equipment to fit out the Brazilian plant with equipment to produce
virginiamycin, other than equipment transferred from the Belgium Plant, the
maximum amount of indebtedness under our domestic senior credit facility
permitted under the indenture governing the notes was increased from $15.0
million to $37.5 million, pursuant to the Second Supplemental Indenture, and we
increased our borrowing to $22.5 million. The proceeds of the 2004 Offering were
used to refinance $22.5 million under the domestic senior credit facility. The
issuance of the additional units had the effect of reducing the maximum amount
of indebtedness under our domestic senior credit facility permitted under the
indenture governing the notes by the principal amount of the additional units
issued. Borrowings under the domestic senior credit facility continue to be
subject to a borrowing base formula based on percentages of eligible domestic
receivables and domestic inventory.
REFINANCING
On October 21, 2003, the Company issued 105,000 units consisting of $85.0
million of its 13% Senior Secured Notes due 2007 (the "US Senior Secured Notes")
and $20.0 million 13% of Senior Secured Notes due 2007 of Philipp Brothers
Netherlands III B.V. (the "Dutch Senior Secured Notes" and, together with the US
Senior Secured Notes, the "Senior Secured Notes"), an indirect wholly-owned
subsidiary of the Company (the "Dutch issuer"). The Company used the proceeds
from the issuance to: (i) repurchase $52.0 million of its 9 7/8% Senior
Subordinated Notes due 2008 at a price equal to 60% of the principal amount
thereof, plus accrued and unpaid interest; (ii) repay $34.9 million under our
then outstanding domestic senior credit facility; (iii) satisfy, for a payment
of approximately $29.3 million certain of its outstanding obligations to Pfizer
Inc., including: (a) $20.1 million aggregate principal amount of its promissory
note plus accrued and unpaid interest, (b) $9.7 million of accounts payable, (c)
$9.0 million of accrued expenses, and (d) future contingent purchase price
obligations under its agreements with Pfizer Inc. by which the Company acquired
Pfizer's medicated feed additive business; and (iv) pay fees and expenses
relating to the above transactions.
A net gain on extinguishment of debt is included in the Company's condensed
consolidated statement of operations, calculated as follows (amounts in
thousands):
<Table>
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 DOMESTIC 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
========
</Table>
The Company filed a registration statement with the SEC on Form S-4 with
respect to an exchange offer for the Senior Secured Notes, but due to pending
confidential acquisition negotiations, such registration statement did not
become effective and the Company caused a notice of withdrawal to be submitted
to the SEC on November 15, 2004.
35
On December 21, 2004, the US issuer and Dutch issuer issued and sold 22,491
additional units, consisting of an additional $18.207 principal amount of US
Senior Secured Notes and $4.284 million principal amount of Dutch Senior Secured
Notes.
The US Senior Secured Notes and the Dutch Senior Secured Notes are senior
secured obligations of each of the Company (the "US Issuer") and the Dutch
issuer, respectively. The US Senior Secured Notes and the Dutch Senior Secured
Notes are guaranteed on a senior secured basis by all the US Issuer's domestic
restricted subsidiaries, and the Dutch Senior Secured Notes are guaranteed on a
senior secured basis by the US Issuer and by the restricted subsidiaries of the
Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior
Secured Notes and related guarantees are collateralized by substantially all of
the US Issuer's assets and the assets of its domestic restricted subsidiaries,
other than real property and interests therein, including a pledge of all the
capital stock of such domestic restricted subsidiaries. The Dutch Senior Secured
Notes and related guarantees are collateralized by a pledge of all the accounts
receivable, a security interest or floating charge on the inventory to the
extent permitted by applicable law, and a mortgage on substantially all of the
real property of the Dutch issuer and each of its restricted subsidiaries, a
pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a
pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries and substantially all of the assets of the U.S. guarantors, other
than real property and interests therein. The indenture governing the Senior
Secured Notes provides for optional make-whole redemptions at any time prior to
June 1, 2005, optional redemption on or after June 1, 2005, and requires the
Company to make certain offers to purchase Senior Secured Notes upon a change of
control, upon certain asset sales and from fifty percent (50%) of excess cash
flow (as such terms are defined in the indenture).
Also, on October 21, 2003, the Company 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
initially could not exceed $25.0 million including aggregate borrowings under
the working capital facility up to $15.0 million. On April 29, 2004, the Company
amended the domestic senior credit facility to increase the aggregate amount of
borrowings available under such working capital and letter of credit facilities
from $25.0 million to $27.5 million and to increase the amount of aggregate
borrowings available under the working capital facility from $15.0 million to
$17.5 million. As of September 24, 2004, the Company amended the domestic senior
credit facility to: (i) increase the aggregate amount of borrowings available
under such working capital and letter of credit facilities from $27.5 million to
$32.5 million; the amount of aggregate borrowings available under the working
capital facility remained unchanged at $17.5 million; (ii) amend the EBITDA
definition to exclude charges and expenses related to unsuccessful acquisitions
and related financings in an aggregate amount not to exceed $5.3 million for the
period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the
definition of Additional Indebtedness to exclude advances under the working
capital facility; (iv) amend the definition of Permitted Investments to allow
other investments made during the period from January 1, 2004 through June 30,
2004 in an aggregate amount not to exceed $336,000; and (v) establish covenant
EBITDA levels for the periods ending after June 30, 2004. The amendment was
effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004
for item (iv); and effective September 24, 2004 for all other items.
Concurrent with the completion of the 2004 Offering, on December 21, 2004,
we amended the domestic senior credit facility to (i) amend the EBITDA
definition to exclude charges and expenses related to the sale of the Belgium
Plant in an aggregate amount not to exceed $26.8 million for purposes of
calculating a certain financial covenant, (ii) amend the Indenture Reserve
definition to include scheduled payments of interest due on the additional
notes, (iii) amend the maximum aggregate amount of borrowings available under
the working capital facility to permit a temporary increase to $22.5 million and
for its reduction to $17.5 million on such borrowings being refinanced by the
proceeds of the 2004 Offering, (iv) amend the Permitted Investments definition
to include investments in connection with the sale of the Belgium Plant and
transfer of certain equipment, together with other assets and rights related to
the production of virginiamycin, to our subsidiary in Brazil or in connection
with alternative production arrangements, and (v) provide for the issuance of
the additional notes and the sale of the Belgium Plant and related transactions.
36
Borrowings under the domestic senior credit facility are subject to a
borrowing base formula based on percentages of eligible domestic receivables and
domestic inventory. Under the domestic 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 domestic 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 domestic senior credit facility, a
monthly servicing fee and standard letter of credit fees to issuing banks.
Borrowings under the domestic 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 domestic senior credit facility, by that date.
Pursuant to the terms of an intercreditor agreement, as amended in
connection with the 2004 Offering, 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 domestic senior credit
facility.
PRINCE TRANSACTIONS
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72.2 million to $16.5 million (accreted
through the Closing Date) by means of the redemption of all of its shares of
Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii)
the termination of $2.2 million in annual management advisory fees payable by
the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium
Investors in respect of the portion of the Company's Preferred Stock not
exchanged in consideration of the business and assets of PMC; (v) the agreement
of the Buyer to pay the Company for advisory fees for the next three years of
$1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid
at closing by the Buyer and satisfied for $1.3 million, the net present value of
such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron
oxide products and to provide certain mineral blending services to the Company's
Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue
to provide the Buyer with certain laboratory, MIS and telephone services, all on
terms substantially consistent with the historic relationship between Prince
Agri and PMC, and to lease to Buyer office space used by PMC in Quincy,
Illinois. The Company has an agreement to receive certain treasury services from
Palladium for $0.1 million per year. Pursuant to definitive agreements, the
Company made customary representations, warranties and environmental and other
indemnities, agreed to a post-closing working capital adjustment, paid $4.0
million in full satisfaction of all intercompany debt owed to PMC, paid a
closing fee to Palladium of $0.5 million, made certain capital expenditure
adjustments included as part of the intercompany settlement amount, and agreed
to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million
of its accounts receivable. The Company established a $1.0 million letter of
credit escrow for two years to secure its working capital adjustment and certain
indemnification obligations. The Company agreed to indemnify the Palladium
Investors for a portion, at the rate of $0.65 for every dollar, of the amount
they receive in respect of the disposition of Buyer for less than $21.0 million
up to a maximum payment by the Company of $4.0 million (the "Backstop
Indemnification Amount"). The Backstop Indemnification Amount would be payable
on the earlier to occur of July 1, 2008 or six months after the redemption date
of all of the Company's Senior Secured Notes due 2007 if such a disposition
closes prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
Incorporation was
37
amended to reduce the multiple of trailing EBITDA payable in connection with any
future redemption of Series C Preferred to 6.0 from 7.5. The amount of
consideration paid and payable in connection with the Prince Transactions and
all matters in connection therewith were determined pursuant to arm's length
negotiations.
The excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions was
recorded as a decrease to accumulated deficit on the Company's condensed
consolidated balance sheet at December 31, 2003, and was calculated as follows
(amounts in thousands):
<Table>
SERIES B & C REDEEMABLE PREFERRED STOCK:
Accreted value pre-transaction.............................. $72,184
Accreted value post-transaction............................. 16,517
-------
REDUCTION IN REDEEMABLE PREFERRED STOCK..................... 55,667
-------
ASSETS DIVESTED AND COSTS INCURRED:
PMC net assets divested..................................... 7,430
Cash paid to Palladium Investors for:
- -- reduction of redeemable preferred stock.................. 10,000
- -- settlement of PMC intercompany debt...................... 3,958
- -- working capital adjustment............................... 1,331
- -- closing fee.............................................. 500
Transaction costs........................................... 8,310
Contingent Backstop Indemnification Amount accrued.......... 4,000
-------
TOTAL ASSETS DIVESTED AND COSTS AND LIABILITIES INCURRED.... 35,529
-------
EXCESS AMOUNT RECORDED AS A DECREASE TO ACCUMULATED
DEFICIT................................................... $20,138
=======
</Table>
PMC is included in the Company's Industrial Chemicals segment. The
divestiture of PMC has not been reflected as a discontinued operation due to the
existence of the Backstop Indemnification and continuing supply and service
agreements.
OTHER RISKS AND UNCERTAINTIES
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
38
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
<Table>
<Caption>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------ -------------------
2004 2003 2002 2004 2003
-------- -------- -------- -------- --------
Net Sales......................... $358,274 $341,746 $328,676 $88,275 $84,950
Gross Margin...................... 90,403 90,546 81,265 22,622 21,160
Selling, general and
administrative expenses......... 66,128 65,050 70,636 16,594 15,785
Costs of non-completed
transaction..................... 5,261 -- -- -- --
Operating income.................. 19,014 25,496 10,629 6,028 5,375
Interest expense, net............. 18,488 16,196 17,724 5,221 3,691
Other expense (income), net....... (781) 1,539 3,349 24 (585)
Net (gain) on extinguishment of
debt............................ (23,226) -- -- -- --
Provision for income taxes........ 7,969 10,060 14,767 924 783
Income (loss) from continuing
operations...................... $ 16,564 $ (2,299) $(25,211) $ (141) $ 1,486
</Table>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Net Sales of $88.3 million increased $3.3 million, or 4%. Animal Health and
Nutrition sales of $65.8 million grew $6.0 million, or 10%, due to volume
increases offset in part by lower average selling prices. Specialty Chemical
Group (comprised of the Industrial Chemicals, Distribution and All Other
segments) sales of $22.5 million decreased $2.6 million. Excluding PMC,
Specialty Chemical group sales increased by $3.1 million due to volume increases
in Industrial Chemicals and All Other segments. The Specialty Chemical Group
included PMC sales of $5.7 million for the 2003 quarter.
Gross Profit of $22.6 million increased $1.5 million to 25.6% of net sales,
compared with 24.9% in 2003. Animal Health and Nutrition gross profit increased
due to higher sales unit volumes and lower unit costs offset in part by lower
average selling prices. The Specialty Chemical Group also contributed to the
improvement due to expanded sales of the Company's new copper-based wood
treatment products. The Specialty Chemical Group included PMC gross profit of
$1.9 million for the 2003 quarter.
Selling, General and Administrative Expenses of $16.6 million increased
$0.8 million. Expenses in the operating segments, excluding PMC, increased over
the prior year due to severance accruals, higher research and development costs
associated with registration trials, unfavorable foreign exchange rates and
overall higher operating costs. Corporate expenses increased due to higher
depreciation and amortization charges, compensation and severance costs offset
partially by income of $0.2 million from the PMC advisory fee and the
elimination of the Palladium management fee of $0.6 million in 2003. PMC
expenses were $0.7 million for the 2003 quarter.
Operating Income of $6.0 million increased $0.7 million to 6.8% of sales.
Operating income, excluding PMC, improved in both the Animal Health and
Nutrition and Specialty Chemical Group with increased gross profit offset in
part by higher selling, general and administrative expenses. PMC contributed
$1.2 million for the 2003 quarter offset in part by the elimination of the
Palladium management fee.
39
Interest Expense, Net of $5.2 million increased $1.5 million from the 2003
quarter, primarily due to higher average interest rates and also higher
borrowing levels associated with the issuance of the Company's Senior Secured
Notes.
Other (Income) Expense, Net principally reflects foreign currency
transaction net (gains) losses related to short-term inter-company balances and
foreign currency translation (gains) losses.
Income Taxes of $0.9 million were recorded on consolidated pre-tax income
of $0.8 million. The tax rate reflects income tax provisions in profitable
foreign jurisdictions and for state income taxes. A provision for U.S. federal
income taxes has not been recorded due to the utilization of net operating loss
carryforwards. The Company has recorded valuation allowances related to
substantially all deferred tax assets. The Company will continue to evaluate the
likelihood of recoverability of these deferred tax assets based upon actual and
expected operating performance.
COMPARISON OF YEARS ENDED JUNE 30, 2004 AND 2003
Net Sales of $358.3 million increased $16.5 million, or 5%. Animal Health
and Nutrition sales of $265.4 million grew $14.7 million, or 6%, due to volume
increases. Specialty Chemical Group sales (comprised of the Industrial
Chemicals, Distribution and All Other segments) of $92.9 million increased $1.8
million, or 2%, primarily due to volume increases in all segments, offset by a
decrease in PMC sales. The Specialty Chemical Group included PMC sales of $11.1
million and $22.3 million for 2004 and 2003, respectively.
Gross Profit of $90.4 million decreased $0.1 million to 25.2% of net sales,
compared with 26.5% in 2003. Animal Health and Nutrition gross profit decreased
due to lower average selling prices and unfavorable currency related to the
effect of the Euro on Belgium manufacturing costs. Improvements in the Specialty
Chemical Group partially offset the Animal Health and Nutrition decline. The
Specialty Chemical Group included PMC gross profit of $3.6 million and $6.2
million, respectively, for the fiscal 2004 and 2003 periods.
Gross profit increased $2.0 million in the fourth quarter of 2004 due to an
agreement related to the production and sale of amprolium, an anticoccidial MFA.
The Company acquired the rights to sell amprolium in most international markets.
In payment for the acquired rights, the Company relinquished its claims against
the seller for certain purchase order commitments, and will make $2.1 million of
cash payments to the seller over the next five years. The present value of these
payments is $1.9 million and was recorded as a liability. The $2.4 million value
of the purchase order commitments was recorded as a reduction in cost of goods
sold and inventory, and an intangible asset of $4.3 million was recorded
representing the fair value of the acquired rights and is included on the
Company's balance sheet at June 30, 2004. The Company will amortize this
intangible over a 10 year period. No amortization was recorded in 2004.
Amortization expense for each of the next five years from 2005 to 2009 is
expected to be $0.4 million per year.
Selling, General and Administrative Expenses of $66.1 million increased
$1.1 million. Expenses in the operating segments, excluding PMC, approximated
the prior year primarily due to lower environmental and severance accruals
offset in part by unfavorable foreign exchange rates. Corporate expenses in the
current fiscal year reflect the elimination of the Palladium annual management
fee of $2.25 million as of December 31, 2003 and income of $0.5 million from the
PMC Advisory fee. Corporate expenses increased in fiscal 2004 due to higher
depreciation and amortization charges and insurance costs offset by lower
benefit charges. Corporate expenses in fiscal 2003 included vitamin settlement
income of $3.0 million. PMC expenses were $1.3 million and $2.6 million for 2004
and 2003, respectively.
Costs of non-completed transaction. During 2004, the Company incurred $5.3
million of costs in connection with a potential acquisition transaction that was
not completed. The Company has charged the costs to expense in its 2004 results.
The costs primarily consisted of professional fees for services in connection
with the transaction.
Net gain on extinguishment of debt. The Company recorded a net gain on the
extinguishment of debt of $23.2 million due to the repurchase of senior
subordinated notes ($16.7 million), and the repayment of Pfizer
40
obligations ($7.6 million) offset in part by a loss on repayment of the domestic
senior credit facility ($1.0 million).
Operating Income of $19.0 million decreased $6.5 million to 5.3% of sales.
The decrease was primarily due to the non-completed transaction costs described
above. In addition, gross profit declined in the Animal Health and Nutrition
segment but was offset in part by improved operating performance of the
Specialty Chemical Group. PMC contributed $2.3 million and $3.6 million for 2004
and 2003, respectively.
Interest Expense, Net of $18.5 million increased $2.3 million from the
prior year, primarily due to higher borrowing levels and also higher average
interest rates associated with the issuance of the Company's Senior Secured
Notes.
Other (Income) Expense, Net of ($0.8) million improved in comparison with
$1.5 million of expense last year. During 2004, the Company's Phibro-Tech
subsidiary received $1.0 million in exchange for the sale of certain assets
related to the manufacture and sale of ferric chloride from its plant in Joliet,
Illinois and recognized a net gain of $0.7 million. The balance of other
(income) expense principally reflects foreign currency transaction net (gains)
losses related to short-term inter-company balances and foreign currency
translation (gains) losses.
Income Taxes of $8.0 million were 32% of consolidated pre-tax income of
$24.5 million. The tax rate reflects income tax provisions in profitable foreign
jurisdictions and for state income taxes. A provision for U.S. federal income
taxes has not been recorded due to the utilization of net operating loss
carryforwards. The Company has recorded valuation allowances related to
substantially all deferred tax assets. The Company will continue to evaluate the
likelihood of recoverability of these deferred tax assets based upon actual and
expected operating performance.
COMPARISON OF YEARS ENDED JUNE 30, 2003 AND 2002
Net Sales of $341.7 million increased $13.1 million, or 4%. Animal Health
and Nutrition sales of $250.7 million grew $11.1 million, or 5%, due to volume
increases. Specialty Chemical Group sales of $91.0 million increased $2.0
million, or 2%, primarily due to volume increases in the Distribution and All
Other businesses.
Gross Profit of $90.5 million improved $9.3 million to 26.5% of net sales,
compared with 24.7% in 2002. Animal Health and Nutrition gross profit
improvements were responsible for the overall increase. Purchase accounting
adjustments related to the MFA acquisition resulted in a $3.3 million increase
to cost of goods sold in 2002. Excluding the purchase accounting adjustment, the
gross profit ratio would have been 25.7% in 2002.
Selling, General and Administrative Expenses of $65.1 million decreased
$5.6 million, or 8%. Expenses declined $6.5 million in the Specialty Chemicals
Group due to downsizing and restructuring of the Industrial Chemicals segment,
reflecting the decline in the printed circuit board market. Industrial Chemicals
included expense for additional environmental reserves and write-offs of
unamortized permit fees at closed facilities of $1.0 million and $1.6 million
for 2003 and 2002, respectively. Animal Health and Nutrition expenses decreased
by approximately $0.4 million. Corporate expenses increased $1.3 million,
primarily due to increased staff levels. Corporate expenses included a vitamin
settlement income of $3.0 million and $0.7 million in 2003 and 2002,
respectively, from the settlement of class action litigation against European
vitamin manufacturers. Debt restructuring costs of $0.8 million, severance of
$0.4 million, and expense related to a divested business of $0.2 million were
also recorded in 2003. Included in 2002 was $0.4 million non-cash income to
reflect the decrease in value of redeemable common stock; no amount was recorded
in 2003.
Operating Income of $25.5 million increased $14.9 million to 7.5% of sales.
The improvement was due to sales growth, gross margin improvements in Animal
Health and Nutrition, and operating expense reductions.
Interest Expense, Net of $16.2 million decreased $1.5 million, compared
with $17.7 million in 2002, primarily due to lower average interest rates and
reduced average borrowing levels.
41
Other Expense, Net of $1.5 million in fiscal 2003 improved in comparison
with $3.4 million in the prior year. The expense principally reflects foreign
currency transaction and translation net losses related to short-term
inter-company balances.
Income Taxes of $10.1 million were primarily due to a $5.6 million increase
in valuation allowances for deferred tax assets in foreign jurisdictions where
future profitability is not currently considered more likely than not, and
income tax provisions in profitable foreign jurisdictions. The Company has
recorded valuation allowances related to substantially all deferred tax assets.
The Company will continue to evaluate the likelihood of recoverability of these
deferred tax assets based upon actual and expected operating performance.
Operating Segments
The Animal Health and Nutrition segment manufactures and markets MFAs and
NFAs to the poultry, swine and cattle markets, and includes the operations of
the Phibro Animal Health business unit, Prince AgriProducts, Koffolk (1949) Ltd.
and Planalquimica. The Industrial Chemicals segment manufacturers and markets
specialty chemicals for use in the pressure treated wood, brick, glass, and
chemical industries, and includes Phibro-Tech and PMC. The Distribution segment
markets a variety of specialty chemicals, and includes PhibroChem and Ferro
operations. The All Other segment includes contract manufacturing of crop
protection chemicals, Wychem and all other operations. Due to the divestiture of
PMC in December 2003, PMC's results are shown separately for comparability.
<Table>
<Caption>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPT. 30,
------------------------------ -------------------
2004 2003 2002 2004 2003
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
NET SALES:
Animal Health & Nutrition....... $265,421 $250,706 $239,602 $65,806 $59,841
Industrial Chemicals -- ex
PMC.......................... 31,135 26,465 29,403 8,393 6,299
Industrial Chemicals -- PMC..... 11,118 22,332 21,451 -- 5,683
Distribution.................... 30,861 30,072 27,852 7,661 7,939
All other....................... 19,739 12,171 10,368 6,415 5,188
-------- -------- -------- ------- -------
$358,274 $341,746 $328,676 $88,275 $84,950
======== ======== ======== ======= =======
OPERATING INCOME:
Animal Health & Nutrition....... $ 33,307 $ 38,472 $ 28,298 $ 7,815 $ 6,900
Industrial Chemicals -- ex
PMC.......................... 621 (5,434) (10,964) 773 (391)
Industrial Chemicals -- PMC..... 2,278 3,579 3,640 -- 1,213
Distribution.................... 2,900 3,207 2,345 864 841
All other....................... 2,301 620 1,164 705 669
Corporate expenses and
adjustments.................. (22,393) (14,948) (13,854) (4,129) (3,857)
-------- -------- -------- ------- -------
$ 19,014 $ 25,496 $ 10,629 $ 6,028 $ 5,375
======== ======== ======== ======= =======
</Table>
OPERATING SEGMENTS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND
2003
Animal Health and Nutrition
Net Sales of $65.8 million increased $6.0 million, or 10%. MFA net sales
increased by $2.4 million. Revenues were higher primarily for antibacterials and
antibiotics but were offset in part by lower sales of anticoccidials. The
increase in MFA revenues was due to higher unit volumes and favorable currency
effect on international sales offset in part by lower average selling prices.
NFA net sales increased by $3.6 million principally due to volume increases in
trace mineral premixes and other feed ingredients.
42
Operating Income of $7.8 million increased $0.9 million, or 13%. Operating
income improved due to higher sales unit volumes and lower unit costs offset in
part by lower average selling prices and increased selling, general and
administrative expenses.
Specialty Chemicals
Industrial Chemicals net sales of $8.4 million, excluding PMC, increased
$2.1 million, or 33%. Sales of copper-related products to the wood treatment
markets increased due to the introduction of new copper based wood treatment
products. PMC, divested in December 2003, generated revenues of $5.7 million for
the 2003 quarter. Operating income, excluding PMC, of $0.8 million improved by
$1.2 million from the 2003 quarter. This improvement was due to new product
introductions and savings from previously implemented headcount reductions and
facility restructurings in Phibro-Tech operations. PMC provided operating income
of $1.2 million for the 2003 quarter.
Distribution net sales of $7.7 million decreased $0.3 million, or 4%. Lower
sales volumes in Europe were offset in part by higher domestic unit volumes and
slightly higher average selling prices. Distribution operating income of $0.9
million approximated the prior period. As a percentage of sales, operating
income was 11% in both 2004 and 2003 quarters.
All Other net sales of $6.4 million increased $1.2 million, or 24%.
Revenues for contract manufacturing increased $0.7 million due to increased
volumes and average selling prices. Revenues from specialized lab projects and
formulations increased $0.5 million over the prior period. Operating income of
$0.7 million improved slightly from the prior period due to higher margins on
specialized lab projects and formulations.
OPERATING SEGMENTS COMPARISON OF YEARS ENDED JUNE 30, 2004 AND 2003
Animal Health and Nutrition
Net Sales of $265.4 million increased $14.7 million, or 6%. Medicated Feed
Additives net sales decreased by $7.8 million. Revenues were lower primarily for
anticoccidials but were offset in part by higher sales of other medicated feed
additives. Sales of anticoccidial products were $7.1 million lower due to
contract negotiations with a major customer that were completed in the fourth
quarter of 2004. The decrease in MFA revenues also was due to lower average
selling prices offset in part by favorable currency effect on international
sales. Nutritional Feed Additives net sales increased by $22.5 million,
principally due to volume increases in core inorganic minerals, trace mineral
premixes and other ingredients.
Operating Income of $33.3 million decreased $5.2 million, or 13%. Operating
income declined due to product mix, higher cost of goods reflecting the stronger
Euro's effect on Belgian manufacturing cost and unfavorable currency effects on
international selling, general and administrative expense. Lower average selling
prices also contributed to the decrease. Operating income increased $2.0 million
in the fourth quarter of 2004 due to an agreement related to the production and
sale of amprolium, an anticoccidial MFA.
Specialty Chemicals
Industrial Chemicals net sales of $31.1 million, excluding PMC, increased
$4.7 million, or 18%. Sales of copper related products to the wood treatment
markets increased due to the introduction of new copper based wood treatment
chemicals which offset the divestiture of the Company's Eastern United States
etchant business in mid 2003. The Company continues its existing etchant
business at one remaining facility. PMC, divested in December 2003, generated
revenues of $11.1 million and $22.3 million for 2004 and 2003, respectively.
Operating income of $0.6 million improved by $6.1 million from the prior year.
This improvement was due to new product introductions and savings from headcount
reductions and facility restructurings in Phibro-Tech operations. PMC provided
operating income of $2.3 million and $3.6 million for 2004 and 2003,
respectively.
Distribution net sales of $30.9 million increased $0.8 million, or 3%.
Higher sales volumes in Europe were offset in part by lower domestic unit
volumes and lower average selling prices. Distribution operating income
43
of $2.9 million decreased $0.3 million from the prior year. As a percentage of
sales, operating income was 9% and 11% in 2004 and 2003, respectively.
All Other net sales of $19.7 million increased $7.6 million, or 62%.
Revenues for contract manufacturing increased $7.6 million due to increased
volumes and average selling prices. Specialized lab projects and formulations
approximated the prior year. Operating income of $2.3 million improved by $1.7
million from the prior year due to higher revenues and increased margins on
contract manufacturing.
OPERATING SEGMENTS COMPARISON OF YEARS ENDED JUNE 30, 2003 AND 2002
Animal Health and Nutrition
Net Sales of $250.7 million increased $11.1 million, or 5%. Medicated Feed
Additives net sales increased by $6.7 million. Revenues were higher for
antibacterials, antibiotics and anticoccidials but were offset in part by lower
sales of anthelmintics and other medicated feed additives. The increased
revenues were due to volume increases offset in part by lower average selling
prices, including the effect of currency devaluations in Latin America.
Nutritional Feed Additives net sales increased by $4.4 million, principally due
to volume increases in core inorganic minerals, trace mineral premixes and other
ingredients.
Operating Income of $38.5 million increased $10.2 million, or 36%. Purchase
accounting adjustments relating to inventory in the MFA acquisition resulted in
a $3.3 million increase to 2002 cost of goods sold. The operating income ratio
increased to 15% in 2003 from 13% in 2002 (excluding the purchase accounting
adjustments). The improvement in operating income resulted from increased sales
of higher margin products and close control of operating expenses.
Specialty Chemicals
Industrial Chemicals net sales of $26.5 million, excluding PMC, decreased
$2.9 million, or 10%. Industrial Chemicals net sales decreased due to the
divestiture of the Company's Eastern United States etchant business in
mid-fiscal 2003 and reduced sales of etchants to the printed circuit board
market. PMC, divested in December 2003, generated revenues of $22.3 million and
$21.5 million for fiscal periods 2003 and 2002, respectively. Industrial
Chemicals operating loss of $5.4 million improved by $5.5 million from the year
earlier loss. The improvement principally was due to the partial disposal during
2003 of the ammoniacal etchant business and savings from headcount reductions
and facility restructurings. The gain on the transaction was not material. PMC
provided operating income of $3.6 million in each of the 2003 and 2002 fiscal
periods.
Distribution net sales of $30.1 million increased $2.2 million, or 8%.
Higher sales volumes in Europe and improved product mix in domestic operations
accounted for the increase. Distribution operating income of $3.2 million
increased $0.9 million, or 37%. As a percentage of sales, operating income
increased to 11% in 2003 from 8% in 2002. The improvement in operating income
margins resulted principally from increased sales of higher margin products.
All Other net sales of $12.2 million increased $1.8 million, or 17%.
Revenues for contract manufacturing increased $2.4 million due to increased
volumes. Revenues from specialized lab projects and formulations declined $0.6
million. Operating income of $0.6 million decreased primarily due to specialized
lab projects and formulations.
DISCONTINUED OPERATIONS
In August 2003, the Company divested Mineral Resource Technologies, Inc and
shutdown its operations at La Cornubia. These businesses have been classified as
discontinued operations. The Company's consoli-
44
dated financial statements have been reclassified to report separately the
operating results and cash flows of the discontinued operations.
<Table>
<Caption>
THREE MONTHS
ENDED SEPTEMBER 30, 2003
-----------------------------
MRT LA CORNUBIA TOTAL
------ ----------- ------
Net Sales............................................... $3,327 $2,220 $5,577
====== ====== ======
Operating Loss.......................................... $ (124) $ (372) $ (496)
Interest Expense, net................................... -- 16 16
Other Expense (Income), net............................. -- (50) (50)
Provision (benefit) for income tax...................... -- -- --
------ ------ ------
Net Income (Loss) from discontinued operations.......... $ (124) $ (338) $ (462)
====== ====== ======
Depreciation & Amortization............................. $ -- $ 100 $ 100
====== ====== ======
</Table>
Mineral Resource Technologies, Inc. ("MRT"). In August 2003, the Company
divested MRT for net proceeds, after transaction costs, of approximately $13.8
million. MRT was included in the Company's All Other segment.
La Cornubia. On June 30, 2004, one of the Company's French subsidiaries,
La Cornubia SA ("La Cornubia"), filed for bankruptcy under the insolvency laws
of France. The Company believes that, as a result of the bankruptcy filing by La
Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's
parent, a holding company with no assets except for its investment in La
Cornubia, may also file for bankruptcy in France. The Company does not believe
that La Cornubia's bankruptcy filing, nor the possible bankruptcy filing by LC
Holding, will have a material adverse effect on its financial condition or
results of operations.
During fiscal 2004, the Company shutdown its operations at La Cornubia.
During fiscal 2003, the Company shutdown or divested Odda Smelteverk (Norway),
Carbide Industries (U.K.), and Mineral Resource Technologies, Inc. These
businesses have been classified as discontinued operations. The Company's
consolidated financial statements have been reclassified to report separately
the operating results, financial position, and cash flows of the discontinued
operations. Prior year financial statements have been reclassified to conform to
the 2004 presentation.
<Table>
<Caption>
YEAR ENDED JUNE 30, 2004
---------------------------------------------
LA CORNUBIA ODDA/CARBIDE MRT TOTAL
----------- ------------ ------ -------
Net Sales................................. $13,918 $ -- $3,327 $17,245
======= ===== ====== =======
Operating Loss............................ $(1,491) $ -- $ (124) $(1,615)
Interest Expense, net..................... 94 94
Other Expense (Income), net............... (102) -- -- (102)
Provision (benefit) for income tax........ 18 -- -- 18
------- ----- ------ -------
Net Income (Loss) from discontinued
operations.............................. $(1,501) $ -- $ (124) $(1,625)
======= ===== ====== =======
Depreciation & Amortization............... $ 400 $ -- $ -- $ 400
======= ===== ====== =======
</Table>
45
<Table>
<Caption>
YEAR ENDED JUNE 30, 2003
-----------------------------------------------
LA CORNUBIA ODDA/CARBIDE MRT TOTAL
----------- ------------ ------- --------
Net Sales............................... $13,479 $ 11,217 $18,671 $ 43,367
======= ======== ======= ========
Operating Loss.......................... $ (359) $(13,462) $(3,454) $(17,275)
Interest Expense, net................... 60 60
Other Expense (Income), net............. (389) (2,327) -- (2,716)
Provision (benefit) for income tax...... 16 58 -- (42)
------- -------- ------- --------
Net Income (Loss) from discontinued
operations............................ $ (46) $(11,077) $(3,454) $(14,577)
======= ======== ======= ========
Depreciation & Amortization............. $ 359 $ 894 $ 1,309 $ 2,562
======= ======== ======= ========
</Table>
<Table>
<Caption>
YEAR ENDED JUNE 30, 2002
-----------------------------------------------
LA CORNUBIA ODDA/CARBIDE MRT TOTAL
----------- ------------ ------- --------
Net Sales............................... $11,873 $ 31,219 $17,045 $ 60,137
======= ======== ======= ========
Operating Loss.......................... $ (912) $(27,709) $(2,930) $(31,551)
Interest Expense, net................... 78 78
Other Expense (Income), net............. (263) (3,699) (3,962)
Provision (benefit) for income tax...... 62 (1,170) -- (1,108)
------- -------- ------- --------
Net Income (Loss) from discounted
operations............................ $ (789) $(22,840) $(2,930) $(26,559)
======= ======== ======= ========
Depreciation & Amortization............. $ 325 $ 17,676 $ 1,192 $ 19,193
======= ======== ======= ========
</Table>
Odda and Carbide. During fiscal 2003, the Company determined that it would
permanently shutdown and no longer fund the operations of Odda. On February 28,
2003, Odda filed for bankruptcy in Norway. The bankruptcy is proceeding in
accordance with Norwegian law. The Company removed all assets, liabilities
(except as noted below), and cumulative translation adjustments related to Odda
from the Company's consolidated balance sheet as of June 30, 2003, and recorded
the net result as a loss on disposal of discontinued operations. The Company has
been advised that, as a result of the bankruptcy, the creditors of Odda have
recourse only to the assets of Odda, except in the case of certain debt
guaranteed by the Company. During fiscal 2004, the Company paid the remaining
guaranteed debt of $5.7 million. The Company has been advised by Norwegian
counsel that it has obtained the benefit of the banks' position as a secured
creditor upon payment pursuant to the guarantees. During fiscal 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
during fiscal 2003. The loss primarily related to the write-off of Odda's
remaining net assets, including the related cumulative currency translation
adjustment.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Provided by Operating Activities. Cash provided by operations for
the three months ended September 30, 2004 and 2003 was $2.4 million and $1.3
million, respectively. Cash provided was due to income from continuing
operations offset in part by working capital requirements. The Company is
currently increasing inventory levels of certain products to enhance future
supply flexibility and reduce cost as part of a strategic review of its
manufacturing capabilities. Cash provided by operations for fiscal 2004 and 2003
was $2.9 million and $34.7 million, respectively. Cash provided in fiscal 2004
was due to income from continuing operations offset in part by working capital
requirements. In addition, payment of the Pfizer obligations (shown in financing
activities) eliminated additional working capital requirements that otherwise
would have
46
been necessary. Cash provided in fiscal 2003 was due to improved income from
continuing operations and aggressive working capital management. The Company
incurred $5.3 million of costs for a non-completed acquisition transaction and
paid approximately $1.4 million of these charges in fiscal 2004.
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for the three months ended September 30, 2004 and 2003
was ($1.7) million and $13.2 million, respectively. Capital expenditures of $1.7
million and $0.9 million for the three months ended September 30, in 2004 and
2003, respectively, were for new product capacity, for maintaining the Company's
existing asset base and for environmental, health and safety projects.
Discontinued operations, primarily from the sale of MRT, provided funds of $14.0
million in the three months ended September 30, 2003. Net cash provided (used)
by investing activities for fiscal 2004 and 2003 was $9.1 million and ($4.0)
million, respectively. Discontinued operations, primarily from the sale of MRT,
provided funds of $14.9 million in fiscal 2004. Discontinued operations provided
$1.4 million in fiscal 2003. Capital expenditures of $6.2 million and $8.6
million for fiscal 2004 and 2003, respectively, were for new product capacity,
for maintaining the Company's existing asset base and for environmental, health
and safety projects. Proceeds from sales of fixed assets and other investing
activities accounted for the remainder of cash provided by investing activities
in fiscal 2004.
Net Cash Provided (Used) by Financing Activities. Net cash provided (used)
by financing activities for the three months ended September 30, 2004 and 2003
was ($0.4) million and $1.1 million, respectively. Short-term debt increased due
to a $0.3 million increase in the domestic senior credit facility. Proceeds from
long-term debt and payments of long-term debt, net used $0.4 million of funds
and primarily reflect the borrowing activity of Koffolk Israel. Net cash (used)
by financing activities for fiscal 2004 and 2003 was ($17.8) million and ($26.4)
million, respectively. Short-term debt decreased due to the reduction of the
domestic senior credit facility of $21.2 million, debt payments related to Odda
of $5.7 million and by other increases of $0.1 million in fiscal 2004. Proceeds
from long-term debt reflect the issuance of $105.0 million Senior Secured Notes
and an increase of $4.6 million in foreign bank loans in fiscal 2004. Payments
of long-term debt primarily reflect the retirement of Senior Subordinated Notes
in fiscal 2004. Payments of the Pfizer obligations, the Prince transactions and
costs related to the refinancing account for the remainder of funds used by
financing activities in fiscal 2004.
Working Capital and Capital Expenditures. Working capital as of September
30, 2004 was $57.7 million compared to $54.4 million at fiscal year end June 30,
2004, an increase of $3.0 million. The Company is currently increasing inventory
levels of certain products to enhance future supply flexibility and reduce cost
as part of a strategic review of its manufacturing capabilities. The fiscal 2005
increase in working capital primarily was due to higher inventory levels.
The Company anticipates spending approximately $8.0 million for capital
expenditures in fiscal 2005, primarily to cover the Company's asset replacement
needs, to improve processes, and for environmental and regulatory compliance,
subject to the availability of funds.
Liquidity. At September 30, 2004, the amount of credit extended under the
Company's domestic senior credit facility totaled $11.3 million under the
working capital facility and $8.7 million under the letter of credit facility,
and the Company had $6.2 million available under the working capital facility.
In addition, certain of the Company's foreign subsidiaries also had availability
totaling $5.1 million under their respective loan agreements. As of September
24, 2004, the Company amended its domestic senior credit facility to: (i)
increase the aggregate amount of borrowings available under such working capital
and letter of credit facilities to $32.5 million; the amount of aggregate
borrowings available under the working capital facility remained unchanged at
$17.5 million; (ii) amend the EBITDA definition to exclude charges and expenses
related to unsuccessful acquisitions and related financings in an aggregate
amount not to exceed $5.3 million for the period beginning January 1, 2004 and
ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to
exclude advances under the working capital facility; (iv) amend the definition
of Permitted Investments to allow other investments made during the period from
January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed
$336,000; and (v) establish covenant EBITDA levels for the periods ending after
June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and
(iii); effective January 1, 2004 for item (iv); and effective September 24, 2004
for item (v).
47
The domestic senior credit facility contains a lock-box requirement and a
material adverse change clause should an event of default (as defined in the
agreement) occur. Accordingly, the amounts outstanding have been classified as
short-term and are included in loans payable to banks in the condensed
consolidated balance sheet.
The Company's ability to fund its operating plan depends upon the continued
availability of borrowing under its domestic senior credit facility. The Company
believes that it will be able to comply with the terms of its covenants under
the domestic senior credit facility based on its forecasted operating plan. In
the event of adverse operating results and/or violation of covenants under this
facility, there can be no assurance that the Company would be able to obtain
waivers or amendments on favorable terms, if at all. The Company's fiscal 2005
operating plan projects adequate liquidity throughout the year, with periods of
reduced availability around the dates of the semi-annual interest payments due
December 1, 2004 and June 1, 2005 related to its senior secured and senior
subordinated notes. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that likely would be available. The Company also has undertaken a
strategic review of its manufacturing capabilities, and is currently increasing
inventory levels of certain products to enhance future flexibility and reduce
cost. There can be no assurance the Company will be successful in any of the
above-noted actions.
The Company's contractual obligations (in millions) at September 30, 2004
mature as follows:
<Table>
<Caption>
YEARS
------------------------------------------------------
WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL
-------- ----------- ----------- ------ ------
Loans payable to banks................ $11.3 $ -- $ -- $ -- $ 11.3
Long-term debt (including current
portion)............................ 1.0 4.1 153.9 -- 159.0
Interest payments..................... 19.3 38.4 12.7 -- 70.4
Lease commitments..................... 1.4 2.6 2.0 2.2 8.2
Acquisition of rights................. 0.6 0.8 0.4 -- 1.8
----- ----- ------ ---- ------
Total contractual obligations....... $33.6 $45.9 $169.0 $2.2 $250.7
===== ===== ====== ==== ======
</Table>
The Company's contractual obligations (in millions) at September 30, 2004,
as adjusted to give effect to the additional notes issued in December 2004,
mature as follows:
<Table>
<Caption>
YEARS
------------------------------------------------------
WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL
-------- ----------- ----------- ------ ------
Loans payable to banks................ $ -- $ -- $ -- $ -- $ --
Long-term debt (including current
portion)............................ 1.0 4.1 176.3 -- 181.4
Interest payments..................... 22.2 44.2 13.2 -- 79.6
Lease commitments..................... 1.4 2.6 2.0 2.2 8.2
Acquisition of rights................. 0.6 0.8 0.4 -- 1.8
----- ----- ------ ---- ------
Total contractual obligations....... $25.2 $51.7 $191.9 $2.2 $271.0
===== ===== ====== ==== ======
</Table>
SUPPLEMENTAL INFORMATION (UNAUDITED)
The Company shutdown Odda and divested Carbide during fiscal 2003, sold MRT
in August 2003, and shutdown La Cornubia in June 2004. 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. In addition,
the Company completed the Prince Transactions in December 2003, including the
divestiture of PMC and the termination of management fees to the Palladium
Investors.
48
To facilitate quarterly comparisons, the following unaudited statements
present the quarterly operating results of continuing operations, for the years
ended June 30, 2004, 2003 and 2002. Amounts are in thousands.
<Table>
<Caption>
QUARTERS ENDED YEAR
----------------------------------------- ENDED
SEP. 30, DEC. 31, MAR. 31, JUN. 30, JUN. 30,
2003 2003 2004 2004 2004
-------- -------- -------- -------- --------
NET SALES:
Animal Health & Nutrition..................... $59,841 $ 68,687 $64,819 $72,074 $265,421
Industrial Chemicals -- ex PMC................ 6,299 6,244 10,000 8,592 31,135
Industrial Chemicals -- PMC................... 5,683 5,435 -- -- 11,118
Distribution.................................. 7,939 7,656 7,916 7,350 30,861
All Other..................................... 5,188 4,518 4,302 5,731 19,739
------- -------- ------- ------- --------
Total net sales............................ 84,950 92,540 87,037 93,747 358,274
Cost of goods sold.............................. 63,790 69,991 63,843 70,247 267,871
------- -------- ------- ------- --------
Gross profit............................... 21,160 22,549 23,194 23,500 90,403
Selling, general and administrative expenses.... 15,785 16,824 16,165 17,354 66,128
Costs of non-completed transaction.............. -- -- -- 5,261 5,261
------- -------- ------- ------- --------
OPERATING INCOME (LOSS):
Animal Health & Nutrition..................... 6,900 7,655 8,370 10,382 33,307
Industrial Chemicals -- ex PMC................ (391) (287) 1,136 163 621
Industrial Chemicals -- PMC................... 1,213 1,065 -- -- 2,278
Distribution.................................. 841 692 789 578 2,900
All Other..................................... 669 657 557 418 2,301
Corporate Expenses............................ (3,377) (4,132) (4,116) (9,729) (21,354)
Eliminations.................................. 82 638 293 (927) 86
Palladium management fee...................... (562) (563) -- -- (1,125)
------- -------- ------- ------- --------
Total operating income (loss).............. 5,375 5,725 7,029 885 19,014
OTHER:
Interest expense.............................. 3,933 4,549 4,918 5,218 18,618
Interest (income)............................. (242) 168 (43) (13) (130)
Other expense, net............................ (585) 127 (131) (192) (781)
Net (gain) on extinguishment of debt.......... -- (23,226) -- -- (23,226)
------- -------- ------- ------- --------
Income (loss) from continuing operations
before income taxes...................... 2,269 24,107 2,285 (4,128) 24,533
Provision for income taxes...................... 783 2,880 2,209 2,097 7,969
------- -------- ------- ------- --------
Income/(loss) from continuing operations... 1,486 21,227 76 (6,225) 16,564
DISCONTINUED OPERATIONS:
Income (loss) from operations................. (462) 59 (471) (751) (1,625)
Gain (loss) on disposal....................... 231 -- -- (2,320) (2,089)
------- -------- ------- ------- --------
Net income/(loss).......................... $ 1,255 $ 21,286 $ (395) $(9,296) $ 12,850
======= ======== ======= ======= ========
DEPRECIATION AND AMORTIZATION FROM CONTINUING
OPERATIONS:
Animal Health & Nutrition..................... $ 2,029 $ 2,059 $ 2,086 $ 2,089 $ 8,263
Industrial Chemicals -- ex PMC................ 406 395 403 432 1,636
Industrial Chemicals -- PMC................... 243 244 -- -- 487
Distribution.................................. 3 4 3 1 11
All Other..................................... 115 98 105 101 419
Corporate Expenses............................ 372 576 660 759 2,367
------- -------- ------- ------- --------
Total depreciation and amortization........ $ 3,168 $ 3,376 $ 3,257 $ 3,382 $ 13,183
======= ======== ======= ======= ========
</Table>
49
<Table>
<Caption>
QUARTERS ENDED YEAR
----------------------------------------- ENDED
SEP. 30, DEC. 31, MAR. 31, JUN. 30, JUN. 30,
2002 2002 2003 2003 2003
-------- -------- -------- -------- --------
NET SALES:
Animal Health & Nutrition................ $59,976 $ 66,650 $62,675 $61,405 $250,706
Industrial Chemicals -- ex PMC........... 8,138 5,946 6,449 5,932 26,465
Industrial Chemicals -- PMC.............. 5,756 5,285 5,743 5,548 22,332
Distribution............................. 8,096 7,197 7,612 7,167 30,072
All Other................................ 1,711 2,190 3,793 4,477 12,171
------- -------- ------- ------- --------
Total net sales....................... 83,667 87,268 86,272 84,529 341,746
Cost of goods sold......................... 61,638 63,366 63,306 62,890 251,200
------- -------- ------- ------- --------
Gross profit.......................... 22,039 23,902 22,966 21,639 90,546
Selling, general and administrative
expenses................................. 15,544 15,874 17,496 16,136 65,050
OPERATING INCOME (LOSS):
Animal Health & Nutrition................ 9,420 11,593 8,902 8,557 38,472
Industrial Chemicals -- ex PMC........... (1,035) (1,815) (1,555) (1,029) (5,434)
Industrial Chemicals -- PMC.............. 1,127 901 839 712 3,579
Distribution............................. 750 802 900 755 3,207
All Other................................ 13 245 356 6 620
Corporate Expenses....................... (3,051) (3,440) (3,324) (2,905) (12,720)
Eliminations............................. (167) 305 (86) (30) 22
Palladium management fee................. (562) (563) (562) (563) (2,250)
------- -------- ------- ------- --------
Total operating income (loss)......... 6,495 8,028 5,470 5,503 25,496
OTHER:
Interest expense......................... 4,489 3,641 3,958 4,193 16,281
Interest (income)........................ (126) 31 (39) 49 (85)
Other expense, net....................... 1,155 235 201 (52) 1,539
------- -------- ------- ------- --------
Income (loss) from continuing
operations before income taxes...... 977 4,121 1,350 1,313 7,761
Provision for income taxes................. 432 1,409 599 7,620 10,060
------- -------- ------- ------- --------
Income/(loss) from continuing
operations.......................... 545 2,712 751 (6,307) (2,299)
DISCONTINUED OPERATIONS:
Income (loss) from operations............ (702) (10,547) (1,681) (1,647) (14,577)
Gain (loss) on disposal.................. -- -- (1,342) 659 (683)
------- -------- ------- ------- --------
Net income/(loss)..................... $ (157) $ (7,835) $(2,272) $(7,295) $(17,559)
======= ======== ======= ======= ========
DEPRECIATION AND AMORTIZATION FROM
CONTINUING OPERATIONS:
Animal Health & Nutrition................ $ 1,892 $ 1,920 $ 1,890 $ 1,988 $ 7,690
Industrial Chemicals -- ex PMC........... 587 699 498 164 1,948
Industrial Chemicals -- PMC.............. 232 239 240 245 956
Distribution............................. 3 3 2 4 12
All Other................................ 87 90 94 93 364
Corporate Expenses....................... 355 395 405 399 1,554
------- -------- ------- ------- --------
Total depreciation and amortization... $ 3,156 $ 3,346 $ 3,129 $ 2,893 $ 12,524
======= ======== ======= ======= ========
</Table>
50
<Table>
<Caption>
QUARTERS ENDED YEAR
----------------------------------------- ENDED
SEP. 30, DEC. 31, MAR. 31, JUN. 30, JUN. 30,
2001 2001 2002 2002 2002
-------- -------- -------- -------- --------
NET SALES:
Animal Health & Nutrition................ $57,943 $63,156 $59,378 $ 59,125 $239,602
Industrial Chemicals -- ex PMC........... 6,591 6,253 7,258 9,301 29,403
Industrial Chemicals -- PMC.............. 5,062 5,218 5,418 5,753 21,451
Distribution............................. 7,590 6,640 6,753 6,869 27,852
All Other................................ 2,377 2,448 2,595 2,948 10,368
------- ------- ------- -------- --------
Total net sales....................... 79,563 83,715 81,402 83,996 328,676
Cost of goods sold......................... 59,592 60,128 60,885 66,806 247,411
------- ------- ------- -------- --------
Gross profit.......................... 19,971 23,587 20,517 17,190 81,265
Selling, general and administrative
expenses................................. 16,431 17,614 17,577 19,014 70,636
OPERATING INCOME (LOSS):
Animal Health & Nutrition................ 7,365 10,259 6,246 4,428 28,298
Industrial Chemicals -- ex PMC........... (2,759) (2,160) (1,175) (4,870) (10,964)
Industrial Chemicals -- PMC.............. 821 588 1,058 1,173 3,640
Distribution............................. 612 544 496 693 2,345
All Other................................ 214 367 108 475 1,164
Corporate Expenses....................... (2,204) (2,708) (2,733) (3,746) (11,391)
Eliminations............................. 53 (354) (498) 586 (213)
Palladium management fee................. (562) (563) (562) (563) (2,250)
------- ------- ------- -------- --------
Total operating income (loss)......... 3,540 5,973 2,940 (1,824) 10,629
OTHER:
Interest expense......................... 4,596 4,660 4,590 4,224 18,070
Interest (income)........................ (65) (231) (6) (44) (346)
Other expense, net....................... 1,263 753 368 965 3,349
------- ------- ------- -------- --------
Income (loss) from continuing
operations before income taxes...... (2,254) 791 (2,012) (6,969) (10,444)
Provision for income taxes................. (197) 1,203 1,264 12,497 14,767
------- ------- ------- -------- --------
Income/(loss) from continuing
operations.......................... (2,057) (412) (3,276) (19,466) (25,211)
DISCONTINUED OPERATIONS:
Income (loss) from operations............ (308) (1,287) (5,796) (19,168) (26,559)
Gain (loss) on disposal.................. -- -- -- -- --
------- ------- ------- -------- --------
Net income/(loss)..................... $(2,365) $(1,699) $(9,072) $(38,634) $(51,770)
======= ======= ======= ======== ========
DEPRECIATION AND AMORTIZATION FROM
CONTINUING OPERATIONS:
Animal Health & Nutrition................ $ 1,810 $ 1,589 $ 1,996 $ 2,043 $ 7,438
Industrial Chemicals -- ex PMC........... 633 579 609 748 2,569
Industrial Chemicals -- PMC.............. 242 240 242 242 966
Distribution............................. 7 (1) 3 3 12
All Other................................ 81 78 80 82 321
Corporate Expenses....................... 264 268 263 254 1,049
------- ------- ------- -------- --------
Total depreciation and amortization... $ 3,037 $ 2,753 $ 3,193 $ 3,372 $ 12,355
======= ======= ======= ======== ========
</Table>
51
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 2 to
the Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, management of the Company is required to make certain
estimates and assumptions during the preparation of consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America. These estimates and assumptions impact the reported
amount of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements. Estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the period they are determined to be necessary. Actual results
could differ from those estimates. Following are some of the Company's 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.
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 15 to the 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 $2.9 million at
September 30, 2004 for such activities.
LONG LIVED ASSETS
Long-lived assets, including plant and equipment, and other intangible
assets are reviewed for impairment when events or circumstances indicate that a
diminution in value may have occurred, based on a comparison of undiscounted
future cash flows to the carrying amount of the long-lived asset. If the
carrying amount exceeds undiscounted future cash flows, an impairment charge is
recorded based on the difference between the carrying amount of the asset and
its fair value.
The assessment of potential impairment for a particular asset or set of
assets requires certain judgments and 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.
52
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. 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 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 14 to the Consolidated Financial
Statements.
NEW ACCOUNTING PRONOUNCEMENTS
There were no new accounting policies issued during the quarter ended
September 30, 2004 which would result in a material 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.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction and
translation (gains) losses were ($116), $789 and $3,385 for fiscal 2004, 2003
and 2002, 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,
inflation 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
53
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 $170.2 million as of September 30, 2004. Approximately 10%
of the debt is variable and would be interest rate sensitive. For further
details, see Note 9, to the 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 June 30, 2004, the fair value of the Company's senior secured and
subordinated notes are estimated based on quoted market rates at $158 million
and the related carrying amount is $153 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 September 30,
2004, the Company does not believe that an instantaneous 10% adverse movement in
foreign currency rates from their levels at September 30, 2004, with all other
variables held constant, would have a material effect on the Company's results
of operations, financial position or cash flows.
COMMODITY PRICE RISK
The Company purchases certain raw materials, such as copper, under
short-term supply contracts. The purchase prices thereunder are generally
determined based on prevailing market conditions. The Company uses commodity
derivative instruments to modify some of the commodity price risks. Assuming a
10% change in the underlying commodity price, the potential change in the fair
value of commodity derivative contracts held at September 30, 2004 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.
54
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 16 countries around the world and sell our animal health and nutrition
products and specialty chemicals products into over 40 countries. Approximately
76% of our fiscal 2004 net sales were from our Animal Health and Nutrition
business, and approximately 24% of our fiscal 2004 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 to produce a copper-based solution
for one of the leading new products for manufacturing pressure-treated wood will
represent our largest growth opportunity in our Specialty Chemicals business.
Over 39% of our fiscal 2004 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 our subsidiaries, Mineral Resource Technologies,
Inc. ("MRT") and The Prince Manufacturing Company ("PMC"). In addition, we
closed our operations in Odda, Norway ("Odda") and Bordeaux, France ("La
Cornubia").
In August 2003, the Company completed the sale of MRT for net proceeds
after transaction costs of approximately $13.8 million. MRT managed and sold
coal combustion by-products, including fly ash.
Effective December 26, 2003, the Company completed the divestiture of
substantially all of the business and assets of PMC to a company 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. PMC manufactured and marketed various mineral oxides,
including iron compounds and manganese compounds (see Note 4 to Consolidated
Financial Statements) (the "Prince Transactions"). Unless otherwise indicated,
the information in this prospectus does not include PMC.
On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA,
filed for bankruptcy under the insolvency laws of France. The Company believes
that as a result of the bankruptcy filing by La Cornubia, it is possible that LC
Holding S.A. ("LC Holding"), La Cornubia's parent, a holding company with no
assets except for its investment in La Cornubia, may also file for bankruptcy in
France.
55
On December 16, 2004, the Company entered into an agreement to sell the
Belgium Plant to Glaxosmithkline Biologicals S.A. ("GSK") and to transfer to GSK
a majority of the employees of PAH Belgium. GSK was a previous owner of the
Rixensart plant, and sold it to Pfizer SA in 1995, which sold it to PAH Belgium
in 2000. Such sale, when completed, would include the following elements: (i)
the transfer of substantially all of the land and buildings and certain
equipment of PAH Belgium at the Belgium Plant, as well as the industrial
activities and intellectual property relating to certain solvent technology of
Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing;
(ii) the transfer to GSK of a majority of the employees of PAH Belgium and the
corresponding responsibility for statutory severance obligations; (iii) GSK
agreeing to be responsible for costs of cleaning-up, by demolition or otherwise,
certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up
to a maximum of EUR 0.7 million for such clean-up costs; (iv) in recognition of
the benefits to us from the proposed transaction, PAH Belgium agreeing to pay to
GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million
within eighteen months from the closing date, EUR 1.5 million within thirty
months from the closing date, and EUR 0.5 million within forty-two months from
the closing date; (v) PAH Belgium retaining certain excess land (valued at
approximately EUR 0.4 million) and being able to sell such land for its own
account; (vi) PAH Belgium being responsible for certain plant closure costs and
legally required severance indemnities in connection with workforce reductions,
estimated in total to be EUR 7.7 million of which an amount estimated to be
approximately EUR 4.1 million would be payable at or around the closing and an
aggregate amount so estimated to be approximately EUR 3.6 million would be
payable over periods up to thirteen years; and (vii) PAH Belgium retaining
certain equipment at the Belgium Plant, and being able to sell such equipment
for the account of PAH Belgium or transfer such equipment, together with other
assets and rights related to the production of virginiamycin, to our subsidiary
in Brazil that owns the facility in Guarulhos or in connection with alternative
production arrangements. The foregoing transactions and agreements are subject
to a closing that is expected to occur no earlier than July 1, 2005 nor later
than June 30, 2006.
On December 21, 2004, we completed a private placement of $22.491 million
of additional old units to refinance borrowings under our domestic senior credit
facility incurred to fund alternative virginiamycin production arrangements and
the increase of virginiamycin inventory pending supply under such alternative
production arrangements.
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 21 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 EFSA/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 semduramicin, 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
56
names, is a popular and efficacious choice of medicated feed additive in the
poultry, swine and cattle industry. Semduramicin, sold under the brand name
Aviax(R), and salinomycin, sold under the brand name Coxistac(R), are also
leading poultry anticoccidials. In fiscal 2004, branded MFAs accounted for
approximately 50% of our total Animal Health and Nutrition sales.
Established Global Network and Customer Base. From our 23 facilities in 16
countries, we manufacture and market our products, which are sold through
multiple distribution channels to over 2,800 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 2004, no
single customer accounted for more than 5% of total revenues and our top 10
customers accounted for less than 22% of total revenues.
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 and semduramicin 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. We are actively working with the FDA and other regulators to
obtain additional registrations and cross-clearances so that our MFA products
can continue to be used in situations where another MFA is also in use. In the
United States, we obtained from the FDA a zero-day withdrawal registration for
the use of our oxytetracycline product in cattle and recently obtained a cross
clearance for Mecadox(R) and Terramycin(R) in swine. We have 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 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.
57
Expand Our Customer Base. We intend to expand and strengthen our customer
base by (i) focusing on relationships with key accounts, (ii) continuing to
incentive our sales force to concentrate on fast-growing, high-margin areas
within existing product groups, and (iii) incent 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. 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.
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 2004, antibiotics and antibacterials generated sales
for us of approximately $79 million, anticoccidials generated sales for us of
approximately $44 million, and anthelmintics and other medicated feed additives
generated sales for us of approximately $9 million.
Our core MFA products are listed in the table below:
<Table>
<Caption>
BRAND ACTIVE/ANTIGEN MARKET ENTRY COMMENT
----- -------------- ------------ -------
Terramycin(R)/Neo- oxytetracycline, 1951 Antibiotic with multiple applications
Terramycin(R)/Neo- neomycin/OTC for a wide number of species
TM(R)
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- virginiamycin 1972 Antibiotic used to prevent and control
Max(R) diseases in poultry, swine and cattle
Coxistac(R)/Posistac(R) salinomycin 1979 Anticoccidial for poultry; disease
preventative in swine
Rumatel(R) morantel tartrate 1981 Anthelmintic for livestock
Cerditac(R)/Cerdimix(R) oxibendazole 1982 Anthelmintic for livestock
Aviax(R) semduramicin 1995 Anticoccidial for poultry
</Table>
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.
58
Virginiamycin. Virginiamycin is an antibiotic marketed under our brand
names Stafac(R) for treating swine, cattle, 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 antibiotic
produced from the streptomyces virginiae fungus. Virginiamycin has been
successful due to a number of strong product features. For example, no
withdrawal period is required since it is virtually unabsorbed from the
digestive tract. It is excreted in very low concentrations and rapidly degraded.
It alleviates some of the production limiting effects of certain diseases of
livestock and poultry. To date, no generic competition has been introduced due
to our proprietary virginiamycin manufacturing technology.
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:
- fowl cholera in chickens,
- airsacculitis in turkeys,
- pneumonia and enteritis in swine, and
- 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 dysentery. 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 the protozoan parasite Eimeria spp., coccidiosis
is one of the 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,
59
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 largest volume world-wide producer of amprolium,
and the largest volume world-wide producer of nicarbazin. We are also the sole
Latin American producer of nicarbazin. Nicarbazin and amprolium, along with
salinomycin and semduramicin, are among the most effective medications for the
prevention of coccidiosis in chickens when used in rotation with other
anticoccidials. In the United States, we market nicarbazin under the trademark
Nicarb(R).
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 and the ability to suppress
coccidial lesions, 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 semduramicin which provides protection for
poultry against all major coccidial parasites. The product can be incorporated
into virtually any type of feed, and provided to broilers of any production
stage. We have received regulatory approval to sell Aviax(R) in the EU and have
applied in the United States for the sale of Aviax(R) in mycelial dosage form.
This dosage form is significantly more cost-effective and may improve
profitability.
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.
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.
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.
60
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:
- Guarulhos, Brazil (salinomycin and semduramicin),
- Rixensart, Belgium (virginiamycin and semduramicin), which facility is to
be sold (see "Prospectus Summary -- The Company -- Recent
Developments -- Sale of Belgium Plant"),
- Ramat Hovav, Israel (nicarbazin and amprolium), and
- Braganca Paulista, Brazil (nicarbazin).
Active ingredients are further processed in our facilities and in contract
premix facilities located in each major region of the world.
We have established sales and technical offices for our MFA products in 14
countries including: the United States, Canada, Mexico, Venezuela, Brazil,
Argentina, Costa Rica, Australia, China, Thailand, Malaysia, South Africa,
Belgium and Israel. The business is not dependent on any one customer.
The use of MFAs is controlled by regulatory authorities that are specific
to each country (e.g., the Food and Drug Administration ("FDA") in the United
States, Health Canada in Canada, EFSA/EMEA authorities in Europe, etc.),
responsible for the safety and wholesomeness of the human food supply, including
feed additives for animals from which human foods are derived. Each product is
registered separately in each country where it is sold. The appropriate
registration files pertaining to such regulations and approvals are continuously
monitored, maintained and updated by us. In certain countries where we are
working with a third party distributor, local regulatory requirements may
require registration in the name of such distributor.
ANIMAL HEALTH AND NUTRITION -- NUTRITIONAL FEED ADDITIVES
We manufacture 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 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.
OUR SPECIALTY CHEMICALS BUSINESS
We manufacture and market a number of specialty chemicals for use in the
wood treatment, chemical catalyst, semiconductor, automotive, aerospace and
agricultural industries. Our manufacturing customers incorporate our specialty
chemicals products into their finished products in various industrial markets.
We seek to take advantage of opportunistic niche markets where we believe that
our expertise and capabilities can be leveraged.
COPPER WOOD TREATMENT PRODUCTS
For many years, we 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
61
industry. Pursuant to a United States Environmental Protection Agency ("EPA")
ruling, since December 31, 2003, all pressure-treated wood for the residential
and recreational markets can no longer be treated using the standard
chromated-copper-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 $30 million over the life of
the contract, based on existing forecasts. A patent with respect to the
manufacturing process of our solution, and the claims in our patent application
was granted and issued on November 11, 2003. We believe that our manufacturing
process allows us to operate in this market with a lower cost of capital and
higher factory through-put than our competition. To take advantage of this
potential new market, we have constructed and are operating commercial
production facilities in Sumter, South Carolina and in Joliet, Illinois. In
addition, we 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 facility. This contract
was part of the sale by us of our Agtrol business to Nufarm, Inc. in the fourth
quarter of fiscal 2001. Utilizing our over fifty-year history in producing
copper chemicals, we supply various metal-based chemicals to the catalyst 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 2,800 customers. Sales to our top ten customers
represented approximately 22% of our fiscal 2004 net sales and no single
customer represented more than 5% of our fiscal 2004 net sales.
Our world-wide sales and marketing network consists of approximately 118
employees, 5 independent agents and 125 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.
Most of our plants have chemists and technicians on staff involved in
product development, quality assurance, quality control and also providing
technical services to customers. Technical assurance is an important aspect of
our overall sales effort. We field Animal Health and Nutrition technical service
people throughout the world, with capabilities to interface with all key
customers on a marketing, sales training and technical (product) basis, and who
work directly with commercial feed manufacturers and integrated 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
62
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
In December 2004, we relocated our principal executive offices and sales
offices to 34,000 square feet of leased space in Ridgefield Park, New Jersey. We
operate company-owned manufacturing facilities and utilize third party toll
manufacturers. The chart below sets forth the locations and sizes of the
principal manufacturing and other facilities operated by us and uses of such
facilities, all of which are owned, except as noted.
<Table>
<Caption>
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 Sales, Premixing and Warehouse
Buenos Aires, Argentina(a)............ 900 Sales and Administrative
San Jose, Costa Rica.................. 800 Sales and 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 and Administrative
Queretaro, Mexico(a).................. 3,500 Sales and Administrative
Sydney, Australia(a).................. 3,500 Sales and Administrative
Valencia, Venezuela(a)................ 1,100 Sales and Administrative
SPECIALTY CHEMICALS
Garland, Texas........................ 20,000 Manufacturing
Joliet, Illinois...................... 34,500 Manufacturing
Reading, United Kingdom(a)............ 3,100 Sales and Administrative
Santa Fe Springs, California(e)....... 90,000 Manufacturing
Stradishall, United Kingdom........... 20,000 Sales, Manufacturing and
Administrative
Sumter, South Carolina................ 123,000 Manufacturing and Research
</Table>
63
- ---------------
(a) This facility is leased. Our leases expire through 2027. For information
concerning our rental obligations, see Note 15 to our Consolidated
Financial Statements included herein.
(b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the
active ingredients semduramicin-mycelial and salinomycin. The plant also
produces Aviax(R), Terramycin(R), Stafac(R) and Coxistac(R) Granular
formulations. The plant is cGMP compliant and is FDA approved.
(c) Comprises three facilities, including a warehouse, laboratory and office.
(d) Our Rixensart, Belgium plant utilizes fermentation processes to produce the
active ingredients semduramicin-crystalline and virginiamycin. The plant
also produces Stafac(R) formulations and is responsible for all of our
fermentation development activities. The plant has been approved by the FDA
and is cGMP compliant. We have entered into an agreement to sell the
Rixensart facility (see "Prospectus Summary -- The Company -- Recent
Developments -- Sale of Belgium Plant").
(e) We lease the land under this facility from a partnership owned by Jack
Bendheim, Marvin Sussman and James Herlands. See "Certain Relationships and
Related Party Transactions."
Our subsidiary, 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, Israel, Rixensart, Belgium (to be sold;
see "Prospectus Summary -- The Company -- Recent Developments -- Sale of Belgium
Plant"), and Guarulhos, 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 2004, no single raw material accounted for more than 5% of our
cost of goods sold. Total raw materials cost was approximately $133 million or
38% of net sales in fiscal 2004. We believe that for most of our raw materials,
alternate sources of supply are available to us at competitive prices.
RESEARCH AND DEVELOPMENT
Research, development and technical service efforts are conducted at our
various facilities. We operate research and development facilities in Rixensart,
Belgium (which is to be sold; see "Prospectus Summary -- The Company -- Recent
Developments -- Sale of Belgium Plant"), Sumter, South Carolina, Ramat Hovav,
Israel and 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.
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
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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 2004 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 June 30, 2004, we had 1,051 employees worldwide. Of these, 210
employees were in management and administration, 118 were in sales and
marketing, 132 were chemists, technicians or quality control personnel, and 591
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
65
applicable statutes or regulations, and may impose requirements which are
stricter than those imposed by the EPA. We can provide no assurance that such
changes will not adversely affect our ability to provide products and services
at competitive prices and thereby reduce the market for our products and
services.
The nature of 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 $2.9 million, which is included in
current and long-term liabilities in our June 30, 2004 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.
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-
66
owned or operated by us or a subsidiary and at third-party sites at which our
subsidiaries disposed of or treated, or arranged for the disposal of or
treatment of, hazardous substances.
Federal Insecticide, Fungicide and Rodenticide Act, as amended
("FIFRA"). FIFRA governs the manufacture, sale and use of pesticides, including
the copper-based fungicides sold by us. FIFRA requires such products and the
facilities at which they are formulated to be registered with the EPA before
they may be sold. If the product in question is generic in nature (i.e.,
chemically identical or substantially similar to a previously registered
product), the new applicant for registration is entitled to cite and rely on the
test data supporting the original registrant's product in lieu of submitting
data of its own. Should the generic applicant choose this citation option, it
must offer monetary compensation to the original registrant and must agree to
binding arbitration if the parties are unable to agree on the terms and amount
of compensation. We have elected this citation option in the past and may use
the citation option in the future should we conclude it is, in some instances,
economically desirable to do so. While there are cost savings associated with
the opportunity to avoid one's own testing and demonstration to the EPA of test
data, there is, in each instance, a risk that the level of compensation
ultimately required to be paid to the original registrant will be substantial.
Under FIFRA, the EPA also has the right to "call in" additional data from
existing registrants of a pesticide, should the EPA determine, for example, that
the data already in the file need to be updated or that a specific issue or
concern needs to be addressed. The existing registrants have the option of
submitting data separately or by joint agreement. Alternatively, if one
registrant agrees to generate and submit the data, the other(s) may meet their
obligations under the statute by making a statutory offer to jointly develop or
share in the costs of developing the data. In that event, the offering party
must, again, agree to binding arbitration to resolve any dispute as to the terms
of the data development arrangement.
The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and
amendments to the Clean Air Act, and corresponding state laws regulate the
emissions of materials into the air. Such laws affect the coal industry both
directly and indirectly and, therefore, the operations of MRT, which was
divested in August 2003. Phibro-Tech is also impacted by the Clean Air Act and
has various air quality permits, including a Title V operating air permit at its
Sumter, South Carolina facility.
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
67
storage facilities have been issued at our facilities in Santa Fe Springs,
California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina; and
Sewaren, New Jersey (expired August 2003, see "Particular Facilities -- Sewaren,
NJ" below). Part B renewal applications have been submitted for the Santa Fe
Springs, Garland and Joliet sites. The applications are being reviewed.
In connection with RCRA Part B permits for the waste storage and treatment
units of various facilities, 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 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 15 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
68
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. 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. Phase I and Phase II corrective
action work has been completed. The application for renewal is presently pending
and is expected to be issued in the first quarter of 2005.
Garland, TX. The renewal application for the Part B Permit at the Garland,
Texas facility has been granted effective September 12, 2003. As part of an
earlier site investigation, certain corrective action was required including
upgrading of pollution control equipment and additional site characterization.
Both of these are presently underway.
Powder Springs, GA. Phibro-Tech's facility in Powder Springs, Georgia has
been operationally closed since 1985. Phibro-Tech retains environmental
compliance responsibility for this facility and has effected a RCRA closure of
the regulated portion of the facility, a surface impoundment. Post-closure
monitoring and corrective action are required pursuant to a state-issued permit.
As required by the permit, corrective action for groundwater has begun, and
Phibro-Tech has submitted and received approval from the state for a remedial
investigation plan.
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 (or
"DEP") and CP. CP has ongoing obligations under that Administrative Consent
Order. CP is required to complete the implementation of the Remedial Action Work
Plan approved by the Department of Environmental Protection and the United
States Environmental Protection Agency. Remediation of soils at the Sewaren
facility is complete, with the exception of long term maintenance, and
groundwater remediation is underway. Although some of the obligations of the
Administrative Consent Order, specifically with respect to groundwater, have
been assumed by the Township under the Lease, CP remains responsible to the
Department of Environmental Protection and the United States Environmental
Protection Agency. CP is currently engaged in discussions with the Department of
Environmental Protection, the United States Environmental Protection Agency and
the Township concerning the ongoing groundwater remediation. CP has posted
financial assurance, based on the estimated costs of implementation, under the
Administrative Consent Order.
The property is also regulated under the Corrective Action Program
administered by the United States Environmental Protection Agency pursuant to
the Resource Conservation and Recovery Act. The property has been designated as
a RCRA facility for which achieving the Environmental Indicators is a priority.
Currently, CP is interfacing with the Department of Environmental Protection and
the Environmental Protection Agency to coordinate its efforts under this program
and the Administrative Consent Order discussed above. Much of the effort
required by CP in this program is already being conducted as part of the
requirements of the Administrative Consent Order discussed above.
The hazardous waste facility permit issued to CP for this facility expired
in August 2003. CP has completed the implementation of its approved closure plan
and is awaiting DEP approval. Based on a formula
69
established by the Department of Environmental Protection, those closure costs
were estimated at $292,823 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. Closure of the Union City, California facility has been
completed.
Union, IL. The facility in Union, Illinois, has been closed since 1986. A
revised remedial action plan ("RAP") has been submitted to the Illinois
Environmental Protection Agency (the "IEPA"). Negotiations between the IEPA and
Phibro-Tech have resulted in an agreed closure plan consistent with the proposed
RAP. The agreed closure plan is expected to resolve Phibro-Tech's appeal of the
IEPA's initial closure requirements. That appeal is currently pending before the
Illinois Pollution Control Board but is expected to be voluntarily dismissed
upon receipt of IEPA's written approval of the negotiated closure plan.
Ramat Hovav, Israel. Koffolk (1949) Ltd's ("Koffolk Israel") Ramat Hovav
plant produces a wide range of organic chemical intermediates for the animal
health, chemical, pharmaceutical and veterinary industries. Israeli legislation
enacted in 1997 amended certain environmental laws by authorizing the relevant
administrative and regulatory agencies to impose certain sanctions, including
issuing an order against any person that violates such environmental laws to
remove the environmental hazard. In addition, this legislation imposes criminal
liability on the officers and directors of a corporation that violates such
environmental laws, and increases the monetary sanctions that such officers,
directors and corporations may be ordered to pay as a result of such violations.
The Ramat Hovav plant operates under the regulation of the Ministry of
Environment of the State of Israel. The sewage system of the plant is connected
to the Ramat Hovav Local Industrial Council'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 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
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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 approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to Current Good Manufacturing Practice ("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 submitted 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 resubmitted our
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.
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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.
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, 2004. 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.
Phibro-Tech, Inc. and DTSC are currently negotiating the settlement of
certain alleged technical permit violations from 2003. Phibro-Tech, Inc.
believes most if not all of the alleged violations will be withdrawn. In the
event penalties are assessed, they are not expected to exceed $50,000.
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 in full settlement.
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.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes
72
that, because its Sumter, South Carolina facility is distant from Turkey Creek
and does not discharge into Turkey Creek, there is a low probability of
liability associated with this matter.
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.
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that could
affect our Israeli subsidiary, Koffolk Israel. Israeli operations (excluding
Koffolk Israel's non-Israeli subsidiaries) accounted for approximately 14% of
our consolidated assets as of September 30, 2004 and approximately 12% of our
consolidated net sales for fiscal 2004. 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 40 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. 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.
73
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.
74
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information with respect to our directors and
executive officers.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Jack C. Bendheim.......................... 58 Chairman of the Board of Directors and
President
Gerald K. Carlson......................... 61 Chief Executive Officer
Marvin S. Sussman......................... 57 Vice Chairman of the Board of Directors and
President, Prince Agri
James O. Herlands......................... 62 Director and Executive Vice President
Richard G. Johnson........................ 55 Chief Financial Officer
Daniel M. Bendheim........................ 33 President, Specialty Chemicals Group*
Steven L. Cohen........................... 60 Vice President, General Counsel and
Assistant Secretary
Keith Collins............................. 50 President, Phibro Animal Health Division**
Daniel A. Welch........................... 54 Senior Vice President, Human Resources
Sam Gejdenson............................. 56 Director, Noteholder Representative
Peter A. Joseph........................... 52 Director
Mary Lou Malanoski........................ 48 Director
Marcos Rodriguez.......................... 43 Director
</Table>
- ---------------
* William A. Mathison, the former President, Specialty Chemicals Group, retired
in August 2004.
** David G. McBeath, the former President, Animal Health Group, returned, as
planned, to his private consulting business in December 2004.
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. 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 the first cousin of Jack
Bendheim.
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
75
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.
Daniel M. Bendheim President, Specialty Chemicals Group. Mr. Bendheim
joined the Company in 1998. In 2001 he was appointed Vice President of Business
Development, and was appointed to his current position of President, Specialty
Chemicals Group in September, 2004. Prior to joining the Company Mr. Bendheim
worked as an analyst at SouthCoast Capital. Mr. Bendheim received a JD from
Harvard Law School in 1996 and a BA from Yeshiva University in 1993. Mr.
Bendheim is a son of Jack Bendheim.
Steven L. 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.
Keith R. Collins President, Phibro Animal Health Division. Mr Collins
joined us in August 2004. Prior to joining us, Mr. Collins was, from 2000 to
2004, Director, Global Strategic Marketing for Cattle and Swine with Merial
Ltd., the world's largest animal health company. From 1995 to 2000, he was
Director of European Operations with Hoechst Roussel Vet and Intervet based in
Germany and Holland respectively. Mr Collins is a Fellow of the New Zealand
Institute of Management.
Daniel A. Welch Senior Vice President Human Resources. Mr. Welch joined us
on August 9, 2004. Prior to joining us, he was Director of Human Resources of
Pfizer Inc. since 2001. From 1998 to 2001, Mr. Welch was the President of Value
Growth Dynamics, LLC, a consulting firm focused on strategic change.
Sam Gejdenson Director. From 1981 to 2000, Congressman Sam Gejdenson served
eastern Connecticut in the U.S. House of Representatives. Mr. Gejdenson was the
senior Democrat on the House International Relations Committee. He received an
A.S. degree from Mitchell College in New London, Connecticut in 1968 and a B.A.
from the University of Connecticut in Storrs, Connecticut in 1970. In 1974, he
was elected to the Connecticut House of Representatives, serving two terms
before accepting a post in the administration of Connecticut Governor Ella T.
Grasso. Mr. Gejdenson is now involved in international trade in his own company
Sam Gejdenson International.
Peter A. Joseph Director. Mr. Joseph has served as one of our Directors
since February 2001. From 1998 to present, he has been a member of Palladium
Equity Partners, LLC. From 1986 to 1997, Mr. Joseph was a general partner of
Joseph Littlejohn & Levy, a buyout firm.
Mary Lou Malanoski Director. Ms. Malanoski currently serves as a Managing
Director at Morgan Joseph & Co. Inc. From 1994 until June 2001, Ms. Malanoski
served as Managing Director and Chief Financial Officer of New Street Advisors
LP, a private equity firm that she co-founded. Ms. Malanoski began her career at
Drexel Burnham Lambert in 1980 in the Corporate Finance Department. She
subsequently served in various positions, finally serving as Managing Director
in the Mergers and Acquisitions Department and Chair of the Corporate Finance
Underwriting Commitment Committee. Following Drexel's bankruptcy filing in 1990,
Ms. Malanoski was responsible for formulating the firm's plan of reorganization,
which was successfully consummated in 1992. She remained at the reorganized
firm, which was renamed New Street Capital Corp., as a Managing Director
responsible for many of the firm's merchant banking investments. Following New
Street Capital's sale in 1994, Ms. Malanoski co-founded New Street Advisors. She
is a Trustee of Rosemont College, from which she received a B.A. degree in
Mathematics, and she also received an MBA from the Johnson School of Cornell
University.
Marcos A. Rodriguez Director. Mr. Rodriguez founded Palladium Equity
Partners in 1997 and serves as Managing Member. Prior to forming Palladium, Mr.
Rodriguez was a partner of Joseph Littlejohn & Levy (JLL), a buyout firm which
he joined in 1989. He was responsible for spearheading a number of JLL's major
investments. Before launching his private equity career 14 years ago, Mr.
Rodriguez worked in operations for General Electric Company in the U.S., Mexico
and France and graduated from GE's Manufacturing Management Program. Mr.
Rodriguez serves on the Board of Directors of portfolio companies Haden
International, The Hilsinger Company and Wise Foods. In addition, Mr. Rodriguez
serves as
76
Chairman of the Development Committee and Treasurer of the Board of Directors of
The Robert Toigo Foundation, a not-for-profit organization that supports the
advancement of exceptional minority business degree students and alumni within
the finance industry through scholarships, mentoring, internships and job
placement. He is also a member of the New America Alliance. Mr. Rodriguez earned
a B.S. in Mechanical Engineering from Columbia University, an M.B.A from the
Wharton School and an M.A. in International Studies from the Lauder Institute of
the University of Pennsylvania.
BOARD COMPOSITION
Our entire Board of Directors consists of 7 members, all of whom 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 Mr. Sam Gejdenson, the
director designated by the holders of the Senior Secured Notes, 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 Party
Transactions."
CODE OF ETHICS
Our Board of Directors has not adopted a code of ethics applicable to our
principal executive, financial or accounting officers. The Board of Directors
believes that our current internal control procedures and business practices are
adequate to promote honest and ethical conduct and to deter wrongdoing by these
executives.
COMMITTEES OF THE BOARD OF DIRECTORS
We are not a "listed issuer" as defined under Section 10A-3 of the Exchange
Act and are therefore not required to have an audit committee comprised of
independent directors. We currently do not have an audit committee and our Board
of Directors has determined that we do not have an audit committee financial
expert. The Board of Directors believes that each of its members has the
requisite financial background, experience, and knowledge to fulfill the duties
and obligations that an audit committee would have, and therefore does not
believe that it is necessary at this time to search for a person who would
qualify as an audit committee financial expert.
Our Board of Directors has not created any committees other than the
compensation committee.
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.
The current members of the Compensation Committee are Mr. Jack C. Bendheim,
Mr. Joseph and Mr. Gejdenson.
77
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by us and our
subsidiaries for services during fiscal 2004, 2003, and 2002 to each of our five
most highly compensated executive officers:
<Table>
<Caption>
ANNUAL COMPENSATION
------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
- --------------------------- ---- ---------- -------- ------------ ---------------
Jack C. Bendheim................... 2004 $1,650,000 $ -- $ -- $ 2,050
Chairman of the Board; President 2003 1,650,000 -- 150,000(2) 6,500
2002 1,500,000 265,000 -- 6,000
Gerald K. Carlson(3)............... 2004 500,000 575,000 24,000 1,458
Chief Executive Officer 2003 500,000 -- 24,000 --
2002 49,350 -- -- --
Marvin S. Sussman(4)............... 2004 1,000,000 101,372 -- 24,581(6)
Vice Chairman of the Board; 2003 1,000,000 -- -- 24,500(6)
President of Prince Agri 2002 1,000,000 -- -- 6,000
James O. Herlands.................. 2004 400,000 95,519 -- 6,581
Executive Vice President 2003 400,000 150,000 -- 6,500
2002 400,000 150,000 -- 6,000
Richard G. Johnson(5).............. 2004 268,750 200,000 13,500 6,703
Chief Financial Officer 2003 192,308 -- 39,000 --
</Table>
- ---------------
(1) Represents contributions by us under our 401(k) Retirement and Savings Plan.
See "Compensation Pursuant to Plans."
(2) In fiscal 2003, Mr. Bendheim was paid $150,000 for temporary deferral of
fiscal 2002 compensation.
(3) 2002 salary is for a partial year commencing May 2002. In fiscal 2004 and
2003, Mr. Carlson received $24,000 for relocation and housing assistance.
(4) Pursuant to a Stockholders Agreement between us and Mr. Sussman, we are
required to purchase, at book value, all shares of our Class B Common Stock
owned by Mr. Sussman in the event of his retirement, death, disability or
the termination of his employment by us. Should Mr. Sussman elect to sell
his shares, we have a right of first offer and an option to purchase the
shares. See "Certain Relationships and Related Party Transactions." As a
result, each year, we are required to record as compensation expense
(income) in our results of operations the change in our book value
attributable to Mr. Sussman's shares. For 2004, 2003 and 2002, the expense
(income) attributable to Mr. Sussman's shares was $0, $0 and ($378,000),
respectively. No distributions have been made to Mr. Sussman under this
agreement.
(5) Salary is since date of employment for 2003. In fiscal 2004 and 2003, Mr.
Johnson received $13,500 and $39,000, respectively, for relocation and
housing assistance.
(6) Of such amount, $18,000 represents the cost of the term portion of a life
insurance policy purchased by the Company in the face amount of $10 million
on the life of Mr. Sussman, with a required premium of $252,000 per year.
The policy commenced in April 2002.
In fiscal 2004, no options were granted to the named executive officers and
no options were held or exercised by any of the named executive officers.
EMPLOYMENT AND SEVERANCE AGREEMENTS
We 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
78
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.
In December 2004, David McBeath resigned as President, Animal Health Group.
We entered into a consulting agreement with Mr. McBeath in November 2004,
pursuant to which Mr. McBeath agreed to provide to us consulting services
through December 2005. The consulting agreement provides that Mr. McBeath shall
work ten days per month at a rate of GBP1,000 per day from January through June
2005 and five days per month at a rate of GBP1,100 per day through December
2005.
In 1995, James O. Herlands purchased stock in Phibro-Tech. In connection
therewith, we entered into a severance agreement with him. The agreement
provides that, upon his Actual or Constructive Termination or a Change in
Control Event (as such terms are defined), he is entitled to receive a cash
Severance Amount (as defined therein), based upon a multiple of Phibro-Tech's
pre-tax earnings (as defined therein). In addition, if an Extraordinary Event
(as defined) occurs within 12 months after the occurrence of an Actual or
Constructive Termination, the executive is entitled to receive an additional
Catch-up Payment (as defined). At June 30, 2004, no severance payments would
have been due to Mr. Herlands if he were terminated. See "Certain Relationships
and Related Party 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
60.0% 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 50.0% of an employee's pre-tax contribution up to 3.0% of such
employee's base salary and 25.0% of such employee's pre-tax contribution from
3.0% to 6.0% of base salary. Participants are vested in employer contributions
in 20% increments beginning after completion of the second year of service and
become fully vested after five years of service. Distributions are generally
payable in a lump sum after termination of employment, retirement, death,
disability, plan termination, attainment of age 59 1/2, 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 Johnson
were credited with employer contributions of $2,050, $1,458, $6,581, $6,581, and
$6,703, respectively, for fiscal 2004.
Retirement Plan. We have adopted The Retirement Plan of Phibro Animal
Health Corporation 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) 1.0% 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;
79
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.
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.
<Table>
<Caption>
YEARS OF SERVICE
-----------------------------------------------
AVERAGE COMPENSATION 15 20 25 30 35
- -------------------- ------- ------- ------- ------- -------
$25,000.............................. $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
$50,000.............................. $ 7,500 $10,000 $12,500 $15,000 $17,500
$75,000.............................. $11,420 $15,000 $18,750 $22,500 $26,250
$100,000............................. $17,040 $22,000 $26,980 $31,990 $37,280
$150,000............................. $28,290 $37,000 $45,730 $54,490 $63,530
$200,000............................. $39,540 $52,000 $64,480 $76,990 $89,780
</Table>
As of June 30, 2004, Messrs. Bendheim, Carlson, Sussman, Herlands, and
Johnson had 35, 2, 33, 40 and 2 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, 2004 is $205,000. Such
individuals, at normal retirement age 65, will have 43, 6, 41, 43 and 12
credited years of service, respectively. The annual expected benefit after
normal retirement at age 65 for each of these individuals, based on the
compensation taken into account as of June 30, 2004, is $118,200, $16,580,
$134,110, $129,240, and $32,000, 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, 2004.
<Table>
<Caption>
ANNUAL SURVIVOR'S DEFERRED
RETIREMENT INCOME COMPENSATION
INCOME BENEFIT BENEFIT BENEFIT
-------------- ---------- ------------
Jack C. Bendheim............................... $35,309 $1,500,000 $386,368
Marvin S. Sussman.............................. $35,309 $1,000,000 $128,451
James O. Herlands.............................. $35,085 $ 400,000 $347,104
</Table>
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 one times annualized compensation at the time of death,
capped at $1,500,000, payable in 24 equal monthly installments. The Deferred
Compensation Benefit is substantially funded by compensation deferred by the
participants. Such benefit is based upon a participant making an election to
defer no less than $3,000 and no more than $20,000 of his compensation in excess
of $150,000, 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.
80
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. 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 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.
MEETINGS OF DIRECTORS
During fiscal 2004, the Board of Directors took certain actions by both
written consent and at regular meetings. Directors are elected annually and
serve until the next annual meeting of Shareholders or until their successors
are elected and qualified.
REPORT OF THE COMPENSATION COMMITTEE
The compensation committee was established during fiscal 2004. The
responsibility of the compensation committee is to recommend to the Board of
Directors a compensation program, including incentives, for the Chief Executive
Officer and other senior officers, for approval by the full Board of Directors.
The compensation committee will prepare recommendations to the Board of
Directors for the 2005 fiscal year. Executive compensation for the 2004 fiscal
year was determined by the Board as a whole. During fiscal 2004 the directors
participated in deliberations regarding compensation of our officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Jack Bendheim, Marvin S. Sussman and James O. Herlands are members of our
Board of Directors and are executive officers. Jack Bendheim, Peter Joseph and
Sam Gejdenson are members of the compensation committee. None of our executive
officers serve as a member of the Board of Directors of any other non-Company
entity which has one or more members serving as a member of our Board of
Directors, except that Jack Bendheim and Peter Joseph serve as directors of
Penick Holding Company. Messrs. Bendheim, Sussman, Herlands, Joseph and
Rodriguez have participated in certain transactions with us and our subsidiaries
and affiliates. See "Certain Relationships and Related Transaction."
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PRINCIPAL STOCKHOLDERS
The table sets forth certain information as of September 30, 2004 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.
<Table>
<Caption>
NUMBER OF COMMON SHARES
(PERCENTAGE OF CLASS)
-----------------------------------------
NAME CLASS A VOTING(1) CLASS B NON-VOTING(2)
- ---- ----------------- ---------------------
Jack Bendheim(3)(4).............................. 12,600(100)% 10,699.65(90)%
Marvin S. Sussman................................ -- 1,188.85(10)%
All other officers and directors(5).............. -- --
All officers and directors as a group............ 12,600(100)% 11,888.50(100)%
</Table>
- ---------------
(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 four of the directors. The holders of Class B Common Stock are
entitled to elect one and the holders of Series C Preferred Stock are
entitled to elect two directors but do not vote on any other matters. In
addition, the holders of the units of senior secured notes have the right to
designate one member of the Board of Directors.
(2) Class B Common shareholders will receive the entire equity upon our
liquidation, after payment of preferences to holders of all classes of
preferred stock and Class A Common Stock.
(3) Jack Bendheim also owns 5,207 (100%) shares of Series A Preferred Stock.
(4) Includes 6,308.527 shares of Class B Common Stock owned by trusts for the
benefit of Jack Bendheim, his spouse, his children and their spouses and his
grandchildren.
(5) Peter A. Joseph and Marcos Rodriguez have been designated as directors of
the Company by Palladium Equity Partners II, LP ("Palladium") which
beneficially owns 10,591 shares of our Series C Preferred Stock. Palladium
has the right to designate two directors to the Board of Directors. See
"Certain Relationships and Related Party 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, and with deductions for, among other things,
outstanding indebtedness ("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. In
connection with the 2004 Offering, we agreed with the holders of the Series C
Preferred Stock that, for purposes of calculating the Equity Value, the total
net debt of Phibro Animal Health Corporation would not exceed $170 million.
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 Party 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.
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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. 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 PARTY 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 39.0%,
40.0% and 20.0% limited partnership interests, respectively. The general
partner, having a 1% interest in the partnership, is Western Magnesium Corp., a
wholly-owned subsidiary of ours, of which Jack Bendheim is the president. The
lease expires on June 30, 2008. The annual rent is $250,000. Phibro-Tech is also
required to pay all real property taxes, personal property taxes and liability
and property insurance premiums. In June 2001, Jack Bendheim entered into a
secured $1.4 million revolving credit arrangement with First Union National
Bank, which replaced a prior loan from Fleet Bank. Mr. Bendheim reloans
borrowings under the First Union credit line to First Dice on the same terms as
his borrowing from First Union. We believe that the terms of such lease and loan
are on terms no less favorable to Phibro-Tech than those that reasonably could
be obtained at such time in a comparable arm's-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."
We advanced $200,000 to Marvin Sussman and his wife in 1987, pursuant to a
secured promissory note that is payable on demand and bears interest at the
annual rate of 9%.
Certain relatives of Jack Bendheim, other than Mr. Sussman and Mr. Herlands
named above, provide services to us, in one case through a consulting firm
controlled by a relative, and in other cases as employees, and received directly
or through such consulting firm annual aggregate payments of approximately
$650,000 for the fiscal year ended June 30, 2004.
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. Jack Bendheim, and
several other investors, including Peter A. Joseph, a director of the Company.
Pursuant to a Shareholders' Agreement among the shareholders of PHC, Messrs.
Bendheim and Joseph have been designated as two of three directors of PHC, and
Mr. Katzenstein, our Secretary, has been designated as Secretary and Treasurer
of PHC. The Company has invested approximately $2,300,000 for shares of Series A
Preferred Stock of PHC bearing an 8.5 percent annual cumulative dividend, and
PBCI LLC invested approximately $500,000 for approximately 15 percent of the
Common Stock of PHC. Mr. Joseph owns or controls approximately 12 percent of the
Common Stock of PHC.
85
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 for our
Board to include two directors to be designated by the Palladium Investors.
Peter A. Joseph and Marcos Rodriguez are currently the two designees of the
Palladium Investors serving as directors. If and for so long as we fail to
redeem any share of Series B or Series C Preferred Stock requested for
redemption by a Palladium Investor after the earliest to occur of June 1, 2008
(the maturity date of our 9 7/8% Senior Subordinated Notes due 2008), the
redemption of such Notes in full prior thereto or a change in control of us,
then (x) the Palladium Investors may take control of our Board of Directors, and
(y) Jack C. Bendheim has agreed to cause all equity securities owned by him to
be voted in the manner directed by the Palladium Investors; provided, that, we
must pay Jack Bendheim and Marvin Sussman, whether or not employed by us, an
amount not less than their respective annual base salaries in effect immediately
prior to such assumption of control, until the earlier to occur of the
expiration of control by the Palladium Investors and the fifth anniversary of
their assumption of control.
The Palladium Stockholders Agreement 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 $500,000, (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 sale of PMC described below, our obligations
for this fee have been terminated.
Our policy with respect to the sale, lease or purchase of assets or
property of any related party is that such transaction should be on terms that
are no less favorable to us or our subsidiary, as the case may be, than those
that could reasonably be obtainable at such time in a comparable arm's length
transaction from an unrelated third party. The indenture and the domestic 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.
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72.2 million to $16.5 million (accreted
through the Closing Date) by means of the redemption of all of its shares of
Series B Preferred Stock and a portion of its Series C Preferred Stock;
86
(iii) the termination of $2.2 million in annual management advisory fees payable
by the Company to Palladium; (iv) a cash payment of $10.0 million to the
Palladium Investors in respect of the portion of the Company's Preferred Stock
not exchanged in consideration of the business and assets of PMC; (v) the
agreement of the Buyer to pay the Company for advisory fees for the next three
years of $1.0 million, $0.5 million, and $0.2 million, respectively (which were
pre-paid at closing by the Buyer and satisfied for $1.3 million, the net present
value of such payments); and (vi) the Buyer agreed to supply manganous oxide and
red iron oxide products and to provide certain mineral blending services to the
Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to
continue to provide the Buyer with certain laboratory, MIS and telephone
services, all on terms substantially consistent with the historic relationship
between Prince Agri and PMC, and to lease to Buyer office space used by PMC in
Quincy, Illinois. The Company has an agreement to receive certain treasury
services from Palladium for $0.1 million per year. Pursuant to definitive
agreements, the Company made customary representations, warranties and
environmental and other indemnities, agreed to a post-closing working capital
adjustment, paid $4.0 million in full satisfaction of all intercompany debt owed
to PMC, paid a closing fee to Palladium of $0.5 million, made certain capital
expenditure adjustments included as part of the intercompany settlement amount,
and agreed to pay for certain out-of-pocket transaction expenses. PMC retained
$0.4 million of its accounts receivable. The Company established a $1.0 million
letter of credit escrow for two years to secure its working capital adjustment
and certain indemnification obligations. The Company agreed to indemnify the
Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the
amount they receive in respect of the disposition of Buyer for less than $21.0
million up to a maximum payment by the Company of $4.0 million (the "Backstop
Indemnification Amount"). The Backstop Indemnification Amount would be payable
on the earlier to occur of July 1, 2008 or six months after the redemption date
of all of the Company's Senior Secured Notes due 2007 if such a disposition
closes prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
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.
In connection with the 2004 Offering, we agreed with the holders of the
Series C Preferred Stock that, for purposes of calculating the Equity Value,
which is calculated as part of the calculation of the Liquidation Value of the
Series C Preferred Stock, the total net debt of Phibro Animal Health Corporation
would not exceed $170 million. See "Description of Capital Stock."
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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.
DOMESTIC 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 originally were not
permitted to exceed $25.0 million, including aggregate borrowings under the
working capital facility of up to $15.0 million. On April 29, 2004, we amended
the domestic senior credit facility to increase the aggregate amount of
borrowings available under such working capital and letter of credit facilities
from $25.0 million to $27.5 million and to increase the amount of aggregate
borrowings available under the working capital facility from $15.0 million to
$17.5 million. As of September 24, 2004, we amended the domestic senior credit
facility to: (i) increase the aggregate amount of borrowings available under
such working capital and letter of credit facilities from $27.5 million to $32.5
million; the amount of aggregate borrowings available under the working capital
facility remained unchanged at $17.5 million; (ii) amend the EBITDA definition
to exclude charges and expenses related to unsuccessful acquisitions and related
financings in an aggregate amount not to exceed $5.3 million for the period
beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition
of Additional Indebtedness to exclude advances under the working capital
facility; (iv) amend the definition of Permitted Investments to allow other
investments made during the period from January 1, 2004 through June 30, 2004 in
an aggregate amount not to exceed $336,000; and (v) establish covenant EBITDA
levels for the periods after June 30, 2004. The amendment was effective June 30,
2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and
effective September 24, 2004 for all other items.
Concurrent with the completion of the 2004 Offering, on December 21, 2004,
we amended the domestic senior credit facility to (i) amend the EBITDA
definition to exclude charges and expenses related to the sale of the Belgium
Plant in an aggregate amount not to exceed $26.8 million for purposes of
calculating a certain financial covenant, (ii) amend the Indenture Reserve
definition to include scheduled payments of interest due on the additional
notes, (iii) amend the maximum aggregate amount of borrowings available under
the working capital facility to permit a temporary increase to $22.5 million and
for its reduction to $17.5 million on such borrowings being refinanced by the
proceeds of the additional old notes issues in the 2004 Offering, (iv) amend the
Permitted Investments definition to include investments in connection with the
sale of the Belgium Plant and transfer of certain equipment, together with other
assets and rights related to the production of virginiamycin, to our subsidiary
in Brazil or in connection with alternative production arrangements, and (v)
provide for the issuance of the additional notes and the sale of the Belgium
Plant and related transactions.
Borrowings under the domestic senior credit facility are subject to a
borrowing base formula based on percentages of eligible domestic receivables and
domestic inventory. Under the domestic senior 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
domestic 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 domestic senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the domestic
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
domestic senior credit facility, by that date. Pursuant to the terms of an
intercreditor agreement, as amended in connection with the 2004 Offering, the
security interest securing the Senior Secured Notes and the guarantees made by
our domestic restricted subsidiaries is subordinated to a lien securing the
domestic senior credit facility.
88
The domestic 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 domestic 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 domestic 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 domestic
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 domestic 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 notes,
refinance, replace, restructure, substitute for, amend or supplement the
domestic senior credit facility. The actual terms of any new or modified credit
facility which replaces the domestic 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 9 7/8%
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 9 7/8% 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 indenture), 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 have existing local credit arrangements
which will continue in effect after the offering. 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.
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THE EXCHANGE OFFER
Simultaneously with the sale of the old units in October 2003 and December
2004, the US issuer, the Dutch issuer and the guarantors entered into
substantially similar registration rights agreements 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 agreements.
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 127,491 units,
each unit consisting of:
- $809.5238 principal amount of 13% Senior Secured Notes due 2007 of the US
issuer; and
- $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 March 7, 2005, 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:
- to delay the acceptance of the old units;
- 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;
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- 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
- 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:
- you have full power and authority to tender, exchange, sell, assign and
transfer old units;
- 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
- 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, or by confirmation
of blocking instructions in accordance with the standard operating procedures of
Euroclear or Clearstream, 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.
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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, Euroclear or Clearstream, as applicable, and either:
- 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
- in lieu of delivering a letter of transmittal, instruct DTC, Euroclear or
Clearstream, as the case may be, 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:
- the exchange agent must receive old units along with the letter of
transmittal; or
- 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; or
- the exchange agent must receive, before the expiration date, timely
confirmation from Euroclear or Clearstream, as the case may be, that the
securities account to which the old units are credited has been blocked
from and including the day on which the confirmation is delivered to the
exchange agent and that no transfers will be effected in relation to such
old units at any time after such date.
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 their respective
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, Euroclear or Clearstream, as applicable, 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
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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:
- 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
- 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:
- a bank;
- a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer;
- a credit union;
- a national securities exchange, registered securities association or
clearing agency; or
- 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.
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EUROCLEAR AND CLEARSTREAM PROCEDURES FOR BLOCKING INSTRUCTIONS
The registered holder of the old units on the records of Euroclear or
Clearstream must instruct Euroclear or Clearstream to block the securities in
the account in Euroclear or Clearstream to which such old units are credited. In
order for the exchange offer to be accepted, the exchange agent must have
received, prior to the expiration date, a confirmation from Euroclear or
Clearstream that the securities account of old units tendered has been blocked
from and including the day on which the confirmation is delivered to the
exchange agent and that no transfers will be effected in relation to the old
units at any time after such date. Old units should be blocked in accordance
with the procedures of Euroclear or Clearstream, as the case may be. The
exchange of the old units so tendered will be made only after a timely receipt
by the exchange agent of an agent's message and any other documents required by
the letter of transmittal. The term "agent's message" means a message,
transmitted by Euroclear or Clearstream and received by the exchange agent that
states that Euroclear or Clearstream has received an express acknowledgment from
a participant tendering old units 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:
- 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;
- 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 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
- 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
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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:
- to reject any tenders determined to be in improper form or unlawful;
- to waive any of the conditions of the exchange offer; and
- 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:
- specify the name of the person tendering the old units to be withdrawn;
- identify the old units to be withdrawn, including the total principal
amount of old units to be withdrawn; and
- 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, Euroclear or Clearstream, as
applicable, 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.
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. In the case of old units tendered in accordance with the blocking
procedures of Euroclear or Clearstream, as the case may be, the old units will
be returned to their holder by cancellation of the blocking instruction in
accordance with the standard operating procedures of Euroclear or Clearstream,
as applicable. 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.
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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:
- 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;
- we have not received all applicable governmental approvals;
- 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
- 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."
EXCHANGE AGENT
We appointed HSBC Bank USA, National Association 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, National Association
One Hanson Place, Lower Level
Brooklyn, NY 10018
Attention: Paulette Shaw -- Issuer Services
By facsimile (for eligible institutions only): (718) 488-4488
Confirm facsimile by telephone ONLY: (718) 488-4475
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.
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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 CERTAIN 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 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,
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(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.
We filed a registration statement with the SEC on Form S-4 with respect to
an exchange offer for the 105,000 old units issued in October 2003, but due to
pending confidential acquisition negotiations, such registration statement did
not become effective and the Company caused a notice of withdrawal to be
submitted to the SEC on November 15, 2004. As a result, a Registration Default
exists with respect to the old notes issued in October 2003 and such notes have
borne additional interest. However, the consummation of the exchange offer of
new units for old units is expected to cure such Registration Default. In such
event, from and after such date, such old notes will bear interest at the rate
set forth on the cover page of this prospectus and cease to accrue such
additional interest.
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:
- 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;
- 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
- 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:
- may not rely on the applicable interpretations of the staff of the SEC
referred to above; and
- 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.
DESCRIPTION OF THE NEW UNITS
We are offering 127,491 new units (the "New Units"), consisting of $103.207
million 13% senior secured notes due 2007 (the "U.S. Notes") of Phibro Animal
Health Corporation (the "U.S. Issuer") and $24.284 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:
- the words "we", "our" and "us" refer only to the Issuers and not to any
of their respective subsidiaries;
- the word "Company" refers only to Phibro Animal Health Corporation and
not to any of its subsidiaries;
On October 21, 2003, we issued 105,000 Units, consisting of $85.0 million
aggregate principal amount of U.S. Notes and $20.0 million aggregate principal
amount of Dutch Notes and on December 21, 2004 we issued 22,491 additional
Units, consisting of $18.207 million aggregate principal amount of U.S. Notes
and $4.284 million aggregate principal amount of Dutch Notes (the "Outstanding
Notes") under an indenture (the "Indenture"), dated as of October 21, 2003, as
amended and supplemented, among us, the Guarantors and HSBC Bank USA, National
Association, as trustee (the "Trustee") and collateral agent (the "Collateral
Agent"). As used in this "Description of the New Notes," except as the context
otherwise requires, the term "Notes" means all U.S. Notes issued by the U.S.
Issuer and all Dutch Notes issued by the Dutch Issuer pursuant to the Indenture
(including the notes offered hereby, the Outstanding Notes and any additional
notes that we may issue from time to time under the Indenture). The terms of the
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
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Indenture Act"). The Collateral Agreements referred to herein under the
subcaption "Security" contain the terms of the security interests that 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:
- the new notes will be registered under the Securities Act of 1933, as
amended;
- the new notes will not bear restrictive legends restricting their
transfer under the Securities Act;
- the holder of the new notes are not entitled to certain rights under the
registration rights agreement; and
- 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 NOTES AND THE GUARANTEES
The 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 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:
- will be the general obligations of the U.S. Issuer;
- will rank equally in right of payment with all other senior obligations
of the U.S. Issuer;
- 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;
- 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;
- will be structurally subordinated to all liabilities of the Foreign
Subsidiaries and Unrestricted Subsidiaries of the U.S. Issuer; and
- 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.
The Dutch Notes. The Dutch Notes:
- will be the general obligations of the Dutch Issuer;
- will rank equally in right of payment with all other senior obligations
of the Dutch Issuer;
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- will rank senior in right of payment to all Indebtedness of the Dutch
Issuer which by its terms is subordinated to the Dutch Notes;
- 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 and a mortgage on substantially all real property of the Dutch Issuer
and its current and future Restricted Subsidiaries,
- 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
- a pledge of the intercompany loans made by the Dutch Issuer to its
Restricted Subsidiaries,
in each case, subject to Permitted Liens;
- 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
- 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.
The Guarantees. Each Guarantee of each Guarantor:
- will be the general obligation of such Guarantor;
- will rank equally in right of payment with all other senior obligations
of such Guarantor; and
- will rank senior in right of payment to all Indebtedness of such
Guarantor which by its terms is subordinated to the Guarantees;
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; and
- the Guarantee of each Guarantor will be secured,
- 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), and
- 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
If a Holder has given wire transfer instructions to us, we will pay all
principal, interest and premium and Additional Interest, if any, on that
Holder's Notes in accordance with those instructions. All other payments on the
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.
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PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as paying agent and registrar. We may change
the paying agent or registrar without prior notice to the Holders of the Notes,
and we or any of our Subsidiaries may act as paying agent or registrar.
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.
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 127,491 Units in this offering
which will be comprised of U.S. Notes in an aggregate principal amount of
$103.207 million and Dutch Notes in an aggregate principal amount of $24.284
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 in 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 June 1, 2005, 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 in the case of the old notes issued in October 2003 and from December
21, 2004 in the case of the old notes issued in the 2004 Offering. 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
Outstanding Notes and the related Company Guarantee and Domestic Guarantees of
the current and future Domestic Guarantors are, and the Notes offered hereby and
the related Company Guarantee and 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 outstanding Dutch Notes and the related Foreign Guarantees of the
Foreign Guarantors are, and the Dutch Notes offered hereby and the related
Foreign Guarantees of the Foreign Guarantors will be, secured, pursuant to the
Foreign
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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 that secures the Outstanding Notes and the related
Company Guarantee and Domestic Guarantees that will secure the Notes offered
hereby and the related Company Guarantee and Domestic Guarantees currently
serves 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 on the Issue Date of the
Units issued in October 2003, and amended the Intercreditor Agreement in
connection with the issuance of the Units issued in December 2004. The
Intercreditor Agreement, as amended, provides, among other things, that (1)
Liens in the Domestic Collateral securing the Notes are 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.
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
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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:
(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
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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 delay the exercise of the rights of pledge
on the shares of Phibro 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 Phibro Belgium would be
severely restricted or prohibited altogether if Phibro 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
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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.
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 Separation 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.
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"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.
"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:
<Table>
<Caption>
PERIOD PERCENTAGE
- ------ ----------
June 1, 2005................................................ 114.0%
December 1, 2005............................................ 109.0%
June 1, 2006................................................ 105.0%
December 1, 2006, and thereafter............................ 101.0%
</Table>
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.
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"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 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
108
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.
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)
109
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 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,
110
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.
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,
111
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.
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
112
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 (w) $37.5 million, less
(x) 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 (y) 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, less (z) the aggregate principal amount of Notes
issued pursuant to clause (xx) below;
(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, 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;
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(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
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
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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;
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(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;
(xix) Indebtedness of the Company and its Restricted Subsidiaries
arising under the Belgium Purchase Agreement; and
(xx) Indebtedness of the Issuers and the Guarantors represented by the
Additional Notes issued after the Issue Date in an aggregate principal
amount not to exceed $22.5 million, the proceeds of which are used to
refinance or replace Indebtedness incurred pursuant to clause (i) above,
Exchange Notes issued in exchange for such Additional Notes and the related
Guarantees and the Company Guarantee.
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
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paragraph or (y) to make any Restricted Investment pursuant to clause
(iv) of the next paragraph; plus
(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
117
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
(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
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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."
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,
119
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. 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;
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(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 (other than any such restriction or encumbrance
contained in the Belgium Purchase Agreement);
(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 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."
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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
(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.
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The Indenture, which as previously stated was entered into on the Issue
Date in connection with the issuance of the Outstanding Notes, contains a
requirement that PMC, MRT Holdings, LLC and Prince MFG, LLC would be deemed to
be redesignated as a Restricted Subsidiaries on January 1, 2004 if the PMC Sale
Transactions were not consummated on or prior to such date. No such
redesignation occurred as we consummated the PMC Sale Transactions on December
26, 2003. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Prince Transactions."
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, were 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.
Noteholder Representative. The Indenture provides that 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. The initial Noteholder Representative
designated by the holders of the Notes in accordance with this covenant was Mr.
Sam Gejdenson. See "Management -- Directors and Executive Officers."
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
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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.
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
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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.
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
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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 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
126
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;
(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
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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 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;
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(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";
(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; and
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(vii) at the end of such covenant, the following provision would be
inserted as an additional provision thereof:
"Notwithstanding the foregoing, the Dutch Issuer may permit, and there may
be effected, the Belgium Plant Sale and Virginiamycin Production Transactions."
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.
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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 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
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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 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;
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(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.
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
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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 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;
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(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 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.
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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, National Association 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 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
136
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 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.
"Belgium Equipment" means all equipment located at the Belgium Plant.
"Belgium Plant" means the plant owned by Phibro Belgium in Rixensart,
Belgium.
"Belgium Plant Sale and Virginiamycin Production Transactions" means the
following transactions and payments, including payments required pursuant to the
documents to evidence such transactions, each of which is subject to entering
into definitive documentation containing customary representations, warranties,
covenants and indemnities for a transaction of that type, and changes in the
definitive economic terms which are not, individually or in the aggregate,
material to the Company: (i) the transfer of substantially all of the land and
buildings and certain equipment of Phibro Belgium at the Belgium Plant, as well
as the industrial activities and intellectual property relating to certain
solvent technology of Phibro Belgium, for a purchase price of EUR 6.2 million,
payable at closing; (ii) the transfer to GSK of a majority of the employees of
Phibro Belgium and the corresponding responsibility for statutory severance
obligations; (iii) GSK agreeing to be responsible for costs of cleaning-up, by
demolition or otherwise, certain buildings not to be used by it, but for Phibro
Belgium to reimburse GSK up to a maximum of EUR 0.7 million for such clean-up
costs; (iv) in
137
recognition of the benefits to the Company from the proposed transaction, Phibro
Belgium agreeing to pay to GSK EUR 1.5 million within six months from the
closing date, EUR 1.5 million within eighteen months from the closing date,
EUR 1.5 million within thirty months from the closing date, and EUR 0.5 million
within forty-two months from the closing date; (v) Phibro Belgium retaining
certain excess land (valued at approximately EUR 0.4 million) and being able to
sell such land for its own account; (vi) Phibro Belgium being responsible for
certain plant closure costs and legally required severance indemnities in
connection with workforce reductions, estimated in total to be EUR 7.7 million,
of which an amount estimated to be approximately EUR 4.1 million would be
payable at or around the closing and an aggregate amount so estimated to be
approximately EUR 3.6 million would be payable over periods up to thirteen
years; and (vii) Phibro Belgium retaining any or all equipment at the Belgium
Plant, and being able to sell such equipment for the account of Phibro Belgium
or transfer such equipment, together with other assets and rights related to the
production of virginiamycin, to the Company's Restricted Subsidiary in Brazil
that owns the facility in Guarulhos or in connection with alternative production
arrangements.
"Belgium Purchase Agreement" means a Purchase Agreement between Phibro
Belgium and GSK relating to the Belgium Plant Sale and Virginiamycin Production
Transactions, and any related or ancillary agreements or instruments entered
into by Phibro Belgium, GSK, their respective Affiliates and/or other persons in
connection with the Belgium Plant Sale and Virginiamycin Production
Transactions, in each case, as such agreements may be amended, modified or
supplemented (so long as such amendments, modifications or supplements are not,
individually or in the aggregate, materially adverse to the Company or the
Holders).
"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;
138
(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 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 66 2/3% 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
139
(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, National Association, 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.
"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;
140
(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.
"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.
"Copyright Security Agreement" means a Copyright Security Agreement made by
any of the Company or any Domestic Guarantor in favor of the Collateral Agent,
as amended or supplemented from time to time in accordance with its terms.
"Credit Agreement" means the Loan and Security Agreement, dated as of the
Issue Date, among the Company, each of its Subsidiaries parties thereto, lenders
parties thereto as such (together with their successors and assigns, the
"Lenders") and Wells Fargo Foothill, Inc., as administrative agent (in such
capacity, together with its successors and assigns, the "Administrative Agent"),
or any other agreement providing for revolving credit loans, term loans,
receivables financing or letters of credit, 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.
141
"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, collectively, the U.S. Security
Agreement, the U.S. Pledge Agreement, each Patent Security Agreement, each
Copyright Security Agreement and each Trademark Security Agreement, in each
case, as the same may be amended, supplemented or modified from time to time in
accordance with its terms.
"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.
"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.
142
"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.
"GSK" means Glaxosmithkline Biologicals SA and/or Affiliates thereof.
"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.
"Holder" means the Person in whose name a Unit or, if a Separation Event
has occurred, a Note, is registered on the Registrar's books.
"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;
(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;
143
(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 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,
144
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 Units and the underlying 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.
"Patent Security Agreement" means a Patent Security Agreement made by any
of the Company or any Domestic Guarantor in favor of the Collateral Agent, as
amended or supplemented from time to time in accordance with its terms.
"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
145
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;
(x) other Investments made after the Issue Date in an aggregate amount
at any one time outstanding not to exceed $2.5 million; and
(xi) Investments in Restricted Subsidiaries of the Company in
connection with the production of virginiamycin in an amount not to exceed
the Fair Market Value of the Belgium Equipment plus $15.0 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
146
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
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; provided, however, 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
147
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;
(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.
"Phibro Belgium" means Phibro Animal Health SA (formerly Phibro Animal
Health (Belgium) SPRL).
"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; (vi) 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
148
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 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.
149
"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.
"Trademark Security Agreement" means a Trademark Security Agreement made by
any of the Company or any Domestic Guarantor in favor of the Collateral Agent,
as amended or supplemented from time to time in accordance with its terms.
"Transactions" means, collectively, the Offering, the PMC Sale Transactions
and the solicitation of consents with respect to the Company's Existing Notes to
amendments to the indenture governing the Existing Notes, the Belgium Plant Sale
and Virginiamycin Production Transactions and the offering of the Notes
described in clause (xx) of the second paragraph under "-- Certain
Covenants -- Limitation on Incurrence of Indebtedness" to refinance a portion of
the Credit Agreement and the solicitation of consents with respect to the Notes
to amendments to the indenture to permit the foregoing.
"U.S. Pledge Agreement" means the Pledge Agreement, dated as of the Issue
Date, made by the Company and the Domestic Guarantors parties thereto in favor
of the Collateral Agent, as amended or supplemented from time to time in
accordance with its terms.
"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.
"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.
150
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing each Unit will be issued in fully registered
form without interest coupons.
Units sold in reliance on Rule 144A will initially be represented by
permanent global units (each a "Restricted Global Unit") consisting of U.S.
Notes and Dutch Notes in fully registered form without interest coupons (each a
"Restricted 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 sold in offshore transactions in reliance on Regulation S under the
Securities Act will initially be represented by global units (a "Regulation S
Global Unit") consisting of U.S. 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. Prior to the expiration of the
"distribution compliance period" (as defined in Regulation S), a beneficial
interest in the Regulation S Global Unit may be transferred to a Person who
takes delivery in the form of an interest in the Restricted Global Unit only
upon receipt by the Trustee of a written certification from the transferor to
the effect that such transfer is being made to a Person whom the transferor
reasonably believes is a QIB in a transaction meeting the requirements of Rule
144A. Beneficial interests in a Restricted Global Unit may be transferred to a
Person who takes delivery in the form of an interest in a Regulation S Global
Unit whether before, on or after such a time, only upon receipt by the Trustee
of a written certification to the effect that such transfer is being made in
accordance with Regulation S.
Any beneficial interest in a Regulation S Global Unit or a Restricted
Global Unit (each a "Global Unit") that is transferred to a Person who takes
delivery in the form of an interest in a Restricted Global Unit or a Regulation
S Global Unit, respectively, will, upon transfer, cease to be an interest in the
type of Global Unit previously held and become an interest in the other type of
Global Unit and, accordingly, will thereafter be subject to all transfer
restrictions, if any, and other procedures applicable to beneficial interests in
such other type of Global Unit for as long as it remains an interest.
The Global Units and Global Notes (and any Units or Notes issued in
exchange therefore) will be subject to certain restrictions on transfer set
forth therein and in the indenture and will bear the legend regarding such
restrictions set forth under the heading "Notice to Investors" herein. Subject
to such restrictions, QIBs or non-U.S. purchasers may elect to take physical
delivery of their certificates (each a "Certified Security") instead of holding
their interests through the Global Units and Global Notes (and which are then
ineligible to trade through DTC) (collectively referred to herein as the
"Non-Global Purchasers"). Upon the transfer to a QIB of any Certificated
Security initially issued to a Non-Global Purchaser, such Certified Security
will, unless the transferee requests otherwise or the Global Units have
previously been exchanged in whole for Certificated Securities, be exchanged for
an interest in the Global Units. For a description of the restrictions on
transfer of Certificated Securities and any interest in the Global Units, see
"Notice to Investors."
Book-entry interests for Restricted Global Units and Permanent Regulation S
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
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ownership 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 Units and Notes (including the
presentation of Units and 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 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 and which will be legended as set
forth under the heading "Notice to Investors."
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
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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. 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.
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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
thereof pursuant to the initial offering thereof. 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 Dutch 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,
- a citizen or resident of the United States,
- 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,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- 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,
- 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,
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- 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
- 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.
Premium. The Notes issued pursuant to the 2004 Offering are treated as
issued at a premium. The amount of premium on any such Note will be the
difference between the portion of the U.S. holder's cost of the related Unit
that is allocable to the Note and the principal amount of the Note. A U.S.
holder may elect to amortize such premium (as an offset to interest income),
using a constant-yield method over the term of the Note. Such election, once
made, generally applies to all taxable debt instruments held or subsequently
acquired by the U.S. holder during or after the first taxable year to which the
election applies and may not be revoked without the consent of the IRS.
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" reduced by the
amount of premium previously amortized on the Note. If a U.S. holder does not
elect to amortize premium on a Note, then the holder's tax basis will include
amounts representing the premium. Thus, if such U.S. holder holds the Note to
maturity, the holder would generally be required to treat the premium as a loss
when the Note matures. 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
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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:
- 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,
- the Non-U.S. holder is not a controlled foreign corporation that is
related to the Company through stock ownership,
- 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
- neither the Company nor its paying agent knows or has reason to know that
the conditions of the exemption are, in fact, not satisfied.
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:
- 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
- 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.
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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:
- the U.S. holder fails to furnish or certify its correct taxpayer
identification number to us or our paying agent in the manner required,
- we are notified by the IRS that the U.S. holder has failed to report
payments of interest or dividends properly, or
- 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 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.
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CERTAIN DUTCH TAX CONSEQUENCES
GENERAL
The following summary describes the principal Dutch tax consequences of the
acquisition, holding, redemption and disposal of Dutch notes. This summary does
not purport to be a comprehensive description of all Dutch 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 Dutch taxes set forth below is included for general
information purposes only.
This summary is based on the Dutch 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 Dutch tax consequences of a holder of
Dutch notes who holds a substantial interest (aanmerkelijk belang) 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 Dutch 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
Dutch 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 Dutch 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.
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 Dutch tax purposes
(nor, if he or she is an individual, has opted to be taxed as
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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
Dutch permanent establishment or permanent representative the Dutch notes
are attributable, or
(ii) 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 Dutch gift and
inheritance tax at the time of the gift or his or her death.
An individual of Dutch nationality is deemed to be a resident of the
Netherlands for the purposes of the Dutch 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 Dutch 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 Dutch 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
Dutch permanent establishment or permanent representative the Dutch notes
are or were attributable; or
(ii) 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 Dutch 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.
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 the Directive
Member States will (if equivalent measures have been introduced by certain
non-EU countries) be required, from July 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. However, 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).
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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 Dutch 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 constitutes 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 Dutch
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).
160
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 May 5, 2005 (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
161
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 LLP.
EXPERTS
The consolidated financial statements of Phibro Animal Health Corporation
as of June 30, 2004 and 2003 and for each of the three years in the period ended
June 30, 2004, the consolidated financial statements of Philipp Brothers
Netherlands I B.V. as of June 30, 2004 and 2003 and for each of the three years
in the period ended June 30, 2004 and the financial statements of Phibro Animal
Health SA (Belgium) as of June 30, 2004 and 2003 and for each of the three years
in the period ended June 30, 2004 included in this prospectus, have all been so
included in reliance on the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, 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. 333-122063). 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
162
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 65 Challenger Road, Ridgefield Park, NJ 07660
telephone number (201) 329-7300.
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, 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.
On December 16, 2004, we entered into an agreement to sell the Rixensart,
Belgium plant to Glaxosmithkline Biologicals S.A. (see "Prospectus
Summary -- The Company -- Recent Developments -- Sale of Belgium Plant").
The managing directors of Philipp Brothers Netherlands III B.V. are Mr.
Jack Bendheim and Mr. Joseph Katzenstein (each a managing director, class B) and
Mr. Robbert Elshout and Ms. Liselotte Heine (each a managing director, class A).
Mr. Bendheim has served as a managing director B of Philipp Brothers Netherlands
III B.V., since June 2004. See also "Management" for additional information
regarding Mr. Bendheim. Mr. Joseph Katzenstein, age 62, has served as a managing
director B of Philipp Brothers Netherlands III B.V. since June 2004. Mr.
Katzenstein, has also served as the secretary of Phibro Animal Health
Corporation since 1982 and the treasurer of Phibro Animal Health Corporation
from 1982 through 2002. Mr. Katzenstein served as corporate controller of Phibro
Animal Health Corporation from 1965 to 1985. Mr. Elshout and Ms. Heine have been
managing directors A of Philipp Brothers Netherlands III B.V. since June 2004.
163
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm..... F-2
Consolidated Balance Sheets as of June 30, 2004 and 2003.... F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended June 30, 2004, 2003 and
2002...................................................... F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended June 30, 2004, 2003 and 2002.......... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2004, 2003 and 2002.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of September 30,
2004 and June 30, 2004.................................... F-45
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three months ended September
30, 2004 and 2003......................................... F-46
Condensed Consolidated Statements of Changes in
Stockholders' Deficit for the three months ended September
30, 2004.................................................. F-47
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2004 and 2003............ F-48
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-49
</Table>
OTHER FINANCIAL STATEMENTS OF CERTAIN PHIBRO ANIMAL HEALTH CORPORATION
SUBSIDIARIES
The following financial statements for certain of Phibro Animal Health
Corporation's indirectly wholly owned subsidiaries are included pursuant to
Regulation S-X Rule 3-16 of the Exchange Act, "Financial Statements of
Affiliates Whose Securities Collateralize an Issue Registered or Being
Registered." See Note 9 to the Phibro Animal Health Corporation consolidated
financial statements.
<Table>
PHILIPP BROTHERS NETHERLANDS I B.V
Report of Independent Registered Public Accounting Firm..... F-66
Consolidated Balance Sheets as of June 30, 2004 and 2003.... F-67
Consolidated Statements of Operations and Comprehensive Loss
for the years ended June 30, 2004, 2003 and 2002.......... F-68
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended June 30, 2004, 2003 and 2002.......... F-69
Consolidated Statements of Cash Flows for the years ended
June 30, 2004, 2003 and 2002.............................. F-70
Notes to Consolidated Financial Statements.................. F-71
PHIBRO ANIMAL HEALTH SA
Report of Independent Registered Public Accounting Firm..... F-82
Balance Sheets as of June 30, 2004 and 2003................. F-83
Statements of Operations and Comprehensive Income (Loss) for
the years ended June 30, 2004, 2003 and 2002.............. F-84
Statements of Changes in Stockholders' Equity for the years
ended June 30, 2004, 2003 and 2002........................ F-85
Statements of Cash Flows for the years ended June 30, 2004,
2003 and 2002............................................. F-86
Notes to Financial Statements............................... F-87
</Table>
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Phibro Animal Health Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), changes
in stockholders' deficit and cash flows present fairly, in all material
respects, the financial position of Phibro Animal Health Corporation and its
subsidiaries at June 30, 2004 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2004,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 27, 2004
F-2
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AS OF JUNE 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 5,568 $ 11,179
Trade receivables, less allowance for doubtful accounts of
$1,358 and $1,437 at June 30, 2004 and 2003,
respectively........................................... 57,658 52,714
Other receivables......................................... 2,766 3,503
Inventories............................................... 79,910 87,849
Prepaid expenses and other current assets................. 8,688 9,868
Current assets from discontinued operations............... -- 9,276
-------- --------
Total current assets................................. 154,590 174,389
Property, plant and equipment, net.......................... 58,786 63,905
Intangibles................................................. 11,695 8,669
Other assets................................................ 16,298 14,059
Other assets from discontinued operations................... -- 13,325
-------- --------
$241,369 $274,347
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft............................................ $ 891 $ 1,686
Loans payable to banks.................................... 10,996 37,878
Current portion of long-term debt......................... 1,351 24,124
Accounts payable.......................................... 46,972 55,355
Accrued expenses and other current liabilities............ 40,010 40,699
Current liabilities from discontinued operations.......... -- 5,557
-------- --------
Total current liabilities............................ 100,220 165,299
Long-term debt.............................................. 158,018 102,263
Other liabilities........................................... 22,286 21,241
Other liabilities from discontinued operations.............. -- 1,173
-------- --------
Total liabilities.................................... 280,524 289,976
-------- --------
Commitments and contingencies
Redeemable securities:
Series B and C preferred stock............................ 24,678 68,881
-------- --------
Stockholders' deficit:
Preferred stock -- $100 par value, 150,543 shares
authorized, none issued at June 30, 2004 and 2003;
Series A preferred stock -- $100 par value, 6% non-
cumulative, 5,207 shares authorized, issued and
outstanding at June 30, 2004 and 2003.................. 521 521
Common stock -- $0.10 par value, 30,300 authorized and
24,488 shares issued and outstanding at June 30, 2004
and 2003............................................... 2 2
Paid-in capital........................................... 860 860
Accumulated deficit....................................... (57,964) (79,489)
Accumulated other comprehensive income (loss):
Gain on derivative instruments......................... 9 81
Cumulative currency translation adjustment............. (7,261) (6,485)
-------- --------
Total stockholders' deficit.......................... (63,833) (84,510)
-------- --------
$241,369 $274,347
======== ========
</Table>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Net sales................................................... $358,274 $341,746 $328,676
Cost of goods sold.......................................... 267,871 251,200 247,411
-------- -------- --------
Gross profit.............................................. 90,403 90,546 81,265
Selling, general and administrative expenses (includes
litigation income of $3,040 in 2003 and $742 in 2002)..... 66,128 65,050 70,636
Costs of non-completed transaction.......................... 5,261 -- --
-------- -------- --------
Operating income.......................................... 19,014 25,496 10,629
Other:
Interest expense.......................................... 18,618 16,281 18,070
Interest (income)......................................... (130) (85) (346)
Other (income) expense, net............................... (781) 1,539 3,349
Net (gain) on extinguishment of debt...................... (23,226) -- --
-------- -------- --------
Income from continuing operations before income taxes..... 24,533 7,761 (10,444)
Provision for income taxes.................................. 7,969 10,060 14,767
-------- -------- --------
Income (loss) from continuing operations.................. 16,564 (2,299) (25,211)
Discontinued operations:
(Loss) from discontinued operations (net of income
taxes)................................................. (1,625) (14,577) (26,559)
(Loss) on disposal of discontinued operations (net of
income taxes).......................................... (2,089) (683) --
-------- -------- --------
Net income (loss)......................................... 12,850 (17,559) (51,770)
Other comprehensive income (loss):
Change in derivative instruments, net of tax.............. (72) (981) 1,062
Change in currency translation adjustment................. (776) 7,377 (6,125)
-------- -------- --------
Comprehensive income...................................... $ 12,002 $(11,163) $(56,833)
======== ======== ========
Net income (loss)......................................... 12,850 (17,559) (51,770)
Excess of the reduction of redeemable preferred stock over
total assets divested and costs and liabilities incurred
on the Prince Transactions................................ 20,138 -- --
Dividends and equity value accreted on Series B and C
redeemable preferred stock................................ (11,463) (12,278) (7,623)
-------- -------- --------
Net income (loss) available to common shareholders........ $ 21,525 $(29,837) $(59,393)
======== ======== ========
</Table>
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' DEFICIT
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002
---------------------------------------------------------------------------------
ACCUMULATED
RETAINED OTHER
PREFERRED COMMON STOCK EARNINGS COMPREHENSIVE
STOCK ----------------- PAID-IN (ACCUMULATED (LOSS)
SERIES A CLASS A CLASS B CAPITAL DEFICIT) INCOME TOTAL
--------- ------- ------- ------- ------------ ------------- --------
(IN THOUSANDS)
Balance, June 30, 2001...... $521 $1 $1 $ 878 $ 9,741 $ (7,737) $ 3,405
Dividends on Series B and
C redeemable preferred
stock.................. (7,623) (7,623)
Change in derivative
instruments, net of
tax.................... 1,062 1,062
Foreign currency
translation
adjustment............. (6,125) (6,125)
Receivable from principal
shareholder............ (138) (138)
Net (loss)................ (51,770) (51,770)
---- -- -- ----- -------- -------- --------
Balance, June 30, 2002...... $521 $1 $1 $ 740 $(49,652) $(12,800) $(61,189)
==== == == ===== ======== ======== ========
Dividends on Series B and
C redeemable preferred
stock.................. (8,808) (8,808)
Equity value accreted on
Series B and C
redeemable preferred
stock.................. (3,470) (3,470)
Change in derivative
instruments, net of
tax.................... (981) (981)
Foreign currency
translation
adjustment............. 7,377 7,377
Payable to principal
shareholder............ 120 120
Net (loss)................ (17,559) (17,559)
---- -- -- ----- -------- -------- --------
Balance, June 30, 2003...... $521 $1 $1 $ 860 $(79,489) $ (6,404) $(84,510)
==== == == ===== ======== ======== ========
Excess of the reduction in
redeemable preferred
stock over total assets
divested and costs and
liabilities incurred on
the Prince
Transactions........... 20,138 20,138
Dividends on Series B and
C redeemable preferred
stock.................. (6,042) (6,042)
Equity value accreted on
Series B and C
redeemable preferred
stock.................. (5,421) (5,421)
Change in derivative
instruments, net of
tax.................... (72) (72)
Foreign currency
translation
adjustment............. (776) (776)
Net (loss)................ 12,850 12,850
---- -- -- ----- -------- -------- --------
Balance, June 30, 2004...... $521 $1 $1 $ 860 $(57,964) $ (7,252) $(63,833)
==== == == ===== ======== ======== ========
</Table>
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
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 12,850 $(17,559) $(51,770)
Adjustment for discontinued operations.................... 3,714 15,260 26,559
-------- -------- --------
Income (loss) from continuing operations.................. 16,564 (2,299) (25,211)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided (used) by operating
activities:
Depreciation and amortization........................... 13,183 12,524 12,355
Deferred income taxes................................... 326 6,460 11,238
Net gain from sales of assets........................... (692) (127) (5)
Net gain on extinguishment of debt...................... (23,226) -- --
Change in redemption amount of redeemable common
stock................................................. -- -- (378)
Effects of changes in foreign currency.................. (548) 390 2,120
Other................................................... 1,114 387 2,416
Changes in operating assets and liabilities:
Accounts receivable................................... (7,222) 3,810 6,046
Inventories........................................... 3,660 (1,598) (13,991)
Prepaid expenses and other current assets............. (314) (3,122) (2,819)
Other assets.......................................... (3,079) (2,632) 2,667
Accounts payable...................................... (5,650) 20,503 (6,606)
Accrued expenses and other liabilities................ 6,965 (355) 8,511
Accrued costs of non-completed transaction............ 3,970 -- --
Cash provided (used) by discontinued operations........... (2,189) 716 (1,088)
-------- -------- --------
Net cash provided (used) by operating activities...... 2,862 34,657 (4,745)
-------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (6,244) (8,636) (8,518)
Acquisition of a business, net of cash acquired........... -- -- (7,182)
Proceeds from property damage claim....................... -- -- 411
Proceeds from sale of assets.............................. 1,094 2,565 19
Other investing........................................... (655) 737 580
Discontinued operations................................... 14,875 1,363 (2,671)
-------- -------- --------
Net cash provided (used) by investing activities...... 9,070 (3,971) (17,361)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in cash overdraft................. (795) (6,081) 3,438
Net increase (decrease) in short-term debt................ (26,954) (6,660) 14,237
Proceeds from long-term debt.............................. 109,661 2,000 2,322
Payments of long-term debt................................ (35,453) (16,014) (4,730)
Payment of Pfizer obligations............................. (28,300) -- --
Payments relating to the Prince Transactions and related
costs................................................... (21,393) -- --
Debt refinancing costs.................................... (15,548) -- --
Discontinued operations................................... 1,005 377 (1,590)
-------- -------- --------
Net cash provided (used) by financing activities...... (17,777) (26,378) 13,677
-------- -------- --------
Effect of exchange rate changes on cash..................... 234 452 3
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................................ (5,611) 4,760 (8,426)
Cash and cash equivalents at beginning of period............ 11,179 6,419 14,845
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 5,568 $ 11,179 $ 6,419
======== ======== ========
Supplemental Cash Flow Information:
Interest paid............................................. $ 17,578 $ 16,104 $ 17,003
Income taxes paid......................................... 4,755 3,046 2,629
</Table>
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 (the "Company" or "PAHC") is a leading
diversified global manufacturer and marketer of a broad range of animal health
and nutrition products, specifically medicated feed additives ("MFA") and
nutritional feed additives ("NFA"), which the Company sells throughout the world
predominately to the poultry, swine and cattle markets. The Company is also a
specialty chemicals manufacturer and marketer, serving numerous markets.
2. SUMMARY 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 Smelteverk (Norway) ("Odda"), Carbide Industries (U.K.)
("Carbide"), Mineral Resource Technologies, Inc. ("MRT"), and La Cornubia S.A.
(France) ("La Cornubia") businesses have been classified as discontinued
operations as discussed in Note 5. The Company's consolidated financial
statements have been reclassified to report separately the operating results,
financial position and cash flows of the discontinued operations. These
footnotes present information only for continuing operations, unless otherwise
indicated.
The Company presents its consolidated financial statements on the basis of
its fiscal year ending June 30. All references to years 2004, 2003, and 2002 in
these financial statements refer to the fiscal year ended June 30 of that year.
RISKS, UNCERTAINTIES AND LIQUIDITY:
The Company's ability to fund its operating plan relies upon the continued
availability of borrowing under the domestic senior credit facility. The Company
believes that it will be able to comply with the terms of its covenants under
the amended domestic senior credit facility based on its forecasted operating
plan. In the event of adverse operating results and/or violation of covenants
under this facility, there can be no assurance that the Company would be able to
obtain waivers or amendments on favorable terms, if at all. The Company's 2005
operating plan projects adequate liquidity throughout the year, with periods of
reduced availability around the dates of the semi-annual interest payments due
December 1, 2004 and June 1, 2005. The Company is pursuing additional cost
reduction activities, working capital improvement plans, and sales of
non-strategic assets to ensure additional liquidity. The Company also has
availability under foreign credit lines that would be available as needed. The
Company has also undertaken a strategic review of its manufacturing
capabilities, and is currently increasing inventory levels of certain products
to enhance future flexibility and reduce costs. There can be no assurance the
Company will be successful in any of the above-noted actions.
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in
F-7
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
further restrictions on the sale of such products, it could have a material
adverse impact on the Company'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, realizability of deferred tax assets and
actuarial assumptions related to the Company's pension plans.
REVENUE RECOGNITION:
Revenue is recognized upon transfer of title and when risk of loss passes
to the customer, generally at the 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.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the probable credit losses in its existing accounts receivable. The
allowance is based on historical write-off experience and is reviewed
periodically. Past due balances are reviewed individually for collectibility.
Account balances are charged against the allowance when
F-8
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company feels that it is probable that the receivable will not be recovered.
Receivables consist of the following:
<Table>
<Caption>
AS OF
-----------------------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Trade receivables........................................... $57,658 $52,714
Employee receivables........................................ 256 267
Other receivables........................................... 2,510 3,236
------- -------
Total receivables........................................... $60,424 $56,217
======= =======
</Table>
The allowance for doubtful accounts was:
<Table>
<Caption>
2004 2003 2002
------ ------ -------
Balance at beginning of period............................ $1,437 $1,461 $ 1,760
Provision for bad debts................................... 565 347 979
Bad debt write-offs....................................... (644) (371) (1,278)
------ ------ -------
Balance at end of period.................................. $1,358 $1,437 $ 1,461
====== ====== =======
</Table>
INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average methods; cost for
certain inventories is determined under the last-in, first-out (LIFO) method.
Inventories valued at LIFO amounted to $0 and $3,805 at June 30, 2004 and 2003,
respectively. Obsolete and unsaleable inventories are reflected at estimated net
realizable value. Inventory costs include materials, direct labor and
manufacturing overhead. Inventories are comprised of:
<Table>
<Caption>
AS OF
-----------------------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Raw materials............................................... $16,313 $21,668
Work-in-process............................................. 1,764 1,565
Finished goods.............................................. 61,833 65,248
Excess of FIFO cost over LIFO cost.......................... -- (632)
------- -------
Total inventory............................................. $79,910 $87,849
======= =======
</Table>
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, $0 and $106 in 2004, 2003 and
2002, 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.
The Company capitalizes costs that extend the useful life or productive
capacity of an asset. Repair and maintenance costs are expensed as incurred. In
the case of disposals, the assets and related accumulated depreciation are
removed from the accounts, and the net amounts, less proceeds from disposal, are
included in the statements of operations and comprehensive income (loss).
F-9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED FINANCING COSTS:
Deferred financing costs related to the senior secured notes and senior
subordinated notes are amortized over the respective lives of the notes.
Deferred financing costs related to the domestic senior credit facility are
amortized over the life of the agreement.
INTANGIBLES:
Product intangibles cost arising from the MFA acquisition was $10,673 and
$10,449 at June 30, 2004 and 2003, respectively, and accumulated amortization of
$3,230 and $1,780 at June 30, 2004 and 2003, respectively. Amortization expense
was $1,229, $964 and $816 for 2004, 2003 and 2002, respectively. Amortization
expense from the MFA acquisition for each of the next five years from 2005 to
2009 is expected to be $1,145 per year.
In May 2004 the Company acquired the rights to sell amprolium, an
anticoccidial MFA, in most international markets. In payment for the acquired
rights, the Company relinquished its claims against the seller for certain
purchase order commitments, and will make $2,100 of cash payments to the seller
over the next five years. The present value of these payments is $1,898 and was
recorded as a liability. The $2,354 value of the purchase order commitments was
recorded as a reduction in cost of goods sold and inventory, and an intangible
asset of $4,252 was recorded representing the fair value of the acquired rights
and is included on the Company's balance sheet at June 30, 2004. The Company
will amortize this intangible over a ten year period. No amortization was
recorded in 2004. Amortization expense for each of the next five years from 2005
to 2009 is expected to be $425 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 liabilities that arise from the use of differing exchange
rates from period to period are included in accumulated other comprehensive loss
in stockholders' deficit. Income statement accounts are translated at the
average rates of exchange prevailing during the year.
A business unit of Koffolk and all of Planalquimica operate primarily in
U.S. dollars. The U.S. dollar is designated as the functional currency for these
businesses and translation gains and losses are included in determining net
income or loss.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction and
translation (gains) losses were $(116), $789 and $3,385 for 2004, 2003 and 2002,
respectively, and were included in other expense, net in the consolidated
statements of operations and comprehensive income (loss).
DERIVATIVE FINANCIAL INSTRUMENTS:
The Company records all derivative financial instruments on the
consolidated balance sheet at fair value. Changes in the fair value of
derivatives are recorded in results of operations or accumulated other
comprehensive income (loss), depending on whether a derivative is designated and
effective as part of a hedge transaction and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in accumulated
other comprehensive income (loss) are included in operations in the periods in
which operations are affected by the hedged item.
F-10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 on current tax laws, which will be in effect in the years in
which the temporary differences are expected to reverse. Valuation allowances
are established as necessary to reduce deferred tax assets to amounts more
likely than not to be realized.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are expensed as incurred, recorded in
selling, general and administrative expenses and were $5,076, $4,634 and $4,251
for 2004, 2003 and 2002, respectively.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company adopted the following new and revised accounting pronouncements
in fiscal 2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The adoption of SFAS No. 149 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
F-11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
settled by issuing equity shares, depending on the nature of the relationship
established between the holder and the issuer. The adoption of SFAS No. 150 did
not result in a material impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment to
FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This
revision to SFAS No. 132 relates to employers' disclosures about pension plans
and other postretirement benefit plans. SFAS No. 132 now requires additional
disclosures to describe the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods of defined pension plans
and other defined postretirement plans. The additional disclosures required by
this revision to SFAS No. 132 have been provided in the notes to consolidated
financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
3. REFINANCING
On October 21, 2003, the Company issued 105,000 units consisting of $85,000
of 13% Senior Secured Notes due 2007 (the "US Senior Secured Notes") and $20,000
13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the
"Dutch Senior Secured Notes" and, together with the US Senior Secured Notes, the
"Senior Secured Notes"), an indirect wholly-owned subsidiary of the Company (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 domestic 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.
A net gain on extinguishment of debt is included in the Company's condensed
consolidated statement of operations, calculated as follows:
<Table>
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)
--------
</Table>
F-12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
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
========
</Table>
The US Senior Secured Notes and the Dutch Senior Secured Notes are senior
secured obligations of each of the Company (the "US Issuer") and the Dutch
issuer, respectively. The US Senior Secured Notes and the Dutch Senior Secured
Notes are guaranteed on a senior secured basis by all the US Issuer's domestic
restricted subsidiaries, and the Dutch Senior Secured Notes are guaranteed on a
senior secured basis by the US Issuer and by the restricted subsidiaries of the
Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior
Secured Notes and related guarantees are collateralized by substantially all of
the US Issuer's assets and the assets of its domestic restricted subsidiaries,
other than real property and interests therein, including a pledge of all the
capital stock of such domestic restricted subsidiaries. The Dutch Senior Secured
Notes and related guarantees are collateralized by a pledge of all the accounts
receivable, a security interest or floating charge on the inventory to the
extent permitted by applicable law, and a mortgage on substantially all of the
real property of the Dutch issuer and each of its restricted subsidiaries, a
pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a
pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries and substantially all of the assets of the U.S. guarantors, other
than real property and interests therein. The indenture governing the Senior
Secured Notes provides for optional make-whole redemptions at any time prior to
June 1, 2005, optional redemption on or after June 1, 2005, and requires the
Company to make certain offers to purchase Senior Secured Notes upon a change of
control, upon certain asset sales and from fifty percent (50%) of excess cash
flow (as such terms are defined in the indenture).
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("domestic senior facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities initially could not exceed $25,000, including
aggregate borrowings under the working capital facility up to $15,000. On April
29, 2004, the Company amended the domestic senior facility to increase the
aggregate amount of borrowings available under such working capital and letter
of credit facilities from $25,000 to $27,500 and to increase the amount of
aggregate borrowings available under the working capital facility from $15,000
to $17,500. As of September 24, 2004, the Company amended the domestic senior
credit facility to: (i) increase the aggregate amount of borrowings available
under such working capital and letter of credit facilities from $27,500 to
$32,500; the amount of aggregate borrowings available under the working capital
facility remained unchanged at $17,500; (ii) amend the EBITDA definition to
exclude charges and expenses related to unsuccessful acquisitions and related
financings in an aggregate amount not to exceed $5,300 for the period beginning
January 1, 2004 and ending June 30, 2004; (iii) amend the definition of
Additional Indebtedness to exclude advances under the working capital facility;
(iv) amend the definition of Permitted Investments to allow other investments
made during the period from January 1, 2004 through June 30, 2004 in an
aggregate amount not to exceed $336; and (v) establish covenant EBITDA levels
for the periods ending
F-13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after June 30, 2004. The amendment was effective June 30, 2004 for items (i),
(ii) and (iii); effective January 1, 2004 for item (iv); and effective September
24, 2004 for all other items.
Borrowings under the domestic senior credit facility are subject to a
borrowing base formula based on percentages of eligible domestic receivables and
domestic inventory. Under the domestic 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 domestic 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 domestic senior credit facility, a
monthly servicing fee and standard letter of credit fees to issuing banks.
Borrowings under the domestic 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 domestic 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
domestic senior credit facility.
4. PRINCE TRANSACTIONS
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72,184 to $16,517 (accreted through the
Closing Date) by means of the redemption of all of its shares of Series B
Preferred Stock and a portion of its Series C Preferred Stock; (iii) the
termination of $2,250 in annual management advisory fees payable by the Company
to Palladium; (iv) a cash payment of $10,000 to the Palladium Investors in
respect of the portion of the Company's Preferred Stock not exchanged in
consideration of the business and assets of PMC; (v) the agreement of the Buyer
to pay the Company for advisory fees for the next three years of $1,000, $500,
and $200, respectively (which were pre-paid at closing by the Buyer and
satisfied for $1,300, the net present value of such payments); and (vi) the
Buyer agreed to supply manganous oxide and red iron oxide products and to
provide certain mineral blending services to the Company's Prince Agriproducts
subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer
with certain laboratory, MIS and telephone services, all on terms substantially
consistent with the historic relationship between Prince Agri and PMC, and to
lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an
agreement to receive certain treasury services from Palladium for $100 per year.
Pursuant to definitive agreements, the Company made customary representations,
warranties and environmental and other indemnities, agreed to a post-closing
working capital adjustment, paid $3,958 in full satisfaction of all intercompany
debt owed to PMC, paid a closing fee to Palladium of $500, made certain capital
expenditure adjustments included as part of the intercompany settlement amount,
and agreed to pay for certain out-of-pocket transaction expenses. PMC retained
$414 of its accounts receivable. The Company established a $1,000 letter of
credit escrow for two years to secure its working capital adjustment and certain
indemnification obligations. The Company agreed to indemnify the Palladium
Investors for a portion, at the rate of $0.65 for every dollar, of the amount
they receive in respect of the disposition of Buyer for less than $21,000, up to
a maximum payment by the Company of $4,000 (the "Backstop Indemnification
Amount"). The Backstop Indemnification Amount would be payable on the
F-14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earlier to occur of July 1, 2008 or six months after the redemption date of all
of the Company's Senior Secured Notes due 2007 if such a disposition closes
prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5
The excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions was
recorded as a decrease to accumulated deficit on the Company's consolidated
balance sheet at December 31, 2003, and was calculated as follows:
<Table>
SERIES B & C REDEEMABLE PREFERRED STOCK:
Accreted value pre-transaction.............................. $72,184
Accreted value post-transaction............................. 16,517
-------
REDUCTION IN REDEEMABLE PREFERRED STOCK..................... 55,667
-------
ASSETS DIVESTED AND COSTS INCURRED:
PMC net assets divested..................................... 7,430
Cash paid to Palladium Investors for:
-- reduction of redeemable preferred stock................ 10,000
-- settlement of PMC intercompany debt.................... 3,958
-- working capital adjustment............................. 1,331
-- closing fee............................................ 500
Transaction costs........................................... 8,310
Contingent Backstop Indemnification Amount accrued.......... 4,000
-------
TOTAL ASSETS DIVESTED AND COSTS AND LIABILITIES INCURRED.... 35,529
-------
EXCESS AMOUNT RECORDED AS A DECREASE TO ACCUMULATED
DEFICIT................................................... $20,138
=======
</Table>
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC were:
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
Net sales............................................... $11,118 $22,332 $21,451
Operating income........................................ 2,278 3,579 3,640
Depreciation and amortization........................... 487 956 966
</Table>
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-15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DISCONTINUED OPERATIONS
The Company shutdown Odda and divested Carbide during 2003, and sold MRT
and shutdown La Cornubia during 2004. These businesses have been classified as
discontinued operations.
ODDA AND CARBIDE
Operating results and loss on disposal of Odda and Carbide were:
<Table>
<Caption>
FOR THE YEARS ENDED
JUNE 30,
-------------------
2003 2002
-------- --------
OPERATING RESULTS:
Net sales................................................... $ 11,217 $ 31,219
Cost of goods sold.......................................... 13,723 46,116
Selling, general and administrative expenses................ 3,175 12,812
Asset writedowns............................................ 7,781 --
Other income................................................ 2,327 3,699
-------- --------
(Loss) before income taxes.................................. (11,135) (24,010)
(Benefit) for income taxes.................................. (58) (1,170)
-------- --------
(Loss) from operations...................................... $(11,077) $(22,840)
======== ========
Depreciation and amortization............................... $ 894 $ 17,676
======== ========
LOSS ON DISPOSAL:
Assets...................................................... $ (3,359)
Liabilities................................................. 6,432
Unsecured debt.............................................. 2,488
Currency translation adjustment............................. (6,244)
--------
(Loss) on disposal.......................................... $ (683)
========
</Table>
MINERAL RESOURCE TECHNOLOGIES, INC.
The Company sold MRT on August 28, 2003. Net proceeds, after transaction
costs, were approximately $13,836. Operating results, gain on sale and balance
sheet items of MRT were:
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
-----------------------------
2004 2003 2002
-------- -------- -------
OPERATING RESULTS:
Net sales.............................................. $ 3,327 $18,671 $17,045
Cost of goods sold..................................... 3,135 19,943 17,676
Selling, general and administrative expenses........... 316 2,182 2,299
-------- ------- -------
(Loss) before income taxes............................. (124) (3,454) (2,930)
Provision for income taxes............................. -- -- --
-------- ------- -------
(Loss) from operations................................. $ (124) $(3,454) $(2,930)
======== ======= =======
Depreciation and amortization.......................... $ -- $ 1,309 $ 1,192
======== ======= =======
</Table>
F-16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
FOR THE YEAR
ENDED JUNE 30,
2003
--------------
GAIN ON SALE:
Current assets.............................................. $ (5,813)
Property, plant & equipment -- net and other assets......... (10,703)
Liabilities................................................. 2,911
Net proceeds of sale........................................ 13,836
--------
Gain on sale................................................ $ 231
========
</Table>
<Table>
<Caption>
AS OF
JUNE 30,
2003
--------
BALANCE SHEET:
Trade receivables........................................... $ 2,633
Other receivables........................................... 304
Inventories................................................. 1,643
Prepaid expenses and other current assets................... 362
-------
Current assets from discontinued operations................. $ 4,942
=======
Property, plant and equipment, net.......................... $ 9,999
Intangibles................................................. 196
Other assets................................................ 455
-------
Other assets from discontinued operations................... $10,650
=======
Accounts payable............................................ $ 1,466
Accrued expenses and other current liabilities.............. 585
-------
Current liabilities from discontinued operations............ $ 2,051
=======
Other liabilities........................................... $ 198
-------
Other liabilities from discontinued operations.............. $ 198
=======
</Table>
LA CORNUBIA, S.A.
During June 2004 the Company determined that it would no longer fund the
operations of La Cornubia. On June 30, 2004, La Cornubia filed for bankruptcy in
France. The bankruptcy is proceeding in accordance with French law. The Company
has been advised that, as a result of the bankruptcy, the creditors of La
Cornubia have recourse only to the assets of La Cornubia. The Company removed
all assets, liabilities, and cumulative translation adjustments related to La
Cornubia from the Company's consolidated balance sheet as of June 30, 2004, and
recorded a loss on disposal of discontinued operations. The Company obtained the
consent of a majority of the holders of its senior secured notes due 2007 and
its senior subordinated notes due 2008 to amend the indentures governing these
notes in such a manner that the bankruptcy of La Cornubia would not create an
event of default thereunder. The Company also obtained a waiver under its
domestic senior credit facility so that the bankruptcy of La Cornubia would not
constitute an event of default under the terms of the domestic senior credit
facility.
F-17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating results, loss on disposal and balance sheet items of La Cornubia
were:
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
OPERATING RESULTS:
Net sales............................................... $13,918 $13,479 $11,873
Cost of goods sold...................................... 13,723 12,528 11,144
Selling, general and administrative expenses............ 1,686 1,310 1,641
Other income............................................ 102 389 263
Interest (expense) -- net............................... (94) (60) (78)
------- ------- -------
(Loss) before income taxes.............................. (1,483) (30) (727)
Provision for income taxes.............................. 18 16 62
------- ------- -------
(Loss) from operations.................................. $(1,501) $ (46) $ (789)
======= ======= =======
Depreciation and amortization........................... $ 400 $ 359 $ 325
======= ======= =======
LOSS ON DISPOSAL:
Current Assets.......................................... $(5,085)
Property, plant & equipment -- net and other assets..... (2,557)
Liabilities............................................. 3,614
Unsecured debt.......................................... 2,167
Currency translation adjustment......................... (459)
-------
(Loss) on disposal...................................... $(2,320)
=======
</Table>
<Table>
<Caption>
AS OF
JUNE 30,
2003
--------
BALANCE SHEET:
Trade receivables....................................... $ 2,957
Other receivables....................................... 139
Inventories............................................. 918
Prepaid expenses and other current assets............... 348
-------
Current assets from discontinued operations............. $ 4,362
=======
Property, plant and equipment, net...................... $ 2,535
Other assets............................................ 140
-------
Other assets from discontinued operations............... $ 2,675
=======
Accounts payable........................................ $ 1,560
Accrued expenses and other current liabilities.......... 910
Unsecured debt.......................................... 1,036
-------
Current liabilities from discontinued operations........ $ 3,506
=======
Other liabilities....................................... $ 975
-------
Other liabilities from discontinued operations.......... $ 975
=======
</Table>
F-18
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was:
<Table>
<Caption>
AS OF JUNE 30,
-------------------
2004 2003
-------- --------
Land........................................................ $ 5,657 $ 5,816
Buildings and improvements.................................. 27,925 29,841
Machinery and equipment..................................... 105,308 106,026
-------- --------
138,890 141,683
Less: accumulated depreciation.............................. 80,104 77,778
-------- --------
$ 58,786 $ 63,905
======== ========
</Table>
Certain of the buildings of Koffolk are on land leased for a nominal amount
from the Israel Land Authority. The lease expires on July 9, 2027.
Depreciation expense was $9,122, $9,202 and $10,235 for 2004, 2003 and
2002, respectively.
7. RELATED PARTY TRANSACTIONS
The Company owns approximately $2,300 par value of preferred stock of a
pharmaceutical company. The principal common stockholder of the Company owns
approximately 15% voting common stock interest in the pharmaceutical company,
acquired for approximately $500. The preferred stock investment, included in
other assets, has a net carrying value of $1,610 at June 30, 2004.
A subsidiary of the Company leases the property underlying its Santa Fe
Springs, California plant from a limited partnership controlled by common
shareholders of the Company. The lease requires annual base rent of $250 and
terminates on December 31, 2008. The Company is responsible under the lease
agreement to pay all real property taxes.
In accordance with the terms of the Prince Transactions (Note 4) the Buyer
paid the Company advisory fees of $500 for the year ended June 30, 2004. The
Buyer also supplied manganous oxide and red iron oxide products, and provided
certain mineral blending services to the Company's Prince Agriproducts
subsidiary ("Prince Agri") for which Prince Agri paid $2,149 during the year
ended June 30, 2004. Prince Agri provided the Buyer with certain laboratory, MIS
and telephone services, and leased to Buyer office space in Quincy, Illinois for
which the buyer paid Prince Agri $421 during the year ended June 30, 2004. The
Company also has an agreement to receive certain treasury services from the
Palladium Investors for $100 per year. Prior to the Prince Transactions an
annual management advisory fee of $2,250 was payable to the Palladium Investors.
Payments were due quarterly in advance and were charged to selling, general and
administrative expenses. The management fee was $1,125, $2,250 and $2,250 for
2004, 2003 and 2002, respectively.
F-19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities were:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Employee related expenses................................... $11,444 $10,003
Payments due to Pfizer...................................... -- 9,040
Interest and tax accruals................................... 4,836 9,249
Other accrued liabilities................................... 23,730 12,407
------- -------
$40,010 $40,699
======= =======
</Table>
9. DEBT
LOANS PAYABLE TO BANKS
At June 30, 2004, loans payable to banks included $10,996 under the
domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted
average interest rate under the domestic senior credit facility from its
inception at October 21, 2003 through June 30, 2004 was 8.0%. At June 30, 2004,
the Company had $6,504 of borrowings available under the borrowing base formula
in effect for the domestic senior credit facility that is provided under the
domestic senior credit facility.
On October 21, 2003, the Company entered into a new 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
$25,000, including aggregate borrowings under the working capital facility of up
to $15,000. On April 29, 2004, the Company amended the domestic senior credit
facility to increase the aggregate amount of borrowings available under such
working capital and letter of credit facilities from $25,000 to $27,500 and to
increase the amount of aggregate borrowings available under the working capital
facility from $15,000 to $17,500. As of September 24, 2004, the Company amended
the domestic senior credit facility to: (i) increase the aggregate amount of
borrowings available under such working capital and letter of credit facilities
from $27,500 to $32,500; the amount of aggregate borrowings available under the
working capital facility remained unchanged at $17,500; (ii) amend the EBITDA
definition to exclude charges and expenses related to unsuccessful acquisitions
and related financings in an aggregate amount not to exceed $5,300 for the
period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the
definition of Additional Indebtedness to exclude advances under the working
capital facility; (iv) amend the definition of Permitted Investments to allow
other investments made during the period from January 1, 2004 through June 30,
2004 in an aggregate amount not to exceed $336; and (v) establish covenant
EBITDA levels for the periods after June 30, 2004. The amendment was effective
June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item
(iv); and effective September 24, 2004 for all other items.
Borrowings under the domestic senior credit facility are subject to a
borrowing base formula based on percentages of eligible domestic receivables and
domestic inventory. Under the domestic 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 domestic 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 domestic senior credit facility, a
monthly servicing fee and standard letter of credit fees to issuing banks.
Borrowings under the domestic 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 domestic senior credit facility, by that date.
F-20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 2004, the Company was in compliance with the financial
covenants of the amended domestic senior credit facility. The domestic senior
credit facility requires, among other things, the maintenance of certain levels
of trailing consolidated and domestic EBITDA (earnings before interest, taxes,
depreciation and amortization) calculated on a monthly basis, and an
acceleration clause should an event of default (as defined in the agreement)
occur. In addition, there are certain restrictions on additional borrowings,
additional liens on the Company's assets, guarantees, dividend payments,
redemption or purchase of the Company's stock, sale of subsidiaries' stock,
disposition of assets, investments, and mergers and acquisitions.
The domestic senior credit facility contains a lock-box requirement and a
material adverse change clause should an event of default (as defined in the
agreement) occur. Accordingly, the amounts outstanding have been classified as
short-term and are included in loans payable to banks in the consolidated
balance sheet.
LONG-TERM DEBT
<Table>
<Caption>
AS OF JUNE 30,
-------------------
2004 2003
-------- --------
Senior secured notes due December 1, 2007................... $105,000 $ --
Senior subordinated notes due June 1, 2008.................. 48,029 100,000
Foreign bank loans.......................................... 6,237 3,906
Pfizer promissory note...................................... -- 20,075
Bank capital expenditure facility........................... -- 1,496
Capitalized lease obligations and other..................... 103 910
-------- --------
159,369 126,387
Less: current maturities.................................... 1,351 24,124
-------- --------
$158,018 $102,263
======== ========
</Table>
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 (the "US Senior Secured Notes") and $20,000 of
13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the
"Dutch Senior Secured Notes" and, together with the US Senior Secured Notes, the
"Senior Secured Notes"), an indirect wholly-owned subsidiary of the Company (the
"Dutch issuer").
The US Senior Secured Notes and the Dutch Senior Secured Notes are senior
secured obligations of each of the Company (the "US issuer") and the Dutch
issuer, respectively. The US Senior Secured Notes and the Dutch Senior Secured
Notes are guaranteed on a senior secured basis by all the US Issuer's domestic
restricted subsidiaries, and the Dutch Senior Secured Notes are guaranteed on a
senior secured basis by the US Issuer and by the restricted subsidiaries of the
Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior
Secured Notes and related guarantees are collateralized by substantially all of
the US Issuer's assets and the assets of its domestic restricted subsidiaries,
other than real property and interests therein, including a pledge of all the
capital stock of such domestic restricted subsidiaries. The Dutch Senior Secured
Notes and related guarantees are collateralized by a pledge of all the accounts
receivable, a security interest or floating charge on the inventory to the
extent permitted by applicable law, and a mortgage on substantially all of the
real property of the Dutch issuer and each of its restricted subsidiaries, a
pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a
pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries and substantially all of the assets of the U.S. guarantors, other
than real property and interests therein. The indenture governing the Senior
Secured Notes provides for optional
F-21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $100,000 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 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 bank loans of the Company's Koffolk Ltd. (Israel) subsidiary are
collateralized by its receivables and inventory, accrue interest at LIBOR plus
1.25%, and are repayable in equal quarterly payments through 2005. The LIBOR
rate was 1.15% at June 30, 2004.
The Company's foreign subsidiaries have aggregate credit lines of $11,044.
At June 30, 2004, the Company had $4,807 of borrowings available under these
credit lines.
Aggregate Maturities of Long-Term Debt
The aggregate maturities of long-term debt as of June 30, 2004 were:
<Table>
<Caption>
YEAR ENDED JUNE 30,
- -------------------
2005........................................................ $ 1,351
2006........................................................ 4,127
2007........................................................ --
2008........................................................ 153,891
2009........................................................ --
--------
Total..................................................... $159,369
========
</Table>
F-22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. 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 domestic senior credit facility. At June 30, 2004 no
severance payments would have been due upon termination.
11. REDEEMABLE PREFERRED STOCK
Effective December 26, 2003 (the "Closing Date"), the Company entered into
the Prince Transactions with the Palladium Investors (Note 4). Pursuant to
definitive purchase and other agreements executed on and effective as of the
Closing Date, the Prince Transactions included the following elements which
relate to the Company's Redeemable Preferred Stock: the reduction of the value
of the Company's Preferred Stock owned by the Palladium Investors from $72,184
(25,000 Series B shares and 20,000 Series C shares) to $16,517 (accreted through
the Closing Date) (10,591 Series C shares) by means of the redemption of all of
its shares of Series B Preferred Stock and a portion of its Series C Preferred
Stock; the termination of $2,250 in annual management advisory fees payable by
the Company to Palladium; a cash payment of $10,000 to the Palladium Investors
in respect of the portion of the Company's Preferred Stock not exchanged in
consideration of the business and assets of PMC; and the agreement of the
Palladium Investors to pay the Company for advisory fees for the next three
years of $1,000, $500, and $200, respectively (which were pre-paid at closing by
the Palladium Investors and satisfied for $1,300, the net present value of such
payments). The Company has an agreement to receive certain treasury services
from the Palladium Investors for $100 per year.
The redeemable preferred stock is entitled to cumulative cash dividends,
payable semi-annually, at 15% per annum of the liquidation value. The redeemable
Preferred C stock is entitled to the Liquidation Value plus a percentage of the
equity value of the Company, as defined in the amended Certificate of
Incorporation. The equity value is calculated as a multiple of earnings before
interest, taxes, depreciation and amortization ("EBITDA") of the Company's
business ("Equity Value").
On the third closing anniversary and on each closing anniversary
thereafter, the Company may redeem, for cash only, in whole the Preferred C, at
the Liquidation Value plus the Equity Value payment. At any time after the
redemption of the Company's Senior Subordinated Notes (due June 2008), Palladium
Investors shall have the right to require the Company to redeem, for cash, the
Preferred C at the Liquidation Value plus the Equity Value payment.
Dividends of $6,042, $8,808 and $7,623 for the years ended June 30, 2004,
2003 and 2002, respectively, were accrued on the preferred shares and charged to
retained earnings. Equity Value of $5,421, $3,470 and $0 for the years ended
June 30, 2004, 2003 and 2002, respectively, was accrued and charged to retained
earnings.
F-23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Redeemable preferred stock is comprised of:
<Table>
<Caption>
AS OF
-----------------------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Series B
Value at issuance......................................... $ -- $25,000
Accrued dividends......................................... -- 11,339
Series C
Value at issuance......................................... 10,591 20,000
Accrued dividends......................................... 7,200 9,072
Accreted equity value..................................... 6,887 3,470
------- -------
Total redeemable preferred stock............................ $24,678 $68,881
======= =======
</Table>
The agreement with the Palladium Investors contains covenants which
restrict, without the consent of at least one director designated by the
Palladium Investors (or if no such director is then serving on the Board, at
least one of the Palladium Investors), certain (a) issuances of equity
securities, (b) sales of assets in excess of $10,000, (c) purchases of business
and other investments in excess of $10,000, (d) incurrence of indebtedness for
borrowed money in excess of $12,500, (e) redemptions, acquisitions or other
purchases of equity securities, (f) transactions with officers, directors,
stockholders or employees or any family member or affiliate thereof in excess of
$500, (g) compensation and benefits of certain officers, and (h) transactions
involving a change of control.
12. COMMON STOCK AND PAID-IN CAPITAL
COMMON STOCK:
Common stock at June 30, 2004 and 2003 was:
<Table>
<Caption>
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
</Table>
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 four 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.
F-24
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. No liability was recorded as of June 30, 2004 and
2003. Income of $378 was recorded during 2002 to adjust the shares to redeemable
value.
13. EMPLOYEE BENEFIT PLANS
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible domestic nonunion employees who meet
certain requirements of age, length of service and hours worked per year. The
Company's Belgium subsidiary maintains a defined contribution and defined
benefit plan for eligible employees. The benefits provided by the plans are
based upon years of service and the employees' average compensation, as defined.
The measurement date for the domestic and international pension plans was June
30, 2004 and 2003, respectively.
Reconciliations of changes in benefit obligations, plan assets, and funded
status of the plans were:
<Table>
<Caption>
DOMESTIC INTERNATIONAL
----------------- ---------------
2004 2003 2004 2003
------- ------- ------ ------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.......... $15,846 $11,821 $6,595 $4,251
Service cost..................................... 1,260 1,056 467 310
Employee contributions........................... -- -- 27 100
Interest cost.................................... 891 784 374 259
Benefits paid.................................... (595) (243) (3) (29)
Actuarial (gain) or loss......................... (251) (663) (475) 879
Curtailment...................................... (922) -- -- --
Change in Discount Rate.......................... (786) 3,091 -- --
Exchange rate impact............................. -- -- 338 825
------- ------- ------ ------
Benefit obligation at end of year................ $15,443 $15,846 $7,323 $6,595
======= ======= ====== ======
</Table>
At June 30, 2004 and 2003, the accumulated benefit obligation was $13,075 and
$12,458, respectively, for domestic pension plans and $4,383 and $4,248,
respectively, for international pension plans.
<Table>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year......................................... $10,387 $ 9,717 $ 4,566 $ 2,882
Actual return on plan assets................... 1,068 537 435 204
Employer contributions......................... 935 376 558 841
Employee contributions......................... -- -- 27 100
Benefits paid.................................. (595) (243) (3) (29)
Exchange rate impact........................... -- -- 245 568
------- ------- ------- -------
Fair value of plan assets at end of year....... $11,795 $10,387 $ 5,828 $ 4,566
======= ======= ======= =======
</Table>
F-25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
FUNDED STATUS
Funded status of the plan...................... $(3,648) $(5,459) $(1,495) $(2,029)
Unrecognized net actuarial (gain) or loss...... 152 2,358 368 961
Unrecognized prior service cost................ (338) (553) -- --
Unrecognized transition obligation/(asset)..... (8) (12) -- --
------- ------- ------- -------
(Accrued) pension cost......................... $(3,842) $(3,666) $(1,127) $(1,068)
======= ======= ======= =======
</Table>
The Company expects to contribute $990 and $602 to its Domestic and
International plans, respectively, during fiscal 2005. The Company's policy is
to fund the pension plans in amounts which comply with contribution limits
imposed by law.
Components of net periodic pension expense were:
<Table>
<Caption>
2004 2003 2002
------ ------ -----
DOMESTIC PENSION EXPENSE
Service cost -- benefits earned during the year............. $1,260 $1,056 $ 879
Interest cost on benefit obligation......................... 891 784 714
Expected return on plan assets.............................. (846) (756) (709)
Amortization of initial unrecognized net transition
(asset)................................................... (3) (3) (3)
Amortization of prior service costs......................... (153) (162) (165)
Amortization of net actuarial loss (gain)................... 25 (57) (31)
Curtailment benefit......................................... (64) -- --
------ ------ -----
Net periodic pension cost -- domestic....................... $1,110 $ 862 $ 685
====== ====== =====
INTERNATIONAL PENSION EXPENSE
Service cost -- benefits earned during the year............. $ 467 $ 310 $ 217
Interest cost on benefit obligation......................... 374 259 164
Expected return on plan assets.............................. (300) (203) (123)
Amortization of net actuarial loss.......................... 22 -- --
------ ------ -----
Net periodic pension cost -- international.................. $ 563 $ 366 $ 258
====== ====== =====
</Table>
Significant actuarial assumptions for the plans were:
<Table>
<Caption>
2004 2003 2002
-------- -------- --------
DOMESTIC ACTUARIAL ASSUMPTIONS
Discount rate for service and interest................ 5.8% 7.1% 7.5%
Expected rate of return on plan assets................ 7.5% 7.5% 7.5%
Rate of compensation increase......................... 3.0%-4.5% 3.0%-4.5% 3.0%-4.5%
Discount rate for year-end benefit obligation......... 6.1% 5.8% 7.1%
INTERNATIONAL ACTUARIAL ASSUMPTIONS
Discount rate for service and interest................ 5.5% 5.8% 5.8%
Expected rate of return on plan assets................ 6.0% 6.0% 6.0%
Rate of compensation increase......................... 3.0% 3.0% 3.0%
Discount rate for year-end benefit obligation......... 5.5% 5.5% 5.8%
</Table>
F-26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated future benefit payments, including benefits attributable to
future service, are as follows:
<Table>
<Caption>
DOMESTIC INTERNATIONAL
-------- -------------
2005........................................................ $ 295 $ 37
2006........................................................ 301 38
2007........................................................ 311 40
2008........................................................ 451 41
2009........................................................ 508 42
2010-2014................................................... 4,500 1,817
</Table>
The Company's domestic plan target allocations for fiscal 2005 and the
weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as
follows:
<Table>
<Caption>
2005 2004 2003
------- ---- ----
DOMESTIC PLAN ASSET ALLOCATIONS
Debt Securities............................................. 45%-55% 50% 59%
Equity Securities........................................... 15%-25% 19% 9%
Other....................................................... 25%-35% 31% 32%
</Table>
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on the
median of the target allocation of each class. Equity securities are expected to
return 8% to 10% over the long-term, while debt securities are expected to
return 4% to 6%. Based on historical experience, the Committee expects that the
Plan's asset managers will provide a modest (1/2% to 1% per annum) premium to
their respective market benchmark indices.
The investment policy and strategy is to earn a long-term investment return
sufficient to meet the obligations of the Plan, while assuming a moderate amount
of risk in order to maximize investment return. In order to achieve this goal,
assets are invested in a diversified portfolio consisting of equity securities,
debt securities, limited partnerships and other investments in a manner
consistent with ERISA's fiduciary requirements.
The Company's international plan target allocations for fiscal 2005 and the
weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as
follows:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
INTERNATIONAL PLAN ASSET ALLOCATIONS
Debt Securities............................................. 59% 62% 79%
Equity Securities........................................... 25% 21% 20%
Other....................................................... 16% 17% 1%
</Table>
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on the
target allocation for each class. Equity securities are expected to return 7.5%
over the long-term, while debt securities are expected to return 5.5%.
The Company assumed the liability for the International pension plan during
2002 as part of the MFA acquisition.
In addition to Belgium, most of the Company's foreign subsidiaries have
retirement plans covering substantially all employees. Contributions to these
plans are generally deposited under fiduciary-type arrangements. Benefits under
these plans primarily are based on compensation levels. Funding policies are
based on legal requirements and local practices. Expense under these plans was
$585, $522 and $534 for 2004, 2003 and 2002, respectively.
F-27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and its domestic subsidiaries provide a 401(k) savings plan,
under which an employee may make a pre-tax contribution of up to 60% of base
compensation. The Company makes a non-matching contribution equal to 1% of the
employee'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 $502, $528 and $539 in 2004, 2003 and
2002, 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 $259, $249, and $204 in 2004, 2003 and 2002, respectively.
The aggregate liability under this plan amounted to $2,018 and $1,678 at June
30, 2004 and 2003, 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, 2004 and 2003 had cash surrender values of $1,481 and
$1,299, respectively, and are included in other assets.
The Company has an executive income program to provide a pre-retirement
death benefit and a supplemental retirement benefit for certain senior
executives. The aggregate liability under this plan amounted to $416 and $385 at
June 30, 2004 and 2003, respectively. To assist in funding the benefits of the
plan, the Company invested in split-dollar life insurance policies, which at
June 30, 2004 and 2003 had cash surrender values to the Company of $1,529 and
$1,392, respectively, and are included in other assets.
14. INCOME TAXES
Income (loss) from continuing operations before income taxes was:
<Table>
<Caption>
2004 2003 2002
------- ------ --------
Domestic................................................ $27,587 $3,855 $ (5,507)
Foreign................................................. (3,054) 3,906 (4,937)
------- ------ --------
Income (loss) from continuing operations before income
taxes................................................. $24,533 $7,761 $(10,444)
======= ====== ========
</Table>
Components of the provision for income taxes were:
<Table>
<Caption>
2004 2003 2002
------- ------- -------
Current tax provision (benefit):
Federal............................................... $ 563 $ -- $ --
State and local....................................... 1,333 516 (256)
Foreign............................................... 5,747 3,084 3,785
------- ------- -------
Total current tax provision........................... 7,643 3,600 3,529
------- ------- -------
Deferred tax provision (benefit):
Federal............................................... 10,150 1,705 (1,225)
State and local....................................... (1,396) (345) (590)
Foreign............................................... (1,671) 850 (1,673)
Change in valuation allowance -- domestic............. (8,754) (1,360) 14,726
-- foreign............ 1,997 5,610 --
------- ------- -------
Total deferred tax provision.......................... 326 6,460 11,238
------- ------- -------
Provision for income taxes.............................. $ 7,969 $10,060 $14,767
======= ======= =======
</Table>
F-28
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:
<Table>
<Caption>
2004 2003 2002
----- ----- -----
Federal income tax rate..................................... 35.0% 35.0% (35.0)%
State and local taxes, net of federal income tax effect..... 3.5 1.4 (4.9)
Foreign tax rate differences and taxes in certain profitable
foreign jurisdictions..................................... 22.9 33.2 50.8
Change in valuation allowance............................... (41.4) 55.0 131.8
Gain not taxable for book purposes.......................... 10.4 -- --
Expenses with no tax benefit................................ 1.7 4.4 1.0
Other....................................................... 0.3 0.6 (2.3)
----- ----- -----
Effective tax rate.......................................... 32.4% 129.6% 141.4%
===== ===== =====
</Table>
Most of the investments in fixed assets of the Company's Israeli subsidiary
have been granted "approved enterprise" status under Israeli law. The subsidiary
is also a "foreign investors' company" as defined by Israeli law. This status
entitles the subsidiary to reduced tax rates. The entitlement of the reduced tax
rates is conditional upon the subsidiary fulfilling the conditions stipulated by
Israeli law, regulations published there-under and the instruments of approval
for the specific investments in approved enterprises. In the event of failure to
comply with these conditions, the benefits may be canceled and the subsidiary
may be required to refund the amount of the benefits, in whole or in part, with
the addition of interest. The periods of benefits expire in various years
through 2010.
Provision has not been made for United States or additional foreign taxes
on undistributed earnings of foreign subsidiaries of approximately $39,200,
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, 2004 and 2003 were:
<Table>
<Caption>
AS OF JUNE 30,
-------------------
2004 2003
-------- --------
Deferred tax assets:
Employee benefits......................................... $ 3,274 $ 3,194
Property, plant and equipment............................. 475 686
Insurance................................................. 350 341
Receivables allowances.................................... 724 770
Inventory................................................. 3,441 4,588
Environmental remediation................................. 1,322 1,232
Alternative minimum tax................................... 701 163
Net operating loss carry forwards -- domestic............. 11,645 20,186
-- foreign............. 10,432 1,290
Other..................................................... 1,333 2,059
-------- --------
33,697 34,509
Valuation allowance....................................... (30,045) (32,954)
-------- --------
3,652 1,555
-------- --------
</Table>
F-29
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
AS OF JUNE 30,
-------------------
2004 2003
-------- --------
Deferred tax liabilities
Property, plant and equipment............................. (2,727) (2,354)
Other..................................................... (2,649) --
-------- --------
(5,376) (2,354)
-------- --------
Net deferred tax liability.................................. $ (1,724) $ (799)
======== ========
</Table>
Deferred taxes are included in the following line items in the consolidated
balance sheets:
<Table>
<Caption>
2004 2003
------- -------
Prepaid expenses and other current assets................... $ 502 $ 543
Accrued expenses and other current liabilities.............. (138) (111)
Other assets................................................ 669 624
Other liabilities........................................... (2,757) (1,855)
------- -------
$(1,724) $ (799)
======= =======
</Table>
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 $11,594 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 valuation allowance for deferred tax assets was:
<Table>
<Caption>
2004 2003 2002
------- ------- -------
Balance at beginning of period.......................... $32,954 $18,495 $ 1,434
Change in valuation allowance........................... (6,757) 4,250 14,726
Other adjustments....................................... 3,848 10,209 2,335
------- ------- -------
Balance at end of period................................ $30,045 $32,954 $18,495
======= ======= =======
</Table>
The other adjustments in the valuation allowance consist primarily of
changes in the valuation allowance attributable to discontinued operations.
The Company has domestic federal net operating loss carry forwards of
approximately $25,000 that expire in 2019 through 2024, state net operating loss
carry forwards of approximately $55,000 that expire over various periods
beginning in 2005 and foreign net operating loss carry forwards of approximately
$30,000 that expire over various periods beginning in 2010.
F-30
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
LEASES:
The Company leases office, warehouse and manufacturing equipment and
facilities for minimum annual rentals (plus certain cost escalations) as
follows:
<Table>
<Caption>
NON-CANCELABLE
-------------------
CAPITAL OPERATING
YEAR ENDED JUNE 30 LEASES LEASES
- ------------------ ------- ---------
2005........................................................ $103 $1,524
2006........................................................ 2 778
2007........................................................ -- 568
2008........................................................ -- 456
2009........................................................ -- 167
Thereafter.................................................. -- 72
---- ------
Total minimum lease payments................................ $105 $3,565
======
Amounts representing interest............................... 2
----
Present value of minimum lease payments..................... $103
====
</Table>
Equipment under capitalized leases included in the consolidated balance
sheet at June 30, 2004 was $1,027, net of accumulated depreciation of $440.
Operating lease commitments include $1,125 with a related party controlled
by shareholders of the Company, as described in Related Party Transactions.
Rent expense under operating leases for 2004, 2003 and 2002 was $2,441,
$2,221 and $2,015, respectively.
LITIGATION:
On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and the
Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in
the United States District Court for the District of New Jersey, alleging that
the operations of CP at its Sewaren plant affected adjoining property owned by
Chevron and alleging that the Company, as the parent of CP, is also responsible
to Chevron. In July 2002, a phased settlement agreement was reached and a
Consent Order entered by the Court. That settlement is in the process of being
implemented. The Company's and CP's portion of the settlement for past costs and
expenses through the entry of the Consent Order was $495 and was included in
selling, general and administrative expenses in fiscal 2002 and was paid in
fiscal 2003. The Consent Order then provides for a period of due diligence
investigation of the property owned by Chevron. The investigation has been
conducted and the results are under review. The investigation costs are being
split with one other defendant, Vulcan Materials Company. Upon completion of the
review of the results of the investigation, a decision will be made whether to
opt out of the settlement or proceed. If no party opts out of the settlement,
the Company and CP will take title to the adjoining Chevron property, probably
through the use of a three-member New Jersey limited liability company. In
preparation to move forward, a limited liability company has been formed, with
Vulcan Materials Company as the third member. The Company also has commenced
negotiations with Chevron regarding its allocation of responsibility and
associated costs under the Consent Order. While the costs cannot be estimated
with any degree of certainty at this time, the Company believes that insurance
recoveries will be available to offset some of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under the
Federal Comprehensive Environmental Response, Compen-
F-31
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sation, 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, 2004. Some recovery from insurance and other sources is
expected but has not been recorded. The Company also has accrued its best
estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
agreement to pay $425 over a six year period ending October 2008.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 in full
settlement.
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.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes that,
because its Sumter, South Carolina facility is distant from Turkey Creek and
does not discharge into Turkey Creek, there is a low probability of liability
associated with 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
F-32
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $2,933, which is included in current and long-term liabilities in
the June 30, 2004 consolidated balance sheet (approximately $2,652 at June 30,
2003). Environmental provisions were $1,511, $1,610 and $2,148 for 2004, 2003
and 2002, respectively, and were included in selling, general and administrative
expenses in the consolidated statements of operations.
16. GUARANTEES
As part of the Prince Transactions (Note 4), as is normal for such
transactions, the Company has agreed to indemnify the Palladium Investors for
losses arising out of breach of representations, warranties and covenants. The
Company's maximum liability under such indemnifications is limited to $15,000.
The Company agreed to indemnify the Palladium Investors for a portion, at
the rate of $0.65 for every dollar, of the amount they receive in respect of the
disposition of Buyer for less than $21,000, up to a maximum payment by the
Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop
Indemnification Amount would be payable on the earlier to occur of July 1, 2008
or six months after the redemption date of all of the Company's Senior Secured
Notes due 2007 if such a disposition closes prior to such redemption and six
months after the closing of any such disposition if the disposition closes after
any such redemption. The Company's obligations with respect to the Backstop
Indemnification Amount will cease if the Palladium Investors do not close the
disposition of Buyer by January 1, 2009. The maximum potential Backstop
Indemnification Amount is included in other liabilities on the Company's
consolidated balance sheet at June 30, 2004.
The Company established a $1,000 letter of credit escrow for two years to
collateralize its working capital adjustment and certain other indemnification
obligations relating to the Prince Transactions.
17. 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 values of the Company's Senior
Secured Notes and Senior Subordinated Notes are estimated based on quoted market
prices. At June 30, 2004 the fair values of the Company's Senior Secured Notes
and Senior Subordinated Notes were $114,450 and $43,706, respectively, and the
related carrying amounts were $105,000 and $48,029,
F-33
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. At June 30, 2003 the fair value of the Company's Senior
Subordinated Notes was $40,000 and the related carrying amount was $100,000. The
fair value of the Company'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, 2004 and 2003 were $9,263 and $2,593,
respectively. The difference between the carrying values and fair values of
these letters of credit was not material.
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world and utilizes certain financial
instruments to manage its foreign currency and commodity exposures, primarily
related to forecasted transactions. To qualify a derivative as a hedge at
inception and throughout the hedge period, the Company formally documents the
nature and relationships between hedging instruments and hedged items, as well
as its risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected
terms of a forecasted transaction must be specifically identified, and it must
be probable that each forecasted transaction would occur. If it were deemed
probable that the forecasted transaction would not occur, the gain or loss would
be recognized in operations currently. Financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the
hedging instrument and the item being hedged, both at inception and throughout
the hedged period. The Company hedges forecasted transactions for periods not
exceeding the next twelve months. The Company does not engage in trading or
other speculative uses of financial instruments.
From time to time, the Company uses forward contracts and options to
mitigate its exposure to changes in foreign currency exchange rates and as a
means of hedging forecasted operating costs. When using options as a hedging
instrument, the Company excludes the time value from the assessment of
effectiveness. Pursuant to SFAS No. 133, 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 $9 and
$81 of cumulative gains (net of losses) on various copper futures contracts
designated as cash flow hedges as of June 30, 2004 and 2003, respectively.
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.
18. 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
F-34
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
custom chemicals and copper-based fungicides. Intersegment sales and transfers
were not significant. The following segment data includes information only for
continuing operations.
<Table>
<Caption>
ANIMAL CORPORATE
HEALTH & INDUSTRIAL EXPENSES &
2004 SEGMENT DETAIL NUTRITION CHEMICALS DISTRIBUTION ALL OTHER ADJUSTMENTS TOTAL
- ------------------- --------- ---------- ------------ --------- ----------- --------
Net Sales.................... $265,421 $42,253 $30,861 $19,739 $ -- $358,274
Operating income/(loss)...... 33,307 2,899 2,900 2,301 (17,132) 24,275
Depreciation and
amortization............... 8,263 2,123 11 419 2,367 13,183
Identifiable assets.......... 185,601 26,146 7,715 5,696 16,211 241,369
Capital expenditures......... 3,850 2,216 6 115 57 6,244
</Table>
<Table>
<Caption>
ANIMAL CORPORATE
HEALTH & INDUSTRIAL EXPENSES &
2003 SEGMENT DETAIL NUTRITION CHEMICALS DISTRIBUTION ALL OTHER ADJUSTMENTS TOTAL
- ------------------- --------- ---------- ------------ --------- ----------- --------
Net Sales.................... $250,706 $48,797 $30,072 $12,171 $ -- $341,746
Operating income/(loss)...... 38,472 (1,855) 3,207 620 (14,948) 25,496
Depreciation and
amortization............... 7,690 2,904 12 364 1,554 12,524
Identifiable assets.......... 190,864 33,191 9,154 5,726 12,811 251,746
Capital expenditures......... 5,669 2,836 -- 129 2 8,636
</Table>
<Table>
<Caption>
ANIMAL CORPORATE
HEALTH & INDUSTRIAL EXPENSES &
2002 SEGMENT DETAIL NUTRITION CHEMICALS DISTRIBUTION ALL OTHER ADJUSTMENTS TOTAL
- ------------------- --------- ---------- ------------ --------- ----------- --------
Net Sales.................... $239,602 $50,854 $27,852 $10,368 $ -- $328,676
Operating income/(loss)...... 28,298 (7,324) 2,345 1,164 (13,854) 10,629
Depreciation and
amortization............... 7,438 3,535 12 321 1,049 12,355
Identifiable assets.......... 186,118 38,985 8,059 8,097 10,393 251,652
Capital expenditures......... 5,915 2,328 12 144 119 8,518
</Table>
19. 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.
<Table>
<Caption>
2004 2003 2002
-------- -------- --------
NET SALES:
United States...................................... $248,577 $233,942 $219,981
Europe............................................. 18,605 16,643 12,004
Israel............................................. 43,170 44,383 45,266
Latin America...................................... 26,800 25,235 28,970
Asia/Pacific....................................... 21,122 21,543 22,455
-------- -------- --------
Total.............................................. $358,274 $341,746 $328,676
======== ======== ========
</Table>
F-35
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2004 2003 2002
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET:
United States...................................... $ 13,836 $ 16,719 $ 19,370
Europe............................................. 20,732 20,463 17,451
Israel............................................. 9,157 10,990 12,647
Latin America...................................... 14,783 15,396 13,772
Asia/Pacific....................................... 278 337 258
-------- -------- --------
Total.............................................. $ 58,786 $ 63,905 $ 63,498
======== ======== ========
</Table>
20. CONSOLIDATING FINANCIAL STATEMENTS
The units of Senior Secured Notes due 2007, consisting of US Senior Secured
Notes issued by the Company (the "Parent Issuer") and Dutch Senior Secured 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. (until divested) (the
"Unrestricted Subsidiaries", as defined in the indenture), fully and
unconditionally guarantee all of the Senior Secured Notes on a joint and several
basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of
Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally
guarantee the Dutch Senior Secured Notes. The Dutch issuer and the Belgium
Guarantor do not guarantee the US Senior Secured Notes. Other foreign
subsidiaries ("Non-Guarantor Subsidiaries") do not presently guarantee the
Senior Secured Notes. The U.S. Guarantor Subsidiaries include all domestic
subsidiaries of the Company other than the Unrestricted Subsidiaries and
include: CP Chemicals, Inc., Phibro-Tech, Inc., Prince Agriproducts, Inc,
Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal
Health Holdings, Inc., and Phibro Animal Health U.S., Inc.
The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc., 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 Issuer using
the equity method. Income tax expense (benefit) is allocated among the
consolidating entities based upon taxable income (loss) by jurisdiction within
each group. The principal consolidation adjustments are to eliminate investments
in subsidiaries and intercompany balances and transactions.
F-36
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
AS OF JUNE 30, 2004
------------------------------------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES
-------- ------------ -------------- ------- --------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents............ $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402
Trade receivables........ 2,670 -- 26,996 -- 2,592 25,400
Other receivables........ 317 414 1,195 -- 72 768
Inventory................ 1,994 -- 37,890 -- 23,159 16,867
Prepaid expenses and
other.................. 3,195 110 565 -- 1,018 3,800
-------- ------- -------- ------- ------- --------
Total current assets... 8,312 524 67,447 17 27,053 51,237
-------- ------- -------- ------- ------- --------
Property, plant &
equipment, net........... 105 -- 13,730 -- 17,321 27,630
Intangibles................ -- -- 4,252 -- 1,569 5,874
Investment in
subsidiaries............. 125,355 -- 3,619 1,604 -- --
Intercompany............... (14,995) 20,995 60,030 20,181 1,630 (12,497)
Other assets............... 14,506 -- 1,056 -- -- 736
-------- ------- -------- ------- ------- --------
$133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980
======== ======= ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft........... $ -- $ 10 $ 881 $ -- $ -- $ --
Loan payable to banks.... 10,996 -- -- -- -- --
Current portion of
long-term debt......... -- -- 101 -- -- 1,250
Accounts payable......... 4,734 9 28,434 -- 2,258 11,537
Accrued expenses and
other.................. 11,857 159 8,306 216 12,022 7,450
-------- ------- -------- ------- ------- --------
Total current
liabilities.......... 27,587 178 37,722 216 14,280 20,237
-------- ------- -------- ------- ------- --------
Long-term debt............. 133,029 -- 2 20,000 -- 4,987
Intercompany debt.......... -- -- -- -- 30,553 44,791
Other liabilities.......... 11,822 -- 4,897 -- 1,136 4,431
-------- ------- -------- ------- ------- --------
Total liabilities...... 172,438 178 42,621 20,216 45,969 74,446
-------- ------- -------- ------- ------- --------
Redeemable Securities:
Series C preferred
stock.................. 24,678 -- -- -- -- --
-------- ------- -------- ------- ------- --------
Stockholders' Equity
(Deficit):
Series A preferred
stock.................. 521 -- -- -- -- --
Common stock............. 2 1 31 -- -- --
Paid-in capital.......... 860 -- 112,004 21 52 1,537
Retained earnings
(accumulated
deficit)............... (57,964) 21,340 (4,339) (2,744) (2,757) 8,374
Accumulated other
comprehensive income
(loss):
Gain on derivative
instruments.......... 9 -- 9 -- -- --
Cumulative currency
translation
adjustment........... (7,261) -- (192) 4,309 4,309 (11,377)
-------- ------- -------- ------- ------- --------
Total stockholders'
equity (deficit)..... (63,833) 21,341 107,513 1,586 1,604 (1,466)
-------- ------- -------- ------- ------- --------
$133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980
======== ======= ======== ======= ======= ========
<Caption>
AS OF JUNE 30, 2004
----------------------------
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS BALANCE
------------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents............ $ -- $ 5,568
Trade receivables........ -- 57,658
Other receivables........ -- 2,766
Inventory................ 79,910
Prepaid expenses and
other.................. -- 8,688
--------- --------
Total current assets... -- 154,590
--------- --------
Property, plant &
equipment, net........... -- 58,786
Intangibles................ -- 11,695
Investment in
subsidiaries............. (130,578) --
Intercompany............... (75,344) --
Other assets............... -- 16,298
--------- --------
$(205,922) $241,369
========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Cash overdraft........... $ -- $ 891
Loan payable to banks.... -- 10,996
Current portion of
long-term debt......... -- 1,351
Accounts payable......... -- 46,972
Accrued expenses and
other.................. 40,010
--------- --------
Total current
liabilities.......... -- 100,220
--------- --------
Long-term debt............. -- 158,018
Intercompany debt.......... (75,344) --
Other liabilities.......... -- 22,286
--------- --------
Total liabilities...... (75,344) 280,524
--------- --------
Redeemable Securities:
Series C preferred
stock.................. -- 24,678
--------- --------
Stockholders' Equity
(Deficit):
Series A preferred
stock.................. -- 521
Common stock............. (32) 2
Paid-in capital.......... (113,614) 860
Retained earnings
(accumulated
deficit)............... (19,874) (57,964)
Accumulated other
comprehensive income
(loss): --
Gain on derivative
instruments.......... (9) 9
Cumulative currency
translation
adjustment........... 2,951 (7,261)
--------- --------
Total stockholders'
equity (deficit)..... (130,578) (63,833)
--------- --------
$(205,922) $241,369
========= ========
</Table>
F-37
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30, 2004
-------------------------------------------------------------------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE
-------- ------------ -------------- ------- --------- ------------- ------------- ------------
(IN THOUSANDS)
Net sales............ $ 21,868 $11,118 $215,591 $ -- $ 5,742 $103,955 $ -- $358,274
Net sales --
intercompany....... 150 2,598 468 -- 28,970 4,375 (36,561) --
Cost of goods sold... 17,318 10,139 160,136 -- 25,293 91,546 (36,561) 267,871
-------- ------- -------- ------- ------- -------- -------- --------
Gross profit....... 4,700 3,577 55,923 -- 9,419 16,784 -- 90,403
Selling, general and
administrative
expenses........... 20,238 1,299 25,317 4 2,676 16,594 -- 66,128
Costs of
non-completed
transaction........ 5,261 -- -- -- -- -- -- 5,261
-------- ------- -------- ------- ------- -------- -------- --------
Operating income
(loss)........... (20,799) 2,278 30,606 (4) 6,743 190 -- 19,014
Other:
Interest expense... 16,208 18 -- 1,806 95 491 -- 18,618
Interest
(income)......... (4) -- -- -- -- (126) -- (130)
Other (income)
expense, net..... 578 -- (605) -- (265) (489) -- (781)
Net (gain) on
extinguishment of
debt............. (23,226) -- -- -- -- -- -- (23,226)
Intercompany
interest and
other............ (26,755) 1,892 16,392 (1,823) 3,335 6,959 -- --
(Profit) loss
relating to
subsidiaries..... (5,349) -- -- (2,124) -- -- 7,473 --
-------- ------- -------- ------- ------- -------- -------- --------
Income (loss) from
continuing
operations before
income taxes..... 17,749 368 14,819 2,137 3,578 (6,645) (7,473) 24,533
Provision for income
taxes.............. 1,185 221 1,294 -- 1,454 3,815 -- 7,969
-------- ------- -------- ------- ------- -------- -------- --------
Income (loss) from
continuing
operations....... 16,564 147 13,525 2,137 2,124 (10,460) (7,473) 16,564
Discontinued
operations:
Profit (loss)
relating to
discontinued
operations....... (517) -- -- -- -- -- 517 --
(Loss) from
discontinued
operations (net
of income
taxes)........... -- (124) -- -- -- (1,501) -- (1,625)
Gain (loss) from
disposal of
discontinued
operations (net
of income
taxes)........... (3,197) -- (2,735) -- -- 3,843 -- (2,089)
-------- ------- -------- ------- ------- -------- -------- --------
Net income
(loss)........... $ 12,850 $ 23 $ 10,790 $ 2,137 $ 2,124 $ (8,118) $ (6,956) $ 12,850
======== ======= ======== ======= ======= ======== ======== ========
</Table>
F-38
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30, 2004
---------------------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR
-------- ------------ -------------- -------- ---------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............... $ 12,850 $ 23 $10,790 $ 2,137 $2,124
Adjustment for discontinued
operations.................... 3,714 124 2,735 -- --
-------- -------- ------- -------- ------
Income (loss) from continuing
operations.................... 16,564 147 13,525 2,137 2,124
Adjustments to reconcile income
(loss) from continuing
operations to net cash
provided (used) by operating
activities:
Depreciation and
amortization................ 2,367 487 2,542 -- 2,669
Deferred income taxes......... 733 -- -- -- --
Net gain from sales of
assets...................... -- -- (689) -- --
Net gain on extinguishment of
debt........................ (23,226) -- -- -- --
Effects of changes in foreign
currency.................... -- -- 84 -- (264)
Other......................... 525 -- 395 -- --
Changes in operating assets
and liabilities:
Accounts receivable......... 79 336 (4,826) -- (945)
Inventory................... 618 (543) 4,143 -- (8,762)
Prepaid expenses and
other..................... (268) 188 (479) -- 1,369
Other assets................ 1,997 -- (4,548) -- --
Intercompany................ (981) 17,331 (8,706) (22,336) 13,316
Accounts payable............ (370) (328) (2,368) -- (2,395)
Accrued expenses and
other..................... 2,803 (89) 5,089 216 2,742
Accrued costs of non-
completed transaction..... 3,970 -- -- -- --
Cash provided (used) by
discontinued operations....... (3,197) (652) (2,735) -- --
-------- -------- ------- -------- ------
Net cash provided (used) by
operating activities........ 1,614 16,877 1,427 (19,983) 9,854
-------- -------- ------- -------- ------
Investing Activities:
Capital expenditures............ (57) (62) (2,506) -- (1,613)
Proceeds from sale of assets.... -- -- 1,057 -- --
Other investing................. (654) -- -- -- --
Discontinued operations......... 14,343 -- -- -- --
-------- -------- ------- -------- ------
Net cash provided (used) by
investing activities........ 13,632 (62) (1,449) -- (1,613)
-------- -------- ------- -------- ------
Financing Activities:
Net (decrease) in cash
overdraft..................... (350) (276) (160) -- --
Net (decrease) in short-term
debt.......................... (26,882) -- -- -- --
Proceeds from long-term debt.... 85,000 -- -- 20,000 --
Payments of long-term debt...... (32,679) (13) (1,055) -- --
Payments of Pfizer
obligations................... (20,075) -- -- -- (8,225)
Transactions and transaction
costs....................... (4,619) (16,645) (129) -- --
Debt refinancing costs.......... (15,548) -- -- -- --
Discontinued operations......... -- -- -- -- --
-------- -------- ------- -------- ------
Net cash provided (used) by
financing activities........ (15,153) (16,934) (1,344) 20,000 (8,225)
-------- -------- ------- -------- ------
Effect of exchange rate changes
on cash......................... -- -- -- -- 11
-------- -------- ------- -------- ------
Net increase (decrease) in cash
and cash equivalents............ 93 (119) (1,366) 17 27
Cash and cash equivalents at
beginning of period............. 43 119 2,167 -- 185
-------- -------- ------- -------- ------
Cash and cash equivalents at end
of period....................... $ 136 $ -- $ 801 $ 17 $ 212
======== ======== ======= ======== ======
<Caption>
FOR THE YEAR ENDED JUNE 30, 2004
--------------------------------------------
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS BALANCE
------------- ------------- ------------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............... $ (8,118) $(6,956) $ 12,850
Adjustment for discontinued
operations.................... (2,342) (517) 3,714
-------- ------- --------
Income (loss) from continuing
operations.................... (10,460) (7,473) 16,564
Adjustments to reconcile income
(loss) from continuing
operations to net cash
provided (used) by operating
activities:
Depreciation and
amortization................ 5,118 -- 13,183
Deferred income taxes......... (407) -- 326
Net gain from sales of
assets...................... (3) -- (692)
Net gain on extinguishment of
debt........................ -- -- (23,226)
Effects of changes in foreign
currency.................... (368) -- (548)
Other......................... 194 -- 1,114
Changes in operating assets
and liabilities: --
Accounts receivable......... (1,866) -- (7,222)
Inventory................... 8,204 -- 3,660
Prepaid expenses and
other..................... (1,124) -- (314)
Other assets................ (528) -- (3,079)
Intercompany................ (6,097) 7,473 --
Accounts payable............ (189) -- (5,650)
Accrued expenses and
other..................... (3,796) -- 6,965
Accrued costs of non-
completed transaction..... -- -- 3,970
Cash provided (used) by
discontinued operations....... 4,395 -- (2,189)
-------- ------- --------
Net cash provided (used) by
operating activities........ (6,927) -- 2,862
-------- ------- --------
Investing Activities:
Capital expenditures............ (2,006) -- (6,244)
Proceeds from sale of assets.... 37 -- 1,094
Other investing................. (1) -- (655)
Discontinued operations......... 532 -- 14,875
-------- ------- --------
Net cash provided (used) by
investing activities........ (1,438) -- 9,070
-------- ------- --------
Financing Activities:
Net (decrease) in cash
overdraft..................... (9) -- (795)
Net (decrease) in short-term
debt.......................... (72) -- (26,954)
Proceeds from long-term debt.... 4,661 -- 109,661
Payments of long-term debt...... (1,706) -- (35,453)
Payments of Pfizer
obligations................... -- -- (28,300)
Transactions and transaction
costs....................... -- -- (21,393)
Debt refinancing costs.......... -- -- (15,548)
Discontinued operations......... 1,005 -- 1,005
-------- ------- --------
Net cash provided (used) by
financing activities........ 3,879 -- (17,777)
-------- ------- --------
Effect of exchange rate changes
on cash......................... 223 234
-------- ------- --------
Net increase (decrease) in cash
and cash equivalents............ (4,263) -- (5,611)
Cash and cash equivalents at
beginning of period............. 8,665 11,179
-------- ------- --------
Cash and cash equivalents at end
of period....................... $ 4,402 $ -- $ 5,568
======== ======= ========
</Table>
F-39
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
AS OF JUNE 30, 2003
--------------------------------------------------------------------------
U.S. NON-
PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM GUARANTOR
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES
-------- ------------ ------------ ------ --------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents.... $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665
Trade receivables............ 2,759 2,452 22,071 -- 1,542 23,890
Other receivables............ 957 3 733 -- 518 1,292
Inventory.................... 2,612 4,278 41,266 -- 13,460 26,233
Prepaid expenses and other... 3,267 458 981 -- 1,866 3,296
Current assets from
discontinued operations.... -- 4,942 -- -- -- 4,334
-------- -------- -------- ------ ------- --------
Total Current Assets....... 9,638 12,252 67,218 -- 17,571 67,710
-------- -------- -------- ------ ------- --------
Property, plant & equipment,
net.......................... 153 3,269 13,297 -- 17,049 30,137
Intangibles.................... -- -- -- -- 1,818 6,851
Investment in subsidiaries..... 103,574 -- 3,619 -- -- --
Intercompany................... 35,034 (19,431) 59,765 -- 6,731 (9,116)
Other assets................... 11,516 710 1,122 -- -- 711
Other assets from discontinued
operations................... -- 10,650 -- -- -- 2,675
-------- -------- -------- ------ ------- --------
$159,915 $ 7,450 $145,021 $ -- $43,169 $ 98,968
======== ======== ======== ====== ======= ========
) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT
)
Current Liabilities:
Cash overdraft............... $ 350 $ 286 $ 1,041 $ -- $ -- $ 9
Loan payable to banks........ 37,878 -- -- -- -- --
Current portion of long-term
debt....................... 21,599 66 381 -- -- 2,078
Accounts payable............. 3,304 2,350 25,926 -- 12,115 11,660
Accrued expenses and other... 7,943 1,151 9,931 -- 8,583 13,091
Current liabilities from
discontinued operations.... -- 2,051 -- -- -- 3,506
-------- -------- -------- ------ ------- --------
Total Current
Liabilities.............. 71,074 5,904 37,279 -- 20,698 30,344
-------- -------- -------- ------ ------- --------
Long-term debt................. 100,073 213 149 -- -- 1,828
Intercompany debt.............. -- -- -- -- 22,319 50,664
Other liabilities.............. 4,397 114 13,289 -- 1,256 2,185
Other liabilities from
discontinued operations...... -- 198 -- -- -- 975
-------- -------- -------- ------ ------- --------
Total Liabilities.............. 175,544 6,429 50,717 -- 44,273 85,996
-------- -------- -------- ------ ------- --------
Redeemable Securities:
Series B and C preferred
stock...................... 68,881 -- -- -- -- --
-------- -------- -------- ------ ------- --------
Stockholders' Equity (Deficit):
Series A preferred stock..... 521 -- -- -- -- --
Common stock................. 2 1 31 -- -- --
Paid-in capital.............. 860 -- 110,883 -- -- 5,179
Retained earnings
(accumulated deficit)...... (79,489) 1,020 (16,499) -- (4,881) 17,862
Accumulated other
comprehensive income
(loss):....................
Gain on derivative
instruments.............. 81 -- 81 -- -- --
Cumulative foreign currency
translation adjustment... (6,485) -- (192) -- 3,777 (10,069)
-------- -------- -------- ------ ------- --------
Total Stockholders'
Equity (Deficit)....... (84,510) 1,021 94,304 -- (1,104) 12,972
-------- -------- -------- ------ ------- --------
$159,915 $ 7,450 $145,021 $ -- $43,169 $ 98,968
======== ======== ======== ====== ======= ========
<Caption>
AS OF JUNE 30, 2003
----------------------------
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS BALANCE
------------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents.... $ 11,179
Trade receivables............ 52,714
Other receivables............ 3,503
Inventory.................... 87,849
Prepaid expenses and other... 9,868
Current assets from
discontinued operations.... 9,276
--------- --------
Total Current Assets....... -- 174,389
--------- --------
Property, plant & equipment,
net.......................... 63,905
Intangibles.................... 8,669
Investment in subsidiaries..... (107,193) --
Intercompany................... (72,983) --
Other assets................... 14,059
Other assets from discontinued
operations................... 13,325
--------- --------
$(180,176) $274,347
========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT
Current Liabilities:
Cash overdraft............... $ 1,686
Loan payable to banks........ 37,878
Current portion of long-term
debt....................... 24,124
Accounts payable............. 55,355
Accrued expenses and other... 40,699
Current liabilities from
discontinued operations.... 5,557
--------- --------
Total Current
Liabilities.............. -- 165,299
--------- --------
Long-term debt................. 102,263
Intercompany debt.............. (72,983) --
Other liabilities.............. 21,241
Other liabilities from
discontinued operations...... 1,173
--------- --------
Total Liabilities.............. (72,983) 289,976
--------- --------
Redeemable Securities:
Series B and C preferred
stock...................... 68,881
--------- --------
Stockholders' Equity (Deficit):
Series A preferred stock..... 521
Common stock................. (32) 2
Paid-in capital.............. (116,062) 860
Retained earnings
(accumulated deficit)...... 2,498 (79,489)
Accumulated other
comprehensive income
(loss):....................
Gain on derivative
instruments.............. (81) 81
Cumulative foreign currency
translation adjustment... 6,484 (6,485)
--------- --------
Total Stockholders'
Equity (Deficit)....... (107,193) (84,510)
--------- --------
$(180,176) $274,347
========= ========
</Table>
F-40
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30, 2003
-----------------------------------------------------------
U.S.
PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR
-------- ------------ ------------ ------ ---------
(IN THOUSANDS)
Net sales...................... $ 23,982 $22,332 $187,628 $ -- $ 6,625
Net sales -- intercompany...... 1,338 4,244 775 -- 26,994
Cost of goods sold............. 20,083 20,422 144,543 -- 31,435
-------- ------- -------- ------ -------
Gross profit................. 5,237 6,154 43,860 -- 2,184
Selling, general and
administrative expenses...... 18,064 2,575 26,632 -- 1,868
-------- ------- -------- ------ -------
Operating income (loss)........ (12,827) 3,579 17,228 -- 316
Other:
Interest expense............. 15,050 86 1 -- 62
Interest (income)............ (2) -- -- -- --
Other (income) expense,
net........................ 3,283 -- (3,481) -- 1,283
Intercompany interest and
other...................... (33,819) 4,952 18,997 -- 2,849
(Profit) loss relating to
subsidiaries............... 4,036 -- -- -- --
-------- ------- -------- ------ -------
Income (loss) from continuing
operations before income
taxes...................... (1,375) (1,459) 1,711 -- (3,878)
Provision for income taxes..... 924 52 570 -- 572
-------- ------- -------- ------ -------
Income (loss) from continuing
operations................. (2,299) (1,511) 1,141 -- (4,450)
Discontinued operations:
Profit (loss) relating to
discontinued operations.... 14,759 -- -- -- --
(Loss) from discontinued
operations (net of income
taxes)..................... -- (3,454) -- -- --
Gain (loss) from disposal of
discontinued operations
(net of income taxes)...... (30,019) -- -- -- --
-------- ------- -------- ------ -------
Net income (loss).......... $(17,559) $(4,965) $ 1,141 $ -- $(4,450)
======== ======= ======== ====== =======
<Caption>
FOR THE YEAR ENDED JUNE 30, 2003
-------------------------------------------
NON-
GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS BALANCE
------------ ------------- ------------
(IN THOUSANDS)
Net sales...................... $101,179 $ -- $341,746
Net sales -- intercompany...... 6,812 (40,163) --
Cost of goods sold............. 74,880 (40,163) 251,200
-------- -------- --------
Gross profit................. 33,111 -- 90,546
Selling, general and
administrative expenses...... 15,911 65,050
-------- -------- --------
Operating income (loss)........ 17,200 -- 25,496
Other:
Interest expense............. 1,082 16,281
Interest (income)............ (83) (85)
Other (income) expense,
net........................ 454 1,539
Intercompany interest and
other...................... 7,021 --
(Profit) loss relating to
subsidiaries............... -- (4,036) --
-------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... 8,726 4,036 7,761
Provision for income taxes..... 7,942 10,060
-------- -------- --------
Income (loss) from continuing
operations................. 784 4,036 (2,299)
Discontinued operations:
Profit (loss) relating to
discontinued operations.... -- (14,759) --
(Loss) from discontinued
operations (net of income
taxes)..................... (11,123) (14,577)
Gain (loss) from disposal of
discontinued operations
(net of income taxes)...... 29,336 (683)
-------- -------- --------
Net income (loss).......... $ 18,997 $(10,723) $(17,559)
======== ======== ========
</Table>
F-41
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30, 2003
-----------------------------------------------------------
U.S.
PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR
-------- ------------ ------------ ------ ---------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............ $(17,559) $(4,965) $ 1,141 $ -- $(4,450)
Adjustment for discontinued
operations................. 15,260 3,454 -- -- --
-------- ------- -------- ------ -------
Income (loss) from continuing
operations................. (2,299) (1,511) 1,141 -- (4,450)
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used) by
operating activities:
Depreciation and
amortization............. 1,554 956 2,900 -- 2,019
Deferred income taxes...... -- -- -- -- --
Net gain from sales of
assets................... -- -- (118) -- --
Effects of changes in
foreign currency......... -- -- (399) -- 1,268
Other...................... 218 13 540 -- --
Changes in operating assets
and liabilities:
Accounts receivable...... 301 245 1,489 -- (322)
Inventory................ 95 (61) (3,658) -- 2,270
Prepaid expenses and
other.................. (702) (195) 558 -- (1,191)
Other assets............. (3,171) -- 1,131 -- --
Intercompany............. 12,780 2,717 (12,285) -- 4,989
Accounts payable......... 2,280 714 12,542 -- 3,523
Accrued expenses and
other.................. 1,415 95 2,326 -- (6,444)
Cash provided (used) by
discontinued operations.... -- (1,928) -- -- --
-------- ------- -------- ------ -------
Net cash provided (used) by
operating activities..... 12,471 1,045 6,167 -- 1,662
-------- ------- -------- ------ -------
Investing Activities:
Capital expenditures......... (2) (350) (2,573) -- (2,149)
Proceeds from sale of
assets..................... -- -- 2,530 -- --
Other investing.............. -- -- -- -- --
Discontinued operations...... -- (493) -- -- --
-------- ------- -------- ------ -------
Net cash provided (used) by
Investing Activities..... (2) (843) (43) -- (2,149)
-------- ------- -------- ------ -------
Financing Activities:
Net (decrease) in cash
overdraft.................. (226) (24) (4,151) -- --
Net (decrease) in short-term
debt....................... (5,844) -- -- -- --
Proceeds from long-term
debt....................... -- -- -- -- --
Payments of long-term debt... (6,813) (111) (415) -- --
Discontinued operations...... -- -- -- -- --
-------- ------- -------- ------ -------
Net cash provided (used) by
financing activities..... (12,883) (135) (4,566) -- --
-------- ------- -------- ------ -------
Effect of exchange rate changes
on cash...................... -- -- 9 -- 54
-------- ------- -------- ------ -------
Net increase (decrease) in cash
and cash equivalents......... (414) 67 1,567 -- (433)
Cash and cash equivalents at
beginning of period.......... 457 52 600 -- 618
-------- ------- -------- ------ -------
Cash and cash equivalents at
end of period................ $ 43 $ 119 $ 2,167 $ -- $ 185
======== ======= ======== ====== =======
<Caption>
FOR THE YEAR ENDED JUNE 30, 2003
-------------------------------------------
NON-
GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS BALANCE
------------ ------------- ------------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............ $ 18,997 $(10,723) $(17,559)
Adjustment for discontinued
operations................. (18,213) 14,759 15,260
-------- -------- --------
Income (loss) from continuing
operations................. 784 4,036 (2,299)
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used) by
operating activities:
Depreciation and
amortization............. 5,095 12,524
Deferred income taxes...... 6,460 6,460
Net gain from sales of
assets................... (9) (127)
Effects of changes in
foreign currency......... (479) 390
Other...................... (384) 387
Changes in operating assets
and liabilities:
Accounts receivable...... 2,097 3,810
Inventory................ (244) (1,598)
Prepaid expenses and
other.................. (1,592) (3,122)
Other assets............. (592) (2,632)
Intercompany............. (4,165) (4,036) --
Accounts payable......... 1,444 20,503
Accrued expenses and
other.................. 2,253 (355)
Cash provided (used) by
discontinued operations.... 2,644 716
-------- -------- --------
Net cash provided (used) by
operating activities..... 13,312 -- 34,657
-------- -------- --------
Investing Activities:
Capital expenditures......... (3,562) (8,636)
Proceeds from sale of
assets..................... 35 2,565
Other investing.............. 737 737
Discontinued operations...... 1,856 1,363
-------- -------- --------
Net cash provided (used) by
Investing Activities..... (934) -- (3,971)
-------- -------- --------
Financing Activities:
Net (decrease) in cash
overdraft.................. (1,680) (6,081)
Net (decrease) in short-term
debt....................... (816) (6,660)
Proceeds from long-term
debt....................... 2,000 2,000
Payments of long-term debt... (8,675) (16,014)
Discontinued operations...... 377 377
-------- -------- --------
Net cash provided (used) by
financing activities..... (8,794) -- (26,378)
-------- -------- --------
Effect of exchange rate changes
on cash...................... 389 452
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents......... 3,973 -- 4,760
Cash and cash equivalents at
beginning of period.......... 4,692 6,419
-------- -------- --------
Cash and cash equivalents at
end of period................ $ 8,665 $ -- $ 11,179
======== ======== ========
</Table>
F-42
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30, 2002
----------------------------------------------------------------
U.S.
UNRESTRICTED GUARANTOR DUTCH BELGIUM
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR
------------- ------------ ------------ ------ ---------
(IN THOUSANDS)
Net sales.................... $ 24,578 $21,451 $173,952 $ -- $ 4,196
Net sales -- intercompany.... 1,114 4,212 924 -- 21,509
Cost of goods sold........... 20,837 19,400 135,378 -- 21,631
-------- ------- -------- ------ -------
Gross profit............... 4,855 6,263 39,498 -- 4,074
Selling, general and
administrative expenses.... 16,786 2,623 32,959 -- 1,559
-------- ------- -------- ------ -------
Operating income (loss).... (11,931) 3,640 6,539 -- 2,515
Other:
Interest expense........... 15,858 (29) (172) -- 365
Interest (income).......... (15) -- -- -- --
Other (income) expense,
net...................... (2,001) -- (839) -- 2,294
Intercompany interest and
other.................... (28,534) 5,210 12,467 -- 2,486
(Profit) loss relating to
subsidiaries............. 17,913 -- -- -- --
-------- ------- -------- ------ -------
Income (loss) from
continuing operations
before income taxes...... (15,152) (1,541) (4,917) -- (2,630)
Provision (benefit) for
income taxes............... 10,059 (407) 4,636 -- (626)
-------- ------- -------- ------ -------
Income (Loss) from
continuing operations.... (25,211) (1,134) (9,553) -- (2,004)
Discontinued Operations:
Profit (loss) relating to
discontinued
operations............... (26,559) -- -- -- --
(Loss) from discontinued
operations (net of income
taxes)................... -- (2,930) -- -- --
-------- ------- -------- ------ -------
Net income (loss)........ $(51,770) $(4,064) $ (9,553) $ -- $(2,004)
======== ======= ======== ====== =======
<Caption>
FOR THE YEAR ENDED JUNE 30, 2002
-------------------------------------------
NON-
GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS BALANCE
------------ ------------- ------------
(IN THOUSANDS)
Net sales.................... $104,499 $ -- $328,676
Net sales -- intercompany.... 9,607 (37,366) --
Cost of goods sold........... 87,531 (37,366) 247,411
-------- -------- --------
Gross profit............... 26,575 -- 81,265
Selling, general and
administrative expenses.... 16,709 70,636
-------- -------- --------
Operating income (loss).... 9,866 -- 10,629
Other:
Interest expense........... 2,048 18,070
Interest (income).......... (331) (346)
Other (income) expense,
net...................... 3,895 3,349
Intercompany interest and
other.................... 8,371 --
(Profit) loss relating to
subsidiaries............. -- (17,913) --
-------- -------- --------
Income (loss) from
continuing operations
before income taxes...... (4,117) 17,913 (10,444)
Provision (benefit) for
income taxes............... 1,105 14,767
-------- -------- --------
Income (Loss) from
continuing operations.... (5,222) 17,913 (25,211)
Discontinued Operations:
Profit (loss) relating to
discontinued
operations............... -- 26,559 --
(Loss) from discontinued
operations (net of income
taxes)................... (23,629) (26,559)
-------- -------- --------
Net income (loss)........ $(28,851) $ 44,472 $(51,770)
======== ======== ========
</Table>
F-43
PHIBRO ANIMAL HEALTH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOR THE YEAR ENDED JUNE 30, 2002
-----------------------------------------------------------
U.S.
PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR
-------- ------------ ------------ ------ ---------
(IN THOUSANDS)
Operating Activities:
Net income (loss).................... $(51,770) $(4,064) $(9,553) $ -- $ (2,004)
Adjustment for discontinued
operations......................... 26,559 2,930 -- -- --
-------- ------- ------- ----- --------
Income (loss) from continuing
operations......................... (25,211) (1,134) (9,553) -- (2,004)
Adjustments to reconcile income
(loss) from continuing operations
to net cash provided (used) by
operating activities:
Depreciation and amortization...... 1,049 966 3,434 -- 2,252
Deferred income taxes.............. 9,297 (466) 5,356 -- --
Net gain from sales of assets...... -- -- -- -- --
Change in redemption amount of
redeemable common stock.......... (378) -- -- -- --
Effects of changes in foreign
currency......................... -- -- (100) -- 1,912
Other.............................. (43) 12 985 -- --
Changes in operating assets and
liabilities:
Accounts receivable.............. 1,299 278 1,932 -- 886
Inventory........................ 606 1,165 (2,915) -- (10,325)
Prepaid expenses and other....... 210 (157) (1,550) -- 273
Other assets..................... (1,335) 1 2,519 -- 66
Intercompany..................... 473 4,753 2,164 -- 7,562
Accounts payable................. (719) (844) 1,460 -- 1,472
Accrued expenses and other....... (119) (225) (3,248) -- 3,487
Cash provided (used) by discontinued
operations......................... -- (2,437) -- -- --
-------- ------- ------- ----- --------
Net cash provided (used) by
operating activities............. (14,871) 1,912 484 -- 5,581
-------- ------- ------- ----- --------
Investing Activities:
Capital expenditures................. (119) (192) (3,022) -- (1,939)
Acquisition of a business............ -- -- -- -- (4,421)
Proceeds from property damage
claim.............................. -- -- 411 -- --
Proceeds from sale of assets......... -- -- -- -- --
Other investing...................... 613 -- -- -- --
Discontinued operations.............. -- (1,832) -- -- --
-------- ------- ------- ----- --------
Net cash provided (used) by
investing activities............. 494 (2,024) (2,611) -- (6,360)
-------- ------- ------- ----- --------
Financing Activities:
Net increase (decrease) in cash
overdraft.......................... 563 (116) 1,447 -- --
Net increase in short-term debt...... 13,520 -- -- -- --
Proceeds from long-term debt......... 2,000 322 -- -- --
Payments of long-term debt........... (2,541) (98) (396) -- --
Discontinued operations.............. -- -- -- -- --
-------- ------- ------- ----- --------
Net cash provided (used) by
financing activities............. 13,542 108 1,051 -- --
-------- ------- ------- ----- --------
Effect of exchange rate changes on
cash................................. -- -- -- -- 128
-------- ------- ------- ----- --------
Net increase (decrease) in cash and
cash equivalents..................... (835) (4) (1,076) -- (651)
Cash and cash equivalents at beginning
of period............................ 1,292 56 1,676 -- 1,269
-------- ------- ------- ----- --------
Cash and cash equivalents at end of
period............................... $ 457 $ 52 $ 600 $ -- $ 618
======== ======= ======= ===== ========
<Caption>
FOR THE YEAR ENDED JUNE 30, 2002
-------------------------------------------
NON-
GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS BALANCE
------------ ------------- ------------
(IN THOUSANDS)
Operating Activities:
Net income (loss).................... $(28,851) $ 44,472 $(51,770)
Adjustment for discontinued
operations......................... 23,629 (26,559) 26,559
-------- -------- --------
Income (loss) from continuing
operations......................... (5,222) 17,913 (25,211)
Adjustments to reconcile income
(loss) from continuing operations
to net cash provided (used) by
operating activities:
Depreciation and amortization...... 4,654 12,355
Deferred income taxes.............. (2,949) 11,238
Net gain from sales of assets...... (5) (5)
Change in redemption amount of
redeemable common stock.......... -- (378)
Effects of changes in foreign
currency......................... 308 2,120
Other.............................. 1,462 2,416
Changes in operating assets and
liabilities:
Accounts receivable.............. 1,651 6,046
Inventory........................ (2,522) (13,991)
Prepaid expenses and other....... (1,595) (2,819)
Other assets..................... 1,416 2,667
Intercompany..................... 2,961 (17,913) --
Accounts payable................. (7,975) (6,606)
Accrued expenses and other....... 8,616 8,511
Cash provided (used) by discontinued
operations......................... 1,349 (1,088)
-------- -------- --------
Net cash provided (used) by
operating activities............. 2,149 -- (4,745)
-------- -------- --------
Investing Activities:
Capital expenditures................. (3,246) (8,518)
Acquisition of a business............ (2,761) (7,182)
Proceeds from property damage
claim.............................. -- 411
Proceeds from sale of assets......... 19 19
Other investing...................... (33) 580
Discontinued operations.............. (839) (2,671)
-------- -------- --------
Net cash provided (used) by
investing activities............. (6,860) -- (17,361)
-------- -------- --------
Financing Activities:
Net increase (decrease) in cash
overdraft.......................... 1,544 3,438
Net increase in short-term debt...... 717 14,237
Proceeds from long-term debt......... -- 2,322
Payments of long-term debt........... (1,695) (4,730)
Discontinued operations.............. (1,590) (1,590)
-------- -------- --------
Net cash provided (used) by
financing activities............. (1,024) -- 13,677
-------- -------- --------
Effect of exchange rate changes on
cash................................. (125) 3
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... (5,860) -- (8,426)
Cash and cash equivalents at beginning
of period............................ 10,552 14,845
-------- -------- --------
Cash and cash equivalents at end of
period............................... $ 4,692 $ -- $ 6,419
======== ======== ========
</Table>
F-44
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<Table>
<Caption>
AS OF
------------------------
SEPTEMBER 30, JUNE 30,
2004 2004
------------- --------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 5,778 $ 5,568
Trade receivables, less allowance for doubtful accounts of
$1,344 at September 30, 2004 and $1,358 at June 30,
2004................................................... 52,721 57,658
Other receivables......................................... 3,440 2,766
Inventories............................................... 87,122 79,910
Prepaid expenses and other current assets................. 7,707 8,688
-------- --------
Total current assets................................... 156,768 154,590
Property, plant and equipment, net.......................... 59,818 58,786
Intangibles................................................. 11,354 11,695
Other assets................................................ 15,611 16,298
-------- --------
$243,551 $241,369
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Cash overdraft.............................................. $ 654 $ 891
Loans payable to banks...................................... 11,268 10,996
Current portion of long-term debt........................... 953 1,351
Accounts payable............................................ 38,892 46,972
Accrued expenses and other current liabilities.............. 47,331 40,010
-------- --------
Total current liabilities.............................. 99,098 100,220
Long-term debt.............................................. 157,992 158,018
Other liabilities........................................... 22,676 22,286
-------- --------
Total liabilities...................................... 279,766 280,524
-------- --------
Commitments and Contingencies
Redeemable securities:
Series C preferred stock.................................. 25,359 24,678
-------- --------
Stockholders' Deficit:
Series A preferred stock.................................. 521 521
Common stock.............................................. 2 2
Paid-in capital........................................... 860 860
Accumulated deficit....................................... (58,787) (57,964)
Accumulated other comprehensive income (loss):
Gain on derivative instruments......................... 84 9
Cumulative currency translation adjustment............. (4,254) (7,261)
-------- --------
Total stockholders' deficit............................ (61,574) (63,833)
-------- --------
$243,551 $241,369
======== ========
</Table>
See notes to unaudited condensed consolidated financial statements.
F-45
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------
2004 2003
--------- ---------
(IN THOUSANDS)
Net sales................................................... $88,275 $84,950
Cost of goods sold.......................................... 65,653 63,790
------- -------
Gross profit.............................................. 22,622 21,160
Selling, general and administrative expenses................ 16,594 15,785
------- -------
Operating income.......................................... 6,028 5,375
Other:
Interest expense.......................................... 5,246 3,933
Interest (income)......................................... (25) (242)
Other (income) expense, net............................... 24 (585)
------- -------
Net (gain) on extinguishment of debt...................... -- --
Income from continuing operations before income taxes..... 783 2,269
Provision for income taxes.................................. 924 783
------- -------
Income (loss) from continuing operations.................. (141) 1,486
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations (net of income
taxes)................................................. -- (462)
Gain on disposal of discontinued operations (net of income
taxes)................................................. -- 231
------- -------
Net income (loss)......................................... (141) 1,255
Other comprehensive income (loss):
Change in derivative instruments, net of tax.............. 75 317
Change in currency translation adjustment................. 3,007 (859)
------- -------
Comprehensive income...................................... $ 2,941 $ 713
======= =======
Net income (loss)......................................... (141) 1,255
Dividends and equity value accreted on Series B and C
redeemable preferred stock................................ (682) (987)
------- -------
Net income (loss) available to common shareholders........ $ (823) $ 268
======= =======
</Table>
See notes to unaudited condensed consolidated financial statements.
F-46
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT (UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------------------------------------------------------------
PREFERRED COMMON STOCK ACCUMULATED OTHER
STOCK ----------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SERIES A CLASS A CLASS B CAPITAL DEFICIT INCOME (LOSS) TOTAL
--------- ---------- ---------- ------- ------------ ----------------- --------
(IN THOUSANDS)
Balance, June 30, 2004... $521 $1 $1 $860 $(57,964) $(7,252) $(63,833)
Dividends on Series C
redeemable preferred
stock............... (668) (668)
Equity value accreted
on Series C
redeemable preferred
stock............... (14) (14)
Change in derivative
instruments, net of
tax................. 75 75
Foreign currency
translation
adjustment.......... 3,007 3,007
Net (loss)............. (141) (141)
---- -- -- ---- -------- ------- --------
Balance, September 30,
2004................... $521 $1 $1 $860 $(58,787) $(4,170) $(61,574)
==== == == ==== ======== ======= ========
</Table>
See notes to unaudited condensed consolidated financial statements.
F-47
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
---------------------
2004 2003
-------- --------
(IN THOUSANDS)
Operating activities:
Net income (loss)......................................... $ (141) $ 1,255
Adjustment for discontinued operations.................... -- 231
------- -------
Income (loss) from continuing operations.................. (141) 1,486
Adjustments to reconcile income (loss) from continuing
operations to net cash provided (used) by operating
activities:
Depreciation and amortization........................... 3,355 3,168
Deferred income taxes................................... 68 53
Effects of changes in foreign currency.................. (122) (1,364)
Other................................................... 47 153
Changes in operating assets and liabilities:
Accounts receivable................................... 4,689 832
Inventories........................................... (4,602) (4,126)
Prepaid expenses and other current assets............. 1,077 7
Other assets.......................................... (1) (375)
Accounts payable...................................... (8,580) (5,483)
Accrued expenses and other liabilities................ 7,695 7,293
Accrued costs of non-completed transaction............ (1,100) --
Cash provided (used) by discontinued operations............. -- (376)
------- -------
Net cash provided (used) by operating activities.......... 2,385 1,268
------- -------
Investing activities:
Capital expenditures...................................... (1,748) (852)
Proceeds from sale of assets.............................. 12 12
Discontinued operations................................... -- 14,049
------- -------
Net cash provided (used) by investing activities........ (1,736) 13,209
------- -------
Financing activities:
Net increase (decrease) in cash overdraft................. (237) 731
Net increase (decrease) in short-term debt................ 272 (280)
Proceeds from long-term debt.............................. 445 1,500
Payments of long-term debt................................ (872) (944)
Discontinued operations................................... -- 86
------- -------
Net cash provided (used) by financing activities........ (392) 1,093
------- -------
Effect of exchange rate changes on cash..................... (47) 168
------- -------
Net increase (decrease) in cash and cash equivalents........ 210 15,738
Cash and cash equivalents at beginning of period............ 5,568 11,179
------- -------
Cash and cash equivalents at end of period.................. $ 5,778 $26,917
======= =======
</Table>
See notes to unaudited condensed consolidated financial statements.
F-48
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
1. GENERAL
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
In the opinion of Phibro Animal Health Corporation (the "Company" or
"PAHC"), the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly its financial position as of September 30, 2004 and
its results of operations and cash flows for the three months ended September
30, 2004 and 2003.
The condensed consolidated balance sheet as of June 30, 2004 was derived
from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States. Additionally
it should be noted the accompanying condensed consolidated financial statements
and notes thereto have been prepared in accordance with accounting standards
appropriate for interim financial statements. While the Company believes 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 the Company's audited consolidated financial statements as found in
the Company's annual report filed on Form 10-K for the year ended June 30, 2004.
The Company's Mineral Resource Technologies, Inc. ("MRT") and La Cornubia
S.A. (France) ("La Cornubia") businesses have been classified as discontinued
operations as discussed in Note 6. The Company's condensed consolidated
financial statements have been reclassified to report separately the financial
position, operating results and cash flows of the discontinued operations. These
footnotes present information only for continuing operations, unless otherwise
noted.
The results of operations for the three months ended September 30, 2004 may
not be indicative of results for the full year.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company has reviewed the Statements of Financial Accounting Standards
and the FASB Interpretations of the Financial Accounting Standards Board and has
determined that no new statements or interpretations have been issued which
would apply to the Company's financial statements or disclosures.
2. RISKS, UNCERTAINTIES, AND LIQUIDITY
The Company's ability to fund its operating plan depends upon the continued
availability of borrowing under its domestic senior credit facility. The Company
believes that it will be able to comply with the terms of its covenants under
the domestic senior credit facility based on its forecasted operating plan. In
the event of adverse operating results and/or violation of covenants under this
facility, there can be no assurance that the Company would be able to obtain
waivers or amendments on favorable terms, if at all. The Company's fiscal 2005
operating plan projects adequate liquidity throughout the year, with periods of
reduced availability around the dates of the semi-annual interest payments due
December 1, 2004 and June 1, 2005 related to its senior secured and senior
subordinated notes. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that likely would be available. The Company also has undertaken a
strategic review of its manufacturing capabilities, and is currently increasing
inventory levels of certain products to enhance future supply flexibility and
reduce costs. There can be no assurance the Company will be successful in any of
the above-noted actions.
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government
F-49
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
restrictions on the use of antibiotics in food-producing animals. The sale of
feed additives containing antibiotics is a material portion of the Company's
business. Should regulatory or other developments result in further restrictions
on the sale of such products, it could have a material adverse impact on the
Company's financial position, results of operations and cash flows.
The testing, manufacturing, and marketing of certain of the Company's
products are subject to extensive regulation by numerous government authorities
in the United States and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and subsidiaries are subject to a wide
variety of complex and stringent federal, state, local and foreign environmental
laws and regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
materials and wastes, the remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters.
3. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average methods. Obsolete
and unsaleable inventories are reflected at estimated net realizable value.
Inventory costs include materials, direct labor and manufacturing overhead.
Inventories are comprised of:
<Table>
<Caption>
AS OF
------------------------
SEPTEMBER 20, JUNE 30,
2004 2004
------------- --------
Raw materials............................................... $16,651 $16,313
Work-in-process............................................. 1,329 1,764
Finished goods.............................................. 69,142 61,833
------- -------
Total inventory............................................. $87,122 $79,910
======= =======
</Table>
4. INTANGIBLES
Product intangible cost arising from the acquisition of the medicated feed
additive business of Pfizer, Inc. and the acquisition of the rights to sell
amprolium was $14,832 and $14,925 at September 30, 2004 and June 30, 2004,
respectively, with related accumulated amortization of $3,478 and $3,230 at
September 30, 2004 and June 30, 2004, respectively. Amortization expense was
$371 and $304 for the three months ended September 30, 2004 and 2003
respectively.
5. PRINCE TRANSACTIONS
Effective December 26, 2003, the Company completed the divestiture of
substantially all of the business and assets of Prince Quincy, Inc. (f/k/a The
Prince Manufacturing Company ("PMC")), to a company
F-50
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
("Buyer") formed by Palladium Equity Partners II, LP and certain of its
affiliates (the "Palladium Investors"), and the related reduction of the
Company's preferred stock held by the Palladium Investors (collectively, the
"Prince Transactions").
The divestiture of PMC has not been reflected as a discontinued operation
due to the existence of the Backstop Indemnification Amount and continuing
supply and service agreements.
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC were:
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2003
------------------
Net sales................................................... $5,683
Operating income............................................ 1,213
Depreciation and amortization............................... 243
</Table>
6. DISCONTINUED OPERATIONS
The Company divested MRT and shutdown La Cornubia during fiscal 2004. These
businesses have been classified as discontinued operations.
Operating results and gain on sale of MRT were:
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2003
------------------
OPERATING RESULTS:
Net sales................................................... $ 3,327
Cost of goods sold.......................................... 3,135
Selling, general and administrative expenses................ 316
--------
Loss before income taxes.................................... (124)
Provision for income taxes.................................. --
--------
(Loss) from operations...................................... $ (124)
========
GAIN ON SALE:
Current assets.............................................. $ (5,813)
Property, plant & equipment -- net and other assets......... (10,703)
Current liabilities......................................... 2,911
Net proceeds of sale........................................ 13,836
--------
Gain on sale................................................ $ 231
========
</Table>
F-51
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Operating results of La Cornubia were:
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, 2003
------------------
OPERATING RESULTS:
Net sales................................................... $2,220
Cost of goods sold.......................................... 2,216
Selling, general and administrative expenses................ 376
Other (income).............................................. (50)
Interest expense............................................ 16
------
Loss before income taxes.................................... (338)
Provision for income taxes.................................. --
------
Loss from operations........................................ $ (338)
======
Depreciation and amortization............................... $ 100
======
</Table>
7. DEBT
LOANS PAYABLE TO BANKS
At September 30, 2004, loans payable to banks included $11,268 under the
domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted
average interest rate under the domestic senior credit facility during the three
months ended September 30, 2004 was 4.5%.
As of September 24, 2004, the Company amended its domestic senior credit
facility to: (i) increase the aggregate amount of borrowings available under the
working capital and letter of credit facilities from $27,500 to $32,500; the
amount of aggregate borrowings available under the working capital facility
remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude
charges and expenses related to unsuccessful acquisitions and related financings
in an aggregate amount not to exceed $5,300 for the period beginning January 1,
2004 and ending June 30, 2004; (iii) amend the definition of Additional
Indebtedness to exclude advances under the working capital facility; (iv) amend
the definition of Permitted Investments to allow other investments made during
the period from January 1, 2004 through June 30, 2004 in an aggregate amount not
to exceed $336; and (v) establish covenant EBITDA levels for the periods after
June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and
(iii); effective January 1, 2004 for item (iv); and effective September 24, 2004
for item (v).
As of September 30, 2004, the Company was in compliance with the financial
covenants of its domestic senior credit facility. The domestic senior credit
facility requires, among other things, the maintenance of certain levels of
trailing consolidated and domestic EBITDA (earnings before interest, taxes,
depreciation and amortization) calculated on a monthly basis, and an
acceleration clause should an event of default (as defined in the agreement)
occur. In addition, there are certain restrictions on additional borrowings,
additional liens on the Company's assets, guarantees, dividend payments,
redemption or purchase of the Company's stock, sale of subsidiaries' stock,
disposition of assets, investments, and mergers and acquisitions.
The domestic senior credit facility contains a lock-box requirement and a
material adverse change clause should an event of default (as defined in the
agreement) occur. Accordingly, the amounts outstanding have been classified as
short-term and are included in loans payable to banks in the consolidated
balance sheet.
F-52
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
LONG-TERM DEBT
<Table>
<Caption>
AS OF
------------------------
SEPTEMBER 30, JUNE 30,
2004 2004
------------- --------
Senior secured notes due December 1, 2007................... $105,000 $105,000
Senior subordinated notes due June 1, 2008.................. 48,029 48,029
Foreign bank loans.......................................... 5,912 6,237
Capitalized lease obligations and other..................... 4 103
-------- --------
158,945 159,369
Less: current maturities.................................... 953 1,351
-------- --------
$157,992 $158,018
======== ========
</Table>
8. EMPLOYEE BENEFIT PLANS
The Company and its domestic subsidiaries maintain noncontributory defined
benefit pension plans for all eligible domestic nonunion employees who meet
certain requirements of age, length of service and hours worked per year. The
Company's Belgium subsidiary maintains a defined contribution and defined
benefit plan for eligible employees.
Components of net periodic pension expense were:
<Table>
<Caption>
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------
DOMESTIC PENSION EXPENSE 2004 2003
- ------------------------ ----- -----
Service cost -- benefits earned during the year............. $ 287 $ 362
Interest cost on benefit obligation......................... 164 230
Expected return on plan assets.............................. (150) (210)
Amortization of initial unrecognized net transition
(asset)................................................... -- (1)
Amortization of prior service costs......................... (17) (41)
Amortization of net actuarial loss (gain)................... 2 16
----- -----
NET PERIODIC PENSION COST -- DOMESTIC....................... $ 286 $ 356
===== =====
</Table>
<Table>
<Caption>
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------
INTERNATIONAL PENSION EXPENSE 2004 2003
- ----------------------------- ----- -----
Service cost -- benefits earned during the year............. $122 $110
Interest cost on benefit obligation......................... 98 88
Expected return on plan assets.............................. (79) (71)
Amortization of net actuarial loss.......................... 6 6
---- ----
NET PERIODIC PENSION COST -- INTERNATIONAL.................. $147 $133
==== ====
</Table>
F-53
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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. In
preparation to move forward, a limited liability company has been formed, with
Vulcan Materials Company as the third member. The Company also has commenced
negotiations with Chevron regarding its allocation of responsibility and
associated costs under the Consent Order. While the costs cannot be estimated
with any degree of certainty at this time, the Company believes that insurance
recoveries will be available to offset some of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency ("the EPA"),
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which such subsidiary agreed to
contribute up to $900 of which $635 has been paid as of September 30, 2004. Some
recovery from insurance and other sources is expected but has not been recorded.
The Company also has accrued its best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substances Control and has reached an
agreement to pay $425 over a six year period ending October 2008.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposal at a licensed Casmalia, California disposal site, including a
business, assets of which were originally acquired by a subsidiary in 1984. A
settlement has been reached in this matter and the Company has paid $171 in full
settlement.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company has investigated the
matter, which relates to events in the 1950's and 1960's, and management does
not believe that the Company has any liability in this matter.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes that,
because its Sumter, South Carolina facility is distant from Turkey Creek and
does not discharge into Turkey Creek, the likelihood of liability associated
with this matter is remote.
The Company and its subsidiaries are party to a number of claims and
lawsuits arising out of the normal course of business including product
liabilities and governmental regulation. Certain of these actions seek
F-54
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 $2,870, which is included in current and long-term liabilities in
the September 30, 2004 condensed consolidated balance sheet (approximately
$2,933 at June 30, 2004).
10. GUARANTEES
As part of the Prince Transactions (Note 5), as is normal for such
transactions, the Company has agreed to indemnify the Palladium Investors for
losses arising out of breach of representations, warranties and covenants. The
Company's maximum liability under such indemnification is limited to $15,000.
The Company agreed to indemnify the Palladium Investors for a portion, at
the rate of $0.65 for every dollar, of the amount they receive in respect of the
disposition of the Buyer for less than $21,000, up to a maximum payment by the
Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop
Indemnification Amount would be payable on the earlier to occur of July 1, 2008
or six months after the redemption date of all of the Company's Senior Secured
Notes due 2007 if such a disposition closes prior to such redemption and six
months after the closing of any such disposition if the disposition closes after
any
F-55
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
such redemption. The Company's obligations with respect to the Backstop
Indemnification Amount will cease if the Palladium Investors do not close the
disposition of the Buyer by January 1, 2009. The maximum potential Backstop
Indemnification Amount is included in other liabilities on the Company's
condensed consolidated balance sheet.
The Company established a $1,000 letter of credit escrow for two years to
collateralize 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.
<Table>
<Caption>
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE
THREE MONTHS ENDED SEPTEMBER 30, 2004 NUTRITION CHEMICALS DISTRIBUTION OTHER & OTHER TOTAL
- ------------------------------------- --------- ---------- ------------ ------ --------- -------
Net sales.............................. $65,806 $8,393 $7,661 $6,415 $ -- $88,275
Operating income/(loss)................ 7,815 773 864 705 (4,129) 6,028
Depreciation and amortization.......... 2,195 403 2 100 655 3,355
</Table>
<Table>
<Caption>
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE
THREE MONTHS ENDED SEPTEMBER 30, 2003 NUTRITION CHEMICALS DISTRIBUTION OTHER & OTHER TOTAL
- ------------------------------------- --------- ---------- ------------ ------ --------- -------
Net sales.............................. $59,841 $11,982 $7,939 $5,188 $ -- $84,950
Operating income/(loss)................ 6,900 822 841 669 (3,857) 5,375
Depreciation and amortization.......... 2,029 649 3 115 372 3,168
</Table>
<Table>
<Caption>
ANIMAL
HEALTH & INDUSTRIAL ALL CORPORATE
IDENTIFIABLE ASSETS NUTRITION CHEMICALS DISTRIBUTION OTHER & OTHER TOTAL
- ------------------- --------- ---------- ------------ ------ --------- --------
At September 30, 2004.................. $188,620 $25,632 $8,607 $5,818 $14,874 $243,551
At June 30, 2004....................... 185,601 26,146 7,715 5,696 16,211 241,369
</Table>
12. CONSOLIDATING FINANCIAL STATEMENTS
The units of Senior Secured Notes due 2007, consisting of US Senior Secured
Notes issued by the Company (the "Parent Issuer") and Dutch Senior Secured Notes
issued by Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are
guaranteed by certain subsidiaries. The Company and its U.S. subsidiaries ("U.S.
Guarantor Subsidiaries"), excluding PMC, Prince MFG, LLC and MRT (until
divested) (the "Unrestricted Subsidiaries", as defined in the indenture), fully
and unconditionally guarantee all of the Senior Secured Notes on a joint and
several basis. In addition, the Dutch Issuer's subsidiaries, presently
consisting of Phibro Animal Health SA (the "Belgium Guarantor"), fully and
unconditionally guarantee the Dutch Senior
F-56
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Secured Notes. The Dutch issuer and the Belgium Guarantor do not guarantee the
US Senior Secured Notes. Other foreign subsidiaries ("Non-Guarantor
Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S.
Guarantor Subsidiaries include all domestic subsidiaries of the Company other
than the Unrestricted Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech,
Inc., Prince Agriproducts, Inc, Phibrochem, Inc., Phibro Chemicals, Inc.,
Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal
Health U.S., Inc.
The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc., PMC, Prince MFG, LLC, MRT (until divested), Phibrochem,
Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health
Holdings, Inc., and Phibro Animal Health U.S., Inc.
The following consolidating financial data summarizes the assets,
liabilities and results of operations and cash flows of the Parent Issuer,
Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium
Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S.
Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor
Subsidiaries are directly or indirectly wholly owned as to voting stock by the
Company.
Investments in subsidiaries are accounted for by the Parent Issuer using
the equity method. Income tax expense (benefit) is allocated among the
consolidating entities based upon taxable income (loss) by jurisdiction within
each group. The principal consolidation adjustments are to eliminate investments
in subsidiaries and intercompany balances and transactions.
F-57
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
AS OF SEPTEMBER 30, 2004
------------------------------------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES
-------- ------------ -------------- ------- --------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 184 $ -- $ 568 $ -- $ 202 $ 4,824
Trade receivables....... 2,828 -- 27,208 -- 2,015 20,670
Other receivables....... 338 -- 1,942 -- 133 1,027
Inventory............... 3,316 -- 36,410 -- 29,112 18,284
Prepaid expenses and
other................. 2,278 -- 691 -- 863 3,875
-------- ------- -------- ------- ------- -------
Total current
assets.............. 8,944 -- 66,819 -- 32,325 48,680
-------- ------- -------- ------- ------- -------
Property, plant &
equipment, net.......... 136 -- 14,052 -- 17,270 28,360
Intangibles............... -- -- 4,146 -- 1,544 5,664
Investment in
subsidiaries............ 107,628 -- 3,619 1,304 -- --
Intercompany.............. 8,802 -- 59,723 20,853 (1,833) (9,222)
Other assets.............. 14,051 -- 833 -- -- 727
-------- ------- -------- ------- ------- -------
$139,561 $ -- $149,192 $22,157 $49,306 $74,209
======== ======= ======== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft.......... $ -- $ -- $ 654 $ -- $ -- $ --
Loan payable to banks... 11,268 -- -- -- -- --
Current portion of long-
term debt............. -- -- 3 -- -- 950
Accounts payable........ 3,985 -- 24,014 -- 1,567 9,326
Accrued expenses and
other................. 15,328 -- 9,083 867 13,766 8,287
-------- ------- -------- ------- ------- -------
Total current
liabilities......... 30,581 -- 33,754 867 15,333 18,563
-------- ------- -------- ------- ------- -------
Long-term debt............ 133,029 -- 1 20,000 -- 4,962
Intercompany debt......... -- -- -- -- 31,720 46,603
Other liabilities......... 12,166 -- 5,054 -- 949 4,507
-------- ------- -------- ------- ------- -------
Total liabilities..... 175,776 -- 38,809 20,867 48,002 74,635
-------- ------- -------- ------- ------- -------
Redeemable Securities:
Series C preferred
stock................. 25,359 -- -- -- -- --
-------- ------- -------- ------- ------- -------
Stockholders' Equity
(Deficit):
Series A preferred
stock................. 521 -- -- -- -- --
Common stock............ 2 -- 31 -- -- --
Paid-in capital......... 860 -- 112,004 21 52 1,537
Retained earnings
(accumulated
deficit).............. (58,787) -- (1,484) (3,500) (3,517) 6,807
Accumulated other
comprehensive income
(loss):...............
Gain on derivative
instruments......... 84 -- 84 -- -- --
Cumulative currency
translation
adjustment.......... (4,254) -- (252) 4,769 4,769 (8,770)
-------- ------- -------- ------- ------- -------
Total stockholders'
equity (deficit).... (61,574) -- 110,383 1,290 1,304 (426)
-------- ------- -------- ------- ------- -------
$139,561 $ -- $149,192 $22,157 $49,306 $74,209
======== ======= ======== ======= ======= =======
<Caption>
AS OF SEPTEMBER 30, 2004
----------------------------
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS BALANCE
------------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents........... $ -- $ 5,778
Trade receivables....... -- 52,721
Other receivables....... -- 3,440
Inventory............... -- 87,122
Prepaid expenses and
other................. -- 7,707
--------- --------
Total current
assets.............. -- 156,768
--------- --------
Property, plant &
equipment, net.......... -- 59,818
Intangibles............... -- 11,354
Investment in
subsidiaries............ (112,551) --
Intercompany.............. (78,323) --
Other assets.............. -- 15,611
--------- --------
$(190,874) $243,551
========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Cash overdraft.......... $ -- $ 654
Loan payable to banks... -- 11,268
Current portion of long-
term debt............. -- 953
Accounts payable........ -- 38,892
Accrued expenses and
other................. -- 47,331
--------- --------
Total current
liabilities......... -- 99,098
--------- --------
Long-term debt............ -- 157,992
Intercompany debt......... (78,323) --
Other liabilities......... -- 22,676
--------- --------
Total liabilities..... (78,323) 279,766
--------- --------
Redeemable Securities:
Series C preferred
stock................. -- 25,359
--------- --------
Stockholders' Equity
(Deficit):
Series A preferred
stock................. -- 521
Common stock............ (31) 2
Paid-in capital......... (113,614) 860
Retained earnings
(accumulated
deficit).............. 1,694 (58,787)
Accumulated other
comprehensive income
(loss):............... --
Gain on derivative
instruments......... (84) 84
Cumulative currency
translation
adjustment.......... (516) (4,254)
--------- --------
Total stockholders'
equity (deficit).... (112,551) (61,574)
--------- --------
$(190,874) $243,551
========= ========
</Table>
F-58
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER
------- ------------ -------------- -------
(IN THOUSANDS)
Net sales................ $ 5,929 $ -- $56,675 $ --
Net
sales -- intercompany... 56 -- 93 --
Cost of goods sold....... 4,620 -- 41,634 --
------- -------- ------- -------
Gross profit........... 1,365 -- 15,134 --
Selling, general and
administrative
expenses............... 4,903 -- 6,956 6
------- -------- ------- -------
Operating income
(loss)............... (3,538) -- 8,178 (6)
Other:
Interest expense....... 4,352 -- (2) 650
Interest (income)...... (1) -- -- --
Other (income) expense,
net.................. 1 -- (228) --
Intercompany interest
and other............ (7,527) -- 5,449 (660)
(Profit) loss relating
to subsidiaries...... (532) -- -- (1,567)
------- -------- ------- -------
Income (loss) from
continuing operations
before income
taxes................ 169 -- 2,959 1,571
Provision for income
taxes.................. 310 -- 104 --
------- -------- ------- -------
Income (loss) from
continuing
operations........... (141) -- 2,855 1,571
Discontinued operations:
Profit (loss) relating
to discontinued
operations........... -- -- -- --
(Loss) from
discontinued
operations (net of
income taxes)........ -- -- -- --
Gain (loss) from
disposal of
discontinued
operations (net of
income taxes)........ -- -- -- --
------- -------- ------- -------
Net income (loss)...... $ (141) $ -- $ 2,855 $ 1,571
======= ======== ======= =======
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------
BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED
GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE
--------- ------------- ------------- ------------
(IN THOUSANDS)
Net sales................ $1,668 $24,003 $ -- $88,275
Net
sales -- intercompany... 6,204 1,075 (7,428) --
Cost of goods sold....... 4,699 22,128 (7,428) 65,653
------ ------- ------- -------
Gross profit........... 3,173 2,950 -- 22,622
Selling, general and
administrative
expenses............... 553 4,176 -- 16,594
------ ------- ------- -------
Operating income
(loss)............... 2,620 (1,226) -- 6,028
Other:
Interest expense....... 11 235 -- 5,246
Interest (income)...... -- (24) -- (25)
Other (income) expense,
net.................. (59) 310 -- 24
Intercompany interest
and other............ 939 1,799 -- --
(Profit) loss relating
to subsidiaries...... -- -- 2,099 --
------ ------- ------- -------
Income (loss) from
continuing operations
before income
taxes................ 1,729 (3,546) (2,099) 783
Provision for income
taxes.................. 162 348 -- 924
------ ------- ------- -------
Income (loss) from
continuing
operations........... 1,567 (3,894) (2,099) (141)
Discontinued operations:
Profit (loss) relating
to discontinued
operations........... -- -- -- --
(Loss) from
discontinued
operations (net of
income taxes)........ -- -- -- --
Gain (loss) from
disposal of
discontinued
operations (net of
income taxes)........ -- -- -- --
------ ------- ------- -------
Net income (loss)...... $1,567 $(3,894) $(2,099) $ (141)
====== ======= ======= =======
</Table>
F-59
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER
------- ------------ -------------- ------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............ $ (141) $ -- $2,855 $1,571
Adjustment for discontinued
operations................. -- -- -- --
------- ---- ------ ------
Income (loss) from continuing
operations................. (141) -- 2,855 1,571
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used) by
operating activities:
Depreciation and
amortization............. 655 -- 703 --
Deferred income taxes...... -- -- -- --
Net gain from sales of
assets................... -- -- -- --
Effects of changes in
foreign currency......... -- -- (227) --
Other...................... 3 -- 31 --
Changes in operating assets
and liabilities:.........
Accounts receivable...... (161) -- 216 --
Inventory................ (1,322) -- 3,251 --
Prepaid expenses and
other.................. 896 -- (267) --
Other assets............. (175) -- 173 --
Intercompany............. (2,988) 5 (2,153) (2,238)
Accounts payable......... (749) 6 (4,441) --
Accrued expenses and
other.................. 3,813 (1) 781 650
------- ---- ------ ------
Net cash provided (used) by
operating activities..... (169) 10 922 (17)
------- ---- ------ ------
Investing Activities:
Capital expenditures......... (55) -- (834) --
Proceeds from sale of
assets..................... -- -- -- --
------- ---- ------ ------
Net cash provided (used) by
investing activities..... (55) -- (834) --
------- ---- ------ ------
Financing Activities:
Net (decrease) in cash
overdraft.................. -- (10) (227) --
Net (decrease) in short-term
debt....................... 272 -- -- --
Proceeds from long-term
debt....................... -- -- -- --
Payments of long-term debt... -- -- (99) --
------- ---- ------ ------
Net cash provided (used) by
financing activities..... 272 (10) (326) --
------- ---- ------ ------
Effect of exchange rate changes
on cash...................... -- -- 5 --
------- ---- ------ ------
Net increase (decrease) in cash
and cash equivalents......... 48 -- (233) (17)
Cash and cash equivalents at
beginning of period.......... 136 -- 801 17
------- ---- ------ ------
Cash and cash equivalents at
end of period................ $ 184 $ -- $ 568 $ --
======= ==== ====== ======
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------------------
BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED
GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE
--------- ------------- ------------- ------------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............ $1,567 $(3,894) $(2,099) $ (141)
Adjustment for discontinued
operations................. -- -- -- --
------ ------- ------- -------
Income (loss) from continuing
operations................. 1,567 (3,894) (2,099) (141)
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used) by
operating activities:
Depreciation and
amortization............. 713 1,284 -- 3,355
Deferred income taxes...... -- 68 -- 68
Net gain from sales of
assets................... -- (1) -- (1)
Effects of changes in
foreign currency......... (59) 164 -- (122)
Other...................... -- 14 -- 48
Changes in operating assets
and liabilities:.........
Accounts receivable...... 618 4,016 -- 4,689
Inventory................ (5,409) (1,122) -- (4,602)
Prepaid expenses and
other.................. 107 341 -- 1,077
Other assets............. -- 1 -- (1)
Intercompany............. 2,450 2,825 2,099 --
Accounts payable......... (724) (2,288) -- (8,196)
Accrued expenses and
other.................. 997 (29) -- 6,211
------ ------- ------- -------
Net cash provided (used) by
operating activities..... 260 1,379 -- 2,385
------ ------- ------- -------
Investing Activities:
Capital expenditures......... (274) (585) -- (1,748)
Proceeds from sale of
assets..................... -- 12 -- 12
------ ------- ------- -------
Net cash provided (used) by
investing activities..... (274) (573) -- (1,736)
------ ------- ------- -------
Financing Activities:
Net (decrease) in cash
overdraft.................. -- -- -- (237)
Net (decrease) in short-term
debt....................... -- -- -- 272
Proceeds from long-term
debt....................... -- 445 -- 445
Payments of long-term debt... -- (773) -- (872)
------ ------- ------- -------
Net cash provided (used) by
financing activities..... -- (328) -- (392)
------ ------- ------- -------
Effect of exchange rate changes
on cash...................... 4 (56) (47)
------ ------- ------- -------
Net increase (decrease) in cash
and cash equivalents......... (10) 422 -- 210
Cash and cash equivalents at
beginning of period.......... 212 4,402 5,568
------ ------- ------- -------
Cash and cash equivalents at
end of period................ $ 202 $ 4,824 $ -- $ 5,778
====== ======= ======= =======
</Table>
F-60
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
AS OF JUNE 30, 2004
------------------------------------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES
-------- ------------ -------------- ------- --------- -------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents............. $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402
Trade receivables......... 2,670 -- 26,996 -- 2,592 25,400
Other receivables......... 317 414 1,195 -- 72 768
Inventory................. 1,994 -- 37,890 -- 23,159 16,867
Prepaid expenses and
other................... 3,195 110 565 -- 1,018 3,800
-------- ------- -------- ------- ------- --------
Total Current Assets.... 8,312 524 67,447 17 27,053 51,237
-------- ------- -------- ------- ------- --------
Property, plant &
equipment, net............ 105 -- 13,730 -- 17,321 27,630
Intangibles................ -- -- 4,252 -- 1,569 5,874
Investment in
subsidiaries.............. 125,355 -- 3,619 1,604 -- --
Intercompany............... (14,995) 20,995 60,030 20,181 1,630 (12,497)
Other assets............... 14,506 -- 1,056 -- -- 736
-------- ------- -------- ------- ------- --------
$133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980
======== ======= ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft............ $ -- $ 10 $ 881 $ -- $ -- $ --
Loan payable to banks..... 10,996 -- -- -- -- --
Current portion of long-
term debt............... -- -- 101 -- -- 1,250
Accounts payable.......... 4,734 9 28,434 -- 2,258 11,537
Accrued expenses and
other................... 11,857 159 8,306 216 12,022 7,450
-------- ------- -------- ------- ------- --------
Total Current
Liabilities........... 27,587 178 37,722 216 14,280 20,237
-------- ------- -------- ------- ------- --------
Long-term debt............. 133,029 -- 2 20,000 -- 4,987
Intercompany debt.......... -- -- -- -- 30,553 44,791
Other liabilities.......... 11,822 -- 4,897 -- 1,136 4,431
-------- ------- -------- ------- ------- --------
Total Liabilities....... 172,438 178 42,621 20,216 45,969 74,446
-------- ------- -------- ------- ------- --------
Redeemable Securities:
Series C preferred
stock................... 24,678 -- -- -- -- --
-------- ------- -------- ------- ------- --------
Stockholders' Equity
(Deficit):
Series A preferred
stock................... 521 -- -- -- -- --
Common stock.............. 2 1 31 -- -- --
Paid-in capital........... 860 -- 112,004 21 52 1,537
Retained earnings
(accumulated deficit)... (57,964) 21,340 (4,339) (2,744) (2,757) 8,374
Accumulated other
comprehensive income
(loss):
Gain on derivative
instruments............... 9 -- 9 -- -- --
Cumulative currency
translation adjustment.... (7,261) -- (192) 4,309 4,309 (11,377)
-------- ------- -------- ------- ------- --------
Total Stockholders'
Equity (Deficit)...... (63,833) 21,341 107,513 1,586 1,604 (1,466)
-------- ------- -------- ------- ------- --------
$133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980
======== ======= ======== ======= ======= ========
<Caption>
AS OF JUNE 30, 2004
----------------------------
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS BALANCE
------------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash
equivalents............. $ -- $ 5,568
Trade receivables......... -- 57,658
Other receivables......... -- 2,766
Inventory................. 79,910
Prepaid expenses and
other................... -- 8,688
--------- --------
Total Current Assets.... -- 154,590
--------- --------
Property, plant &
equipment, net............ -- 58,786
Intangibles................ -- 11,695
Investment in
subsidiaries.............. (130,578) --
Intercompany............... (75,344) --
Other assets............... -- 16,298
--------- --------
$(205,922) $241,369
========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Cash overdraft............ $ -- $ 891
Loan payable to banks..... -- 10,996
Current portion of long-
term debt............... -- 1,351
Accounts payable.......... -- 46,972
Accrued expenses and
other................... 40,010
--------- --------
Total Current
Liabilities........... -- 100,220
--------- --------
Long-term debt............. -- 158,018
Intercompany debt.......... (75,344) --
Other liabilities.......... -- 22,286
--------- --------
Total Liabilities....... (75,344) 280,524
--------- --------
Redeemable Securities:
Series C preferred
stock................... -- 24,678
--------- --------
Stockholders' Equity
(Deficit):
Series A preferred
stock................... -- 521
Common stock.............. (32) 2
Paid-in capital........... (113,614) 860
Retained earnings
(accumulated deficit)... (19,874) (57,964)
Accumulated other
comprehensive income
(loss):
Gain on derivative
instruments............... (9) 9
Cumulative currency
translation adjustment.... 2,951 (7,261)
--------- --------
Total Stockholders'
Equity (Deficit)...... (130,578) (63,833)
--------- --------
$(205,922) $241,369
========= ========
</Table>
F-61
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER
------- ------------ -------------- ------
(IN THOUSANDS)
Net sales................... $ 5,697 $5,683 $48,095 $ --
Net sales -- intercompany... 45 1,339 209 --
Cost of goods sold.......... 4,508 5,134 35,893 --
------- ------ ------- -----
Gross profit.............. 1,234 1,888 12,411 --
Selling, general and
administrative expenses... 4,673 675 6,221 --
------- ------ ------- -----
Operating income (loss)... (3,439) 1,213 6,190 --
Other:
Interest expense.......... 3,712 11 -- --
Interest (income)......... -- -- -- --
Other (income) expense,
net..................... 228 -- (242) --
Intercompany interest and
other................... (5,992) 1,082 2,539 --
(Profit) loss relating to
subsidiaries............ (2,874) -- -- --
------- ------ ------- -----
Income (loss) from
continuing operations
before income taxes..... 1,487 120 3,893 --
Provision for income
taxes..................... 1 16 218 --
------- ------ ------- -----
Income (loss) from
continuing operations... 1,486 104 3,675 --
Discontinued operations:
Profit (loss) relating to
discontinued
operations.............. (462) -- -- --
(Loss) from discontinued
operations (net of
income taxes)........... -- (124) -- --
Gain from disposal of
discontinued operations
(net of income taxes)... 231 -- -- --
------- ------ ------- -----
Net income (loss)....... $ 1,255 $ (20) $ 3,675 $ --
======= ====== ======= =====
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------
BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED
GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE
--------- ------------- ------------- ------------
(IN THOUSANDS)
Net sales................... $ 992 $24,483 $ -- $84,950
Net sales -- intercompany... 9,269 770 (11,632) --
Cost of goods sold.......... 9,196 20,691 (11,632) 63,790
------ ------- -------- -------
Gross profit.............. 1,065 4,562 -- 21,160
Selling, general and
administrative expenses... 524 3,692 15,785
------ ------- -------- -------
Operating income (loss)... 541 870 -- 5,375
Other:
Interest expense.......... -- 210 3,933
Interest (income)......... (30) (212) (242)
Other (income) expense,
net..................... (978) 407 (585)
Intercompany interest and
other................... 696 1,675 --
(Profit) loss relating to
subsidiaries............ -- -- 2,874 --
------ ------- -------- -------
Income (loss) from
continuing operations
before income taxes..... 853 (1,210) (2,874) 2,269
Provision for income
taxes..................... 333 215 783
------ ------- -------- -------
Income (loss) from
continuing operations... 520 (1,425) (2,874) 1,486
Discontinued operations:
Profit (loss) relating to
discontinued
operations.............. -- -- 462 --
(Loss) from discontinued
operations (net of
income taxes)........... -- (338) (462)
Gain from disposal of
discontinued operations
(net of income taxes)... -- -- 231
------ ------- -------- -------
Net income (loss)....... $ 520 $(1,763) $ (2,412) $ 1,255
====== ======= ======== =======
</Table>
F-62
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
<Table>
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------
PARENT UNRESTRICTED U.S. GUARANTOR DUTCH
ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER
-------- ------------ -------------- ------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............ $ 1,255 $ (20) $ 3,675 $ --
Adjustment for discontinued
operations................. 231 124 -- --
-------- ------- ------- -----
Income (loss) from continuing
operations................. 1,486 104 3,675 --
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used) by
operating activities:
Depreciation and
amortization............. 372 243 630 --
Deferred income taxes...... -- -- -- --
Net gain from sales of
assets................... -- -- -- --
Effects of changes in
foreign currency......... -- -- (164) --
Other...................... 126 -- 319 --
Changes in operating assets
and liabilities:
Accounts receivable...... 119 83 (1,351) --
Inventory................ (778) (1,305) (9,995) --
Prepaid expenses and
other.................. 433 404 (955) --
Other assets............. (530) 1 78 --
Intercompany............. (11,621) 523 7,744 --
Accounts payable......... (1,176) 289 (996) --
Accrued expenses and
other.................. 4,015 (9) (174) --
Cash provided (used) by
discontinued operations.... 231 (652) -- --
-------- ------- ------- -----
Net cash provided (used) by
operating activities..... (7,323) (319) (1,189) --
-------- ------- ------- -----
Investing Activities:
Capital expenditures......... -- (32) (286) --
Proceeds from sale of
assets..................... -- -- -- --
Other investing.............. -- -- -- --
Discontinued operations...... 13,788 -- -- --
-------- ------- ------- -----
Net cash provided (used) by
investing activities..... 13,788 (32) (286) --
-------- ------- ------- -----
Financing Activities:
Net (decrease) in cash
overdraft.................. 18 277 365 --
Net (decrease) in short-term
debt....................... (6,280) -- -- --
Proceeds from long-term
debt....................... -- -- -- --
Payments of long-term debt... (203) (12) (143) --
Other financing.............. -- -- -- --
Discontinued operations...... -- -- -- --
-------- ------- ------- -----
Net cash provided (used) by
financing activities..... (6,465) 265 222 --
-------- ------- ------- -----
Effect of exchange rate
changes on cash.............. -- -- 2 --
-------- ------- ------- -----
Net increase (decrease) in
cash and cash equivalents.... -- (86) (1,251) --
Cash and cash equivalents at
beginning of period.......... 43 119 2,167 --
-------- ------- ------- -----
Cash and cash equivalents at
end of period................ $ 43 $ 33 $ 916 $ --
======== ======= ======= =====
<Caption>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------
BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED
GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE
--------- ------------- ------------- ------------
(IN THOUSANDS)
Operating Activities:
Net income (loss)............ $ 520 $(1,763) $(2,412) $ 1,255
Adjustment for discontinued
operations................. -- 338 (462) 231
------- ------- ------- -------
Income (loss) from continuing
operations................. 520 (1,425) (2,874) 1,486
Adjustments to reconcile
income (loss) from
continuing operations to
net cash provided (used) by
operating activities:
Depreciation and
amortization............. 632 1,291 3,168
Deferred income taxes...... -- 53 53
Net gain from sales of
assets................... -- 1 1
Effects of changes in
foreign currency......... (913) (287) (1,364)
Other...................... -- (293) 152
Changes in operating assets
and liabilities:
Accounts receivable...... 544 1,437 832
Inventory................ 6,828 1,124 (4,126)
Prepaid expenses and
other.................. 441 (316) 7
Other assets............. -- 76 (375)
Intercompany............. (7,853) 8,333 2,874 --
Accounts payable......... (2,152) (1,448) (5,483)
Accrued expenses and
other.................. 2,641 820 7,293
Cash provided (used) by
discontinued operations.... -- 45 (376)
------- ------- ------- -------
Net cash provided (used) by
operating activities..... 688 9,411 -- 1,268
------- ------- ------- -------
Investing Activities:
Capital expenditures......... (226) (308) (852)
Proceeds from sale of
assets..................... -- 12 12
Other investing.............. -- -- --
Discontinued operations...... -- 261 14,049
------- ------- ------- -------
Net cash provided (used) by
investing activities..... (226) (35) -- 13,209
------- ------- ------- -------
Financing Activities:
Net (decrease) in cash
overdraft.................. -- 71 731
Net (decrease) in short-term
debt....................... -- 6,000 (280)
Proceeds from long-term
debt....................... -- 1,500 1,500
Payments of long-term debt... -- (586) (944)
Other financing.............. -- -- --
Discontinued operations...... -- 86 86
------- ------- ------- -------
Net cash provided (used) by
financing activities..... -- 7,071 -- 1,093
------- ------- ------- -------
Effect of exchange rate
changes on cash.............. 16 150 168
------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.... 478 16,597 -- 15,738
Cash and cash equivalents at
beginning of period.......... 185 8,665 11,179
------- ------- ------- -------
Cash and cash equivalents at
end of period................ $ 663 $25,262 $ -- $26,917
======= ======= ======= =======
</Table>
F-63
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
13. SUBSEQUENT EVENTS
ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES:
On December 21, 2004, the Company completed a private offering of 22,491
additional units consisting of $18,207 13% Senior Secured Notes due 2007 of the
Company (the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 (the
"Dutch Notes" and together with the U.S. Notes, the "Additional Notes") of
Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of
the Company (the "Dutch Issuer" and together with the Company, the "Issuers").
The Additional Notes were issued under the Indenture dated October 21, 2003, as
amended and supplemented (the "Indenture") under which the Issuers previously
issued 105,000 units consisting of $85,000 aggregate principal amount of U.S.
Notes and $20,000 aggregate principal amount of Dutch Notes. The proceeds from
the sale of the Additional Notes will be used to refinance a portion of the
Company's indebtedness under its domestic senior credit facility.
AMENDMENT TO THE SENIOR DOMESTIC CREDIT FACILITY:
On December 21, 2004, concurrent with the completion of the offering of the
Additional Notes, the Company amended the domestic senior credit facility to:
(i) amend the EBITDA definition to exclude charges and expenses related to the
sale of the Belgium Plant in an aggregate amount not to exceed $26,800 for
purposes of calculating a certain financial covenant; (ii) amend the Indenture
reserve definition to include scheduled payments of interest due on the
Additional Notes; (iii) amend the maximum aggregate amount of borrowing
available under the working capital facility to permit a temporary increase to
$22,500 and for its reduction to $17,500 on such borrowings being refinanced by
the proceeds of the Additional Notes; (iv) amend the Permitted Investments
definition to include investments in connection with the sale of the Belgium
Plant and transfer of certain equipment, together with other assets and rights
related to the production of virginiamycin, to Philipp Brothers Brasil Holdings
Ltda, ("PAH Brazil") or in connection with alternative production arrangements;
and (v) provide for the issuance of the Additional Notes and the sale of the
Belgium Plant and related transactions.
SALE OF BELGIUM PLANT:
On December 16, 2004, Phibro Animal Health SA, ("PAH Belgium") entered into
an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK
substantially all of PAH Belgium's facilities in Rixensart, Belgium ("the
Belgium Plant") as follows (U.S. dollar amounts at the December 16, 2004
exchange rate): (i) the transfer of substantially all of the land and buildings
and certain equipment of PAH Belgium at the Belgium Plant, as well as the
industrial activities and intellectual property relating to certain solvent
technology of PAH Belgium for a purchase price of EUR 6,200 ($8,238), payable at
closing; (ii) the transfer to GSK of a majority of the employees of the Belgium
Plant and the corresponding responsibility for statutory severance obligations;
(iii) GSK agreeing to be responsible for costs of removal, by demolition or
otherwise, certain buildings not to be used by it, but for PAH Belgium to
reimburse GSK up to a maximum of EUR 700 ($930) for such removal costs; (iv) in
recognition of the benefits to PAHC from the proposed transaction, PAH Belgium
agreeing to pay to GSK EUR 1,500 ($1,993) within six months from the closing
date, EUR 1,500 ($1,993) within eighteen months from the closing date, EUR 1,500
($1,993) within thirty months from the closing date, and EUR 500 ($664) within
forty-two months from the closing date; (v) PAH Belgium retaining certain excess
land (valued at approximately EUR 400 ($531)) and being able to sell such land
for its own account; (vi) PAH Belgium being responsible for certain plant
closure costs and legally required severance indemnities in connection with
workforce reductions, estimated in total to be EUR 7,700 ($10,231), of which an
amount estimated to be approximately EUR 4,100 ($5,448) would be payable at or
around the closing and an aggregate amount so estimated to be approximately
EUR 3,600 ($4,783) would be payable over periods up to thirteen years; and (vii)
PAH Belgium retaining any or all equipment at the Belgium Plant, and being able
to sell such equipment for the account of PAH Belgium or transfer such
F-64
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
equipment, together with other assets and rights related to the production of
virginiamycin, to PAH Brazil which owns a facility in Guarulhos, Brazil or in
connection with alternative production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur no earlier than July 1, 2005 nor later than June 30, 2006.
The Dutch Notes and related guarantees are secured by a mortgage on the
Belgium Plant which will be released in connection with the closing of the sale
of the Belgium Plant to GSK.
The carrying value of the Belgium Plant and related assets at September 30,
2004 is EUR 13.908 ($18,480). The Company is in the process of evaluating the
accounting for this transaction and will record an impairment loss, if required,
in the second quarter ended December 31, 2004. In addition, the company will
expense severance, plant closure and other related costs in the period in which
such liabilities are incurred in accordance with Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
disposal Activities". As of the date of this filing, estimates of such costs are
in process of being determined.
F-65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Philipp Brothers Netherlands I B.V.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, changes in
stockholders' deficit and cash flows present fairly, in all material respects,
the financial position of Philipp Brothers Netherlands I B.V. and its
subsidiaries at June 30, 2004 and June 30, 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2004, in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 10, 2005
F-66
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
AS OF JUNE 30,
---------------------
2004 2003
--------- ---------
(U.S.$ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash, including restricted balance of $175 at June 30,
2004 and 2003.......................................... $ 422 $ 689
Trade receivables, less allowance for doubtful accounts of
$39 and $58 at June 30, 2004 and 2003, respectively.... 4,344 3,090
Other receivables......................................... 304 711
Inventories............................................... 32,611 22,768
Prepaid expenses and other current assets................. 4,020 4,429
Trade receivables -- related parties...................... 7,917 11,116
-------- --------
TOTAL CURRENT ASSETS................................... 49,618 42,803
PROPERTY, PLANT AND EQUIPMENT, net.......................... 30,588 30,732
INTANGIBLES................................................. 1,569 1,818
OTHER ASSETS................................................ 1,084 --
-------- --------
$ 82,859 $ 75,353
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,223 $ 12,928
Accrued expenses and other current liabilities............ 13,438 9,160
Trade payables -- related parties......................... 1,687 922
-------- --------
TOTAL CURRENT LIABILITIES.............................. 18,348 23,010
LONG-TERM DEBT.............................................. 20,000 --
OTHER LIABILITIES........................................... 2,897 2,905
NOTES PAYABLE -- RELATED PARTIES............................ 55,124 60,034
-------- --------
TOTAL LIABILITIES...................................... 96,369 85,949
-------- --------
STOCKHOLDERS' DEFICIT:
Paid-in capital........................................... 7,405 3,877
Accumulated deficit....................................... (14,860) (10,258)
Cumulative foreign currency translation adjustment........ (6,055) (4,215)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT............................ (13,510) (10,596)
-------- --------
$ 82,859 $ 75,353
======== ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements
F-67
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
(U.S.$ IN THOUSANDS)
NET SALES................................................... $15,601 $15,467 $14,639
NET SALES -- RELATED PARTIES................................ 34,357 31,216 32,261
------- ------- -------
TOTAL SALES............................................... 49,958 46,683 46,900
COST OF GOODS SOLD.......................................... 37,940 38,744 35,856
------- ------- -------
GROSS PROFIT.............................................. 12,018 7,939 11,044
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 6,966 5,205 5,071
------- ------- -------
OPERATING INCOME.......................................... 5,052 2,734 5,973
OTHER:
Interest expense.......................................... 2,097 251 185
Interest expense -- related parties....................... 6,624 7,336 6,397
Other (income) expense, net............................... (681) 1,650 231
Other (income) expense, net -- related parties............ -- 2,880 --
------- ------- -------
(LOSS) BEFORE INCOME TAXES................................ (2,988) (9,383) (840)
PROVISION FOR INCOME TAXES.................................. 1,614 359 (10)
------- ------- -------
NET LOSS.................................................. (4,602) (9,742) (830)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in currency translation adjustment................. (1,840) 2,669 (3,612)
------- ------- -------
COMPREHENSIVE LOSS........................................ $(6,442) $(7,073) $(4,442)
======= ======= =======
</Table>
The accompanying notes are an integral part of the consolidated financial
statements
F-68
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 AND 2002
---------------------------------------------------
FOREIGN
CURRENCY
PAID-IN (ACCUMULATED TRANSLATION
CAPITAL DEFICIT) ADJUSTMENT TOTAL
-------- ------------- ------------ ---------
(U.S.$ IN THOUSANDS)
BALANCE, JUNE 30, 2001............................ $ 25 $ 314 $(3,272) $ (2,933)
Contribution from parent........................ 1,922 1,922
Net (loss)...................................... (830) (830)
Foreign currency translation adjustment......... (3,612) (3,612)
------ -------- ------- --------
BALANCE, JUNE 30, 2002............................ $1,947 $ (516) $(6,884) $ (5,453)
====== ======== ======= ========
Contribution from parent........................ 1,930 1,930
Net (loss)...................................... (9,742) (9,742)
Foreign currency translation adjustment......... 2,669 2,669
------ -------- ------- --------
BALANCE, JUNE 30, 2003............................ $3,877 $(10,258) $(4,215) $(10,596)
====== ======== ======= ========
Contribution from parent........................ 3,528 3,528
Net (loss)...................................... (4,602) (4,602)
Foreign currency translation adjustment......... (1,840) (1,840)
------ -------- ------- --------
BALANCE, JUNE 30, 2004............................ $7,405 $(14,860) $(6,055) $(13,510)
====== ======== ======= ========
</Table>
The accompanying notes are an integral part of the consolidated financial
statements
F-69
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
----------------------------
2004 2003 2002
------- ------- --------
(U.S.$ IN THOUSANDS)
OPERATING ACTIVITIES:
Net (loss)................................................ $(4,602) $(9,742) $ (830)
Adjustments to reconcile net (loss) to net cash used by
operating activities:
Depreciation and amortization.......................... 3,558 2,449 2,889
Deferred taxes......................................... 112 1,376 862
Allocated selling, general and administrative expenses
from parent.......................................... 2,217 1,930 1,922
Effects of changes in foreign currency and other....... (378) 1,419 (474)
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,287) (572) 1,469
Inventories.......................................... (9,699) (1,398) (13,181)
Prepaid expenses and other current assets............ 354 (2,534) (791)
Other assets......................................... -- -- 66
Related party receivables and payables............... 6,227 6,611 1,466
Accounts payable..................................... (2,169) 3,540 971
Accrued expenses and other liabilities............... 4,022 (6,611) 5,021
------- ------- --------
NET CASH USED BY OPERATING ACTIVITIES............. (1,645) (3,532) (610)
------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (3,024) (4,260) (2,657)
Acquisition of a business................................. -- -- (4,422)
Other investing........................................... (189) -- --
------- ------- --------
NET CASH USED BY INVESTING ACTIVITIES............. (3,213) (4,260) (7,079)
------- ------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in intercompany debt.............. (7,176) 7,578 809
Proceeds from long-term debt.............................. 20,000 -- --
Payment of Pfizer obligations............................. (8,225) -- --
------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 4,599 7,578 809
------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (8) 78 86
------- ------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (267) (136) (6,794)
CASH AND CASH EQUIVALENTS at beginning of period............ 689 825 7,619
------- ------- --------
CASH AND CASH EQUIVALENTS at end of period.................. $ 422 $ 689 $ 825
======= ======= ========
Supplemental Cash Flow Information:
Interest paid............................................. $ 89 $ 88 $ --
Income taxes paid......................................... 63 956 358
</Table>
The accompanying notes are an integral part of the consolidated financial
statements
F-70
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. $ IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
Philipp Brothers Netherlands I B.V., a company organized under the laws of
The Netherlands, (the "Company") is a global manufacturer and marketer of a
broad range of animal health and nutrition products, specifically medicated feed
additives ("MFA"), which the Company sells throughout the world predominately to
the poultry, swine and cattle markets.
The Company is a direct wholly-owned subsidiary of Phibro Animal Health
Holdings, Inc ("PAH Holdings") and an indirect wholly-owned subsidiary of Phibro
Animal Health Corporation ("PAHC"). PAHC has agreed to fund the Company's cash
flows to the extent required through January 31, 2006.
On November 30, 2000, PAHC purchased the medicated feed additive ("MFA")
business of Pfizer, Inc. The Company, the Company's subsidiaries and PAH
Holdings were part of that acquisition. In connection with the MFA acquisition
additional purchase price of $4,422, was earned and paid in 2002. All earn-out
requirements have been satisfied and no further payments are necessary.
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, including Phibro Animal Health SA ("PAH
Belgium") and Philipp Brothers Brasil Holdings Ltda. ("PAH Brazil"). All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
The Company presents its consolidated financial statements on the basis of
its fiscal year ending June 30. All references to years 2004, 2003, and 2002 in
these financial statements refer to the fiscal year ended June 30 of that year.
RISKS AND UNCERTAINTIES:
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
A significant portion of the Company's sales and earnings are attributable
to transactions with related parties.
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
F-71
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
could differ from these estimates. Significant estimates include reserves for
bad debts, inventory obsolescence, environmental matters, depreciation and
amortization periods of long-lived assets, recoverability of long-lived assets
and realizability of deferred tax assets and actuarial assumptions related to
the Company's pension plan.
REVENUE RECOGNITION:
Revenue is recognized upon transfer of title and when risk of loss passes
to the customer, generally at time of shipment. Net sales reflect total sales
billed, less reductions for goods returned and trade discounts.
CASH:
Cash includes cash in banks. Cash also includes cash, of a subsidiary of
the Company, which is on deposit in a restricted bank account under a
contractual obligation with a customer, in the amount of $175 at June 30, 2004
and 2003. This cash was subsequently released during December 2004.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the probable credit losses in its existing accounts receivable. The
allowance is based on historical write-off experience and is reviewed
periodically. Past due balances are reviewed individually for collectibility.
Account balances are charged against the allowance when the Company feels that
it is probable that the receivable will not be recovered.
The allowance for doubtful accounts was:
<Table>
<Caption>
2004 2003 2002
---- ---- ----
Balance at beginning of period.............................. $ 58 $20 $25
Provision for bad debts..................................... -- 38 --
Bad debt write-offs......................................... (19) -- (5)
---- --- ---
Balance at end of period.................................... $ 39 $58 $20
==== === ===
</Table>
INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) method. Obsolete and unsaleable
inventories are reflected at estimated net realizable value. Inventory costs
include materials, direct labor and manufacturing overhead. Inventories are
comprised of:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Raw materials............................................... $ 1,454 $ 2,016
Work-in-process............................................. 585 220
Finished goods.............................................. 30,572 20,532
------- -------
Total inventory............................................. $32,611 $22,768
======= =======
</Table>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost.
Depreciation is charged to results of operations using the straight-line
method based upon the assets' estimated useful lives ranging from 8 to 20 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
F-72
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company capitalizes costs that extend the useful life or productive
capacity of an asset. Repair and maintenance costs are expensed as incurred. In
the case of disposals, the assets and related accumulated depreciation are
removed from the accounts, and the net amounts, less proceeds from disposal, are
included in the statements of operations and comprehensive loss.
DEFERRED FINANCING COSTS:
Deferred financing costs related to the 13% Senior Secured Notes due 2007
were allocated to the Company from PAHC and were $1,311 net of accumulated
amortization of $227 at June 30, 2004. These deferred financing costs are being
amortized over the life of the notes. Amortization expense was $227 for 2004.
INTANGIBLES:
Product intangibles cost arising from the MFA acquisition was $2,191 and
$2,069 at June 30, 2004 and 2003, respectively, and accumulated amortization of
$622 and $251 at June 30, 2004 and 2003, respectively. Amortization expense was
$252, $156 and $201 for 2004, 2003 and 2002, respectively. Amortization expense
from the MFA acquisition for each of the next five years from 2005 to 2009 is
expected to be approximately $250 per year. These product intangible costs are
being amortized on a straight-line basis over ten years with 6 1/2 years
remaining at June 30, 2004.
FOREIGN CURRENCY TRANSLATION:
Financial position and results of operations of the Company are measured
using the Euro as the functional currency. Assets and liabilities are translated
at the exchange rates in effect at each fiscal year end. The translation
adjustments related to assets and liabilities that arise from the use of
differing exchange rates from period to period are included in cumulative
foreign currency translation adjustment on the Company's balance sheet. Income
statement accounts are translated at the average rates of exchange prevailing
during the year.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction (gains)
losses were $(378), $1,419 and $(474) for 2004, 2003 and 2002, respectively, and
were included in other (income) expense, net in the consolidated statements of
operations and comprehensive loss.
PAHC considers long-term notes payable with related parties to be balances
for which settlement is not planned or anticipated in the foreseeable future.
PAHC considers these balances to be part of the net investment and, accordingly,
foreign currency transaction (gains) losses from such items are recorded in
cumulative foreign currency translation adjustment on the Company's balance
sheet.
RECOVERABILITY OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of long-lived assets, including
intangible assets, when events or circumstances indicate that a diminution in
value may have occurred, using financial indicators such as historical and
future ability to generate cash flows from operations. The Company's policy is
to record an impairment loss in the period it is determined the carrying amount
of the asset may not be recoverable. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future net cash flows (undiscounted and without interest or income
taxes) are less than the carrying amount of the assets.
F-73
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
Income tax expense includes The Netherlands, Belgium and Brazil income
taxes. The tax effect of certain temporary differences between amounts
recognized for financial reporting purposes and amounts recognized for tax
purposes are reported as deferred income taxes. Deferred tax balances are
adjusted to reflect tax rates, based on current tax laws, which will be in
effect in the years in which the temporary differences are expected to reverse.
Valuation allowances are established as necessary to reduce deferred tax assets
to amounts more likely than not to be realized.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are expensed as incurred, recorded in
selling, general and administrative expenses and were $520, $273 and $273 for
2004, 2003 and 2002, respectively.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company adopted the following new and revised accounting pronouncements
in fiscal 2004:
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment to
FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This
revision to SFAS No. 132 relates to employers' disclosures about pension plans
and other postretirement benefit plans. SFAS No. 132 now requires additional
disclosures to describe the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods of defined pension plans
and other defined postretirement plans. The additional disclosures required by
this revision to SFAS No. 132 have been provided.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
The Company will adopt the following new accounting pronouncements during
2005:
Statement of Financial Accounting Standards No. 151, "Inventory Costs, an
amendment to Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151").
SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No.
43, Chapter 4, previously stated that "...under some circumstances, items such
as idle facility expense, excessive spoilage, double freight, and rehandling
costs may be so abnormal as to require treatment as current period charges...."
SFAS No. 151 requires that those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
SFAS No. 151 requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 30, 2005 and the provisions of this statement shall be applied
prospectively. The Company is currently assessing the impact of this statement.
Statement of Financial Accounting Standards No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS
No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly
F-74
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after December 2004. The
provisions of this statement shall be applied prospectively. The Company is
currently assessing the impact of this statement.
3. REFINANCING
On October 21, 2003, PAHC issued 105,000 units consisting of $85,000 of 13%
Senior Secured Notes due 2007 of PAHC and $20,000 13% Senior Secured Notes due
2007 of Philipp Brothers Netherlands III B.V., an indirect wholly-owned
subsidiary of the Company. Certain proceeds from the issuance were to satisfy
its outstanding obligations to Pfizer Inc., including $8,225 of accounts
payable.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Land........................................................ $ 4,199 $ 4,287
Buildings and improvements.................................. 10,267 8,820
Machinery and equipment..................................... 25,321 23,859
------- -------
39,787 36,966
Less: accumulated depreciation.............................. (9,199) (6,234)
------- -------
$30,588 $30,732
======= =======
</Table>
Depreciation expense was $3,079, $2,293 and $2,688 for 2004, 2003 and 2002,
respectively.
5. RELATED PARTY TRANSACTIONS
The Company transacts business with PAHC and certain of its subsidiaries.
The amounts of these transactions, and the related receivables and payables,
reflected in the Company's financial statements are as follows:
<Table>
<Caption>
2004 2003 2002
------- ------- -------
Product sales........................................... $34,357 $31,216 $32,261
Product purchases....................................... 913 3,086 4,028
Receivables at June 30.................................. 7,917 11,116 16,730
Payables at June 30..................................... 1,687 922 1,989
</Table>
The Company has notes payable to related parties. These notes bear interest
at 6%, 9%, 13% and 13.125% per annum and interest is payable annually on
December 31. The Company's related interest obligations to related parties will
be payable only to the extent that the Company's cash flows are sufficient to
service such obligations. These notes mature on June 23, 2006, September 22,
2006, December 1, 2007 and July 2, 2011. These notes payable are included in
notes payable -- related parties on the Company's consolidated balance sheet.
During August and September 2001, Odda, a Norwegian subsidiary of PAHC,
issued $2,000 of 9 7/8% promissory notes, with a 5-year maturity, to PAH Brazil.
During 2003 PAHC determined it would permanently shutdown and no longer fund the
operations of Odda, and on February 28, 2003 Odda filed for bankruptcy in
Norway. As a result of the bankruptcy, during 2003, the Company recorded a
reserve of $2,280 for the principal amount of the promissory notes plus accrued
interest. This reserve was included in other
F-75
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(income) expense, net -- related parties on the Company's consolidated
statements of operations and comprehensive loss.
Cost allocations from PAHC and certain other related parties are included
in selling, general and administrative expenses on the Company's consolidated
statements of operations and comprehensive loss. These allocations are based
upon the ratio of the Company's third party sales to the third party sales of
PAHC and certain other related parties, and represent administrative costs
incurred by these entities in support of the operations of the Company. These
cost allocations amounted to $2,217, $1,930 and $1,922 for 2004, 2003 and 2002,
respectively. PAHC and the certain other related parties have decided not to
seek repayment for these amounts from the Company and contributed these amounts
as additional capital to the Company.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Employee related expenses................................... $ 3,264 $ 2,876
Tax accruals................................................ 8,167 5,188
Interest accruals........................................... 217 --
Other accrued liabilities................................... 1,790 1,096
------- -------
$13,438 $ 9,160
======= =======
</Table>
7. DEBT
In October 2003 PAHC 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"), (the "Dutch issuer"), an indirect wholly-owned subsidiary of the
Company.
The Dutch Senior Notes are senior secured obligations of the Dutch issuer
and are guaranteed on a senior secured basis by PAHC and by the restricted
subsidiaries of the Dutch issuer, presently consisting of Phibro Animal Health
SA. 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, and a pledge of the intercompany loans made by the Dutch issuer to
its restricted subsidiaries.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires PAHC to make certain offers to purchase
Senior Secured Notes upon a change of control, upon certain asset sales and from
fifty percent (50%) of excess cash flow (as such terms are defined in the
indenture).
The indenture contains certain covenants with respect to PAHC, the Company
and the guarantors, which restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of dividends and other restricted
payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain
payment restrictions affecting subsidiaries, and (f) transactions with
affiliates. The indenture restricts the Company's ability to consolidate, or
merge with or into, or to transfer all or substantially all of its assets to,
another person.
F-76
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company's Belgium subsidiary maintains a defined benefit plan for
eligible employees. The benefits provided by the plan are based upon years of
service and the employees' average compensation, as defined. The measurement
date for the plan was June 30, 2004 and 2003, respectively.
Reconciliations of changes in benefit obligations, plan assets, and funded
status of the plans were:
<Table>
<Caption>
JUNE 2004 JUNE 2003
--------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $6,595 $4,251
Service cost................................................ 467 310
Employee contributions...................................... 27 100
Interest cost............................................... 374 259
Benefits paid............................................... (3) (29)
Actuarial (gain) or loss.................................... (475) 879
Exchange rate impact........................................ 338 825
------ ------
Benefit obligation at end of year........................... $7,323 $6,595
====== ======
</Table>
At June 30, 2004 and 2003, the accumulated benefit obligations were $4,383
and $4,248, respectively.
<Table>
<Caption>
JUNE 2004 JUNE 2003
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $4,566 $2,882
Actual return on plan assets................................ 435 204
Employer contributions...................................... 558 841
Employee contributions...................................... 27 100
Benefits paid............................................... (3) (29)
Exchange rate impact........................................ 245 568
------ ------
Fair value of plan assets at end of year.................... $5,828 $4,566
====== ======
</Table>
<Table>
<Caption>
JUNE 2004 JUNE 2003
--------- ---------
FUNDED STATUS
Funded status of the plan................................... $(1,495) $(2,029)
Unrecognized net actuarial (gain) or loss................... 368 961
------- -------
(Accrued) pension cost...................................... $(1,127) $(1,068)
======= =======
</Table>
The Company expects to contribute $602 to the plan during fiscal 2005. The
Company's policy is to fund the plan in amounts which comply with contribution
limits imposed by law.
F-77
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of net periodic pension expense were:
<Table>
<Caption>
2004 2003 2002
----- ----- -----
Service cost -- benefits earned during the year............. $ 467 $ 310 $ 217
Interest cost on benefit obligation......................... 374 259 164
Expected return on plan assets.............................. (300) (203) (123)
Amortization of net actuarial loss.......................... 22 -- --
----- ----- -----
Net periodic pension cost................................... $ 563 $ 366 $ 258
===== ===== =====
</Table>
Significant actuarial assumptions for the plan were:
<Table>
<Caption>
2004 2003 2002
---- ---- ----
Discount rate for service and interest...................... 5.5% 5.8% 5.8%
Expected rate of return on plan assets...................... 6.0% 6.0% 6.0%
Rate of compensation increase............................... 3.0% 3.0% 3.0%
Discount rate for year-end benefit obligation............... 5.5% 5.5% 5.8%
</Table>
Estimated future benefit payments, including benefits attributable to
future service, are as follows:
<Table>
2005........................................................ $ 37
2006........................................................ 38
2007........................................................ 40
2008........................................................ 41
2009........................................................ 42
2010-2014................................................... 1,817
</Table>
The Company's plan target allocations for fiscal 2005 and the weighted
asset allocation of plan assets as of June 30, 2004 and 2003 are as follows:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
Debt securities............................................. 59% 62% 79%
Equity securities........................................... 25% 21% 20%
Other....................................................... 16% 17% 1%
</Table>
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on the
target allocation for each class. Equity securities are expected to return 7.5%
over the long-term, while debt securities are expected to return 5.5%.
The Company assumed the liability for the plan during 2002 as part of the
MFA acquisition from Pfizer.
The Company's Brazil subsidiary provides a savings plan, under which
eligible employees may make a pre-tax contribution of up to 12% of base
compensation. The Company makes a matching contribution equal to the employee's
contribution up to the first 6% of base compensation. All employee contributions
are subject to the maximum amounts permitted under statutory income tax
guidelines. Expense related to the Company's contribution under this plan was
$58, $41 and $39 for 2004, 2003 and 2002, respectively.
In addition the Company's Brazil subsidiary makes a supplemental retirement
contribution on behalf of certain eligible employees transferred to the Company
in December 2000. Expense related to the Company's contribution was $30, $24 and
$30 in 2004, 2003 and 2002, respectively.
F-78
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
<Table>
<Caption>
2004 2003 2002
------- ------- -----
Loss before income taxes.................................. $(2,988) $(9,383) $(840)
======= ======= =====
Current tax provision (benefit)........................... $ 1,502 $(1,017) $(872)
Deferred tax provision.................................... 112 1,376 862
------- ------- -----
Provision (benefit) for income taxes...................... $ 1,614 $ 359 $ (10)
======= ======= =====
</Table>
Reconciliations of the statutory income tax rate and the Company's
effective income tax rate are:
<Table>
<Caption>
2004 2003 2002
----- ----- -----
% % %
Statutory income tax rate................................... (34.0) (34.0) (34.0)
Foreign tax rate differences................................ 9.3 1.5 (36.4)
Expenses with no tax benefit................................ 34.2 6.4 72.4
Changes in valuation allowance.............................. 33.8 27.2 --
Other....................................................... 10.7 2.7 (3.2)
----- ----- -----
Effective income tax rate................................... 54.0 3.8 (1.2)
===== ===== =====
</Table>
The tax effects of significant temporary differences that comprise deferred
tax assets and deferred tax liabilities at June 30, 2004 and 2003 were:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Deferred tax assets:
Depreciation.............................................. $ 7 $ 7
Inventory................................................. 615 615
Net operating loss carry forwards......................... 3,686 1,849
Other..................................................... 97 11
------- -------
4,405 2,482
Less: valuation allowance................................. (3,686) (1,849)
------- -------
719 633
------- -------
Deferred tax liabilities:
Depreciation.............................................. (1,022) (990)
Other..................................................... (1,143) (977)
------- -------
(2,165) (1,967)
------- -------
Net deferred tax liability.................................. $(1,446) $(1,334)
======= =======
</Table>
Deferred taxes are included in the following line items on the Company's
consolidated balance sheets:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Prepaid expenses and other current assets................... $ 315 $ 315
Other liabilities........................................... (1,761) (1,649)
------- -------
$(1,446) $(1,334)
======= =======
</Table>
F-79
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has incurred 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
will continue to evaluate the likelihood of recoverability of these deferred tax
assets based upon actual and expected operating performance.
10. SUBSEQUENT EVENTS
ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES:
On December 21, 2004, PAHC completed a private offering of 22,491
additional units consisting of $18,207 13% Senior Secured Notes due 2007 of PAHC
(the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 (the "Dutch
Notes" and together with the U.S. Notes, the "Additional Notes") of Philipp
Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of the
Company (the "Dutch Issuer" and together with PAHC, the "Issuers"). The
Additional Notes were issued under the Indenture dated October 21, 2003, as
amended and supplemented (the "Indenture") under which the Issuers previously
issued 105,000 units consisting of $85,000 aggregate principal amount of U.S.
Notes and $20,000 aggregate principal amount of Dutch Notes. The proceeds from
the sale of the Additional Notes will be used to refinance a portion of PAHC's
indebtedness under its domestic senior credit facility.
SALE OF BELGIUM PLANT:
On December 16, 2004 PAH Belgium entered into an agreement with
GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of PAH
Belgium's facilities in Rixensart, Belgium ("the Belgium Plant") as follows
(U.S. dollar amounts at the December 16, 2004 exchange rate): (i) the transfer
of substantially all of the land and buildings and certain equipment of PAH
Belgium at the Belgium Plant, as well as the industrial activities and
intellectual property relating to certain solvent technology of PAH Belgium for
a purchase price of EUR 6,200 ($8,238), payable at closing; (ii) the transfer to
GSK of a majority of the employees of the Belgium Plant and the corresponding
responsibility for statutory severance obligations; (iii) GSK agreeing to be
responsible for costs of removal, by demolition or otherwise, certain buildings
not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of
EUR 700 ($930) for such removal costs; (iv) in recognition of the benefits to
PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1,500
($1,993) within six months from the closing date, EUR 1,500 ($1,993) within
eighteen months from the closing date, EUR 1,500 ($1,993) within thirty months
from the closing date, and EUR 500 ($664) within forty-two months from the
closing date; (v) PAH Belgium retaining certain excess land (valued at
approximately EUR 400 ($531)) and being able to sell such land for its own
account; (vi) PAH Belgium being responsible for certain plant closure costs and
legally required severance indemnities in connection with workforce reductions,
estimated in total to be EUR 7,700 ($10,231), of which an amount estimated to be
approximately EUR 4,100 ($5,448) would be payable at or around the closing and
an aggregate amount so estimated to be approximately EUR 3,600 ($4,783) would be
payable over periods up to thirteen years; and (vii) PAH Belgium retaining any
or all equipment at the Belgium Plant, and being able to sell such equipment for
the account of PAH Belgium or transfer such equipment, together with other
assets and rights related to the production of virginiamycin, to PAH Brazil
which owns a facility in Guarulhos, Brazil or in connection with alternative
production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur no earlier than July 1, 2005 nor later than June 30, 2006.
The Dutch Notes and related guarantees are secured by a mortgage on the
Belgium Plant which will be released in connection with the closing of the sale
of the Belgium Plant to GSK.
F-80
PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying value of the Belgium Plant and related assets at September 30,
2004 is EUR 13,098 ($18,480). The Company is in the process of evaluating the
accounting for this transaction and will record an impairment loss, if required
in the second quarter ended December 31, 2004. In addition, the Company will
expense severance, plant closure and other related costs in the period in which
such liabilities are incurred in accordance with Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". As of the date of this filing, estimates of such costs are
in process of being determined.
11. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and trade receivables. The Company places its cash
with high quality financial institutions. The Company sells to customers in a
variety of industries, markets and countries. Concentrations of credit risk with
respect to receivables arising from these sales are limited due to the large
number of customers comprising the Company's customer base. Ongoing credit
evaluations of customers' financial conditions are performed and, generally, no
collateral is required. The Company maintains appropriate reserves for
uncollectible receivables.
The carrying amounts of cash, trade receivables and trade payables is
considered to be representative of their fair value because of their short
maturities. The fair value of the Company's Dutch Senior Notes is estimated
based on quoted market prices. At June 30, 2004 the fair value of the Company's
Dutch Senior Notes was $21,800 and the related carrying amount was $20,000.
12. BUSINESS SEGMENTS
The Company has determined that it operates only in one segment. The
Company manufactures and markets numerous formulations and concentrations of
medicated feed additives including antibiotics, antibacterials, anticoccidials,
anthelmintics, and other animal health and nutrition products.
13. 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.
<Table>
<Caption>
2004 2003 2002
------- ------- -------
TOTAL SALES
Europe................................................ $34,713 $33,619 $25,705
South America......................................... 15,245 13,064 21,195
------- ------- -------
Total................................................. $49,958 $46,683 $46,900
======= ======= =======
</Table>
<Table>
<Caption>
2004 2003 2002
------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, NET
Europe................................................ $17,320 $17,049 $14,399
South America......................................... 13,268 13,683 11,799
------- ------- -------
Total................................................. $30,588 $30,732 $26,198
======= ======= =======
</Table>
F-81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Phibro Animal Health SA (Belgium):
In our opinion, the accompanying balance sheets and the related statements
of operations and comprehensive (loss), changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Phibro
Animal Health SA (Belgium) at June 30, 2004 and June 30, 2003, and the results
of its operations and its cash flows for each of the three years in the period
ended June 30, 2004, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
January 10, 2005
F-82
PHIBRO ANIMAL HEALTH SA (BELGIUM)
BALANCE SHEETS
<Table>
<Caption>
AS OF JUNE 30,
---------------------
2004 2003
--------- ---------
(U.S.$ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash, including restricted balance of $175 at June 30,
2004 and 2003.......................................... $ 212 $ 185
Trade receivables, less allowance for doubtful accounts of
$13 and $22 at June 30, 2004 and 2003, respectively.... 2,592 1,542
Other receivables......................................... 72 518
Inventories............................................... 23,159 13,460
Prepaid expenses and other current assets................. 1,018 1,866
Trade receivables -- related parties...................... 4,527 8,553
------- -------
TOTAL CURRENT ASSETS................................... 31,580 26,124
PROPERTY, PLANT AND EQUIPMENT, net.......................... 17,321 17,049
INTANGIBLES................................................. 1,569 1,818
------- -------
$50,470 $44,991
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,258 $12,115
Accrued expenses and other current liabilities............ 8,291 4,804
Trade payables -- related parties......................... 2,879 1,835
------- -------
TOTAL CURRENT LIABILITIES.............................. 13,428 18,754
OTHER LIABILITIES........................................... 2,897 2,905
NOTES PAYABLE -- RELATED PARTIES............................ 30,571 22,306
------- -------
TOTAL LIABILITIES...................................... 46,896 43,965
------- -------
STOCKHOLDERS' EQUITY:
Paid-in capital........................................... 1,896 1,186
Accumulated deficit....................................... (2,631) (3,937)
Cumulative foreign currency translation adjustment........ 4,309 3,777
------- -------
TOTAL STOCKHOLDERS' EQUITY............................. 3,574 1,026
------- -------
$50,470 $44,991
======= =======
</Table>
The accompanying notes are an integral part of the financial statements
F-83
PHIBRO ANIMAL HEALTH SA (BELGIUM)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
------------------------------
2004 2003 2002
-------- -------- --------
(U.S.$ IN THOUSANDS)
NET SALES................................................... $ 5,742 $ 6,625 $ 4,196
NET SALES -- RELATED PARTIES................................ 28,970 26,994 21,509
------- ------- -------
TOTAL SALES............................................... 34,712 33,619 25,705
COST OF GOODS SOLD.......................................... 25,293 31,435 21,631
------- ------- -------
GROSS PROFIT.............................................. 9,419 2,184 4,074
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 3,334 2,595 2,018
------- ------- -------
OPERATING INCOME (LOSS)................................... 6,085 (411) 2,056
OTHER:
Interest expense.......................................... 95 62 365
Interest expense -- related parties....................... 3,335 2,849 2,486
Other (income) expense, net............................... (265) 1,283 2,294
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES......................... 2,920 (4,605) (3,089)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 1,614 (1,086) (1,098)
------- ------- -------
NET INCOME (LOSS)......................................... 1,306 (3,519) (1,991)
OTHER COMPREHENSIVE INCOME:
Change in currency translation adjustment................. 532 2,401 1,319
------- ------- -------
COMPREHENSIVE INCOME (LOSS)............................... $ 1,838 $(1,118) $ (672)
======= ======= =======
</Table>
The accompanying notes are an integral part of the financial statements
F-84
PHIBRO ANIMAL HEALTH SA (BELGIUM)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 AND 2002
------------------------------------------------------
FOREIGN
CURRENCY
PAID-IN (ACCUMULATED TRANSLATION
CAPITAL DEFICIT) ADJUSTMENT TOTAL
--------- -------------- ------------- ---------
(U.S.$ IN THOUSANDS)
BALANCE, JUNE 30, 2001............................ $ -- $ 1,573 $ 57 $ 1,630
Contribution from parent........................ 459 459
Net (loss)...................................... (1,991) (1,991)
Foreign currency translation adjustment......... 1,319 1,319
------ ------- ------ -------
BALANCE, JUNE 30, 2002............................ $ 459 $ (418) $1,376 $ 1,417
====== ======= ====== =======
Contribution from parent........................ 727 727
Net (loss)...................................... (3,519) (3,519)
Foreign currency translation adjustment......... 2,401 2,401
------ ------- ------ -------
BALANCE, JUNE 30, 2003............................ $1,186 $(3,937) $3,777 $ 1,026
====== ======= ====== =======
Contribution from parent........................ 710 710
Net (loss)...................................... 1,306 1,306
Foreign currency translation adjustment......... 532 532
------ ------- ------ -------
BALANCE, JUNE 30, 2004............................ $1,896 $(2,631) $4,309 $ 3,574
====== ======= ====== =======
</Table>
The accompanying notes are an integral part of the financial statements
F-85
PHIBRO ANIMAL HEALTH SA (BELGIUM)
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED JUNE 30,
----------------------------
2004 2003 2002
------- ------- --------
(U.S.$ IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,306 $(3,519) $ (1,991)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.......................... 2,669 2,019 2,252
Deferred taxes......................................... 112 142 (178)
Allocated selling, general and administrative expenses
from parent.......................................... 658 727 459
Effects of changes in foreign currency and other....... (264) 1,268 1,912
Changes in operating assets and liabilities:
Accounts receivable.................................. (945) (322) 886
Inventories.......................................... (8,762) 2,270 (10,325)
Prepaid expenses and other current assets............ 1,369 (1,191) 273
Other assets......................................... -- -- 66
Related party receivables and payables............... 5,135 1,557 4,022
Accounts payable..................................... (2,395) 3,523 1,472
Accrued expenses and other liabilities............... 2,790 (8,244) 3,193
------- ------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES...................................... 1,673 (1,770) 2,041
------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (1,613) (2,149) (1,938)
Acquisition of a business................................. -- -- (4,422)
Other investing........................................... -- -- --
------- ------- --------
NET CASH USED BY INVESTING ACTIVITIES............. (1,613) (2,149) (6,360)
------- ------- --------
FINANCING ACTIVITIES:
Net increase in intercompany debt......................... 8,181 3,432 3,540
Payment of Pfizer obligations............................. (8,225) -- --
------- ------- --------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES...................................... (44) 3,432 3,540
------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 11 54 128
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 27 (433) (651)
CASH AND CASH EQUIVALENTS at beginning of period............ 185 618 1,269
------- ------- --------
CASH AND CASH EQUIVALENTS at end of period.................. $ 212 $ 185 $ 618
======= ======= ========
Supplemental Cash Flow Information:
Interest paid............................................. $ 55 $ 88 $ --
Income taxes paid......................................... -- 366 358
</Table>
The accompanying notes are an integral part of the financial statements
F-86
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS
(U.S.$ IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
Phibro Animal Health SA, a company organized under the laws of Belgium,
(the "Company") is a manufacturer and marketer of a broad range of animal health
and nutrition products, specifically medicated feed additives ("MFA"), which the
Company sells in various markets predominately to the poultry, swine and cattle
markets.
The Company is a direct wholly-owned subsidiary of Philipp Brothers
Netherlands III B.V. ("BV III") and an indirect wholly-owned subsidiary of both
Philipp Brothers Netherlands I B.V. ("BV I") and Phibro Animal Health
Corporation ("PAHC").
On November 30, 2000, PAHC purchased the medicated feed additive ("MFA")
business of Pfizer, Inc. The Company, BV III and BV I were part of that
acquisition. In connection with the MFA acquisition additional purchase price of
$4,422 was earned and paid in 2002. All earn-out requirements have been
satisfied and no further payments are necessary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The Company presents its financial statements on the basis of its fiscal
year ending June 30. All references to years 2004, 2003, and 2002 in these
financial statements refer to the fiscal year ended June 30 of that year.
RISKS AND UNCERTAINTIES:
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
A significant portion of the Company's sales and earnings are attributable
to transactions with related parties.
USE OF ESTIMATES:
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. Actual results could differ from these estimates. Significant
estimates include reserves for bad debts, inventory obsolescence, environmental
matters, depreciation and amortization periods of long-lived assets,
recoverability of long-lived assets and realizability of deferred tax assets and
actuarial assumptions related to the Company's pension plan.
REVENUE RECOGNITION:
Revenue is recognized upon transfer of title and when risk of loss passes
to the customer, generally at time of shipment. Net sales reflect total sales
billed, less reductions for goods returned and trade discounts.
F-87
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH:
Cash includes cash in banks. Cash also includes cash on deposit in a
restricted bank account under a contractual obligation with a customer, in the
amount of $175 at June 30, 2004 and 2003. This cash was subsequently released
during December 2004.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the probable credit losses in its existing accounts receivable. The
allowance is based on historical write-off experience and is reviewed
periodically. Past due balances are reviewed individually for collectibility.
Account balances are charged against the allowance when the Company feels that
it is probable that the receivable will not be recovered.
The allowance for doubtful accounts was:
<Table>
<Caption>
2004 2003 2002
---- ---- -----
Balance at beginning of period.............................. $22 $-- $ --
Provision for bad debts..................................... -- 22 --
Bad debt write-offs......................................... (9) -- --
--- --- -----
Balance at end of period.................................... $13 $22 $ --
=== === =====
</Table>
INVENTORIES:
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) method. Obsolete and unsaleable
inventories are reflected at estimated net realizable value. Inventory costs
include materials, direct labor and manufacturing overhead. Inventories are
comprised of:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Raw materials............................................... $ 910 $ 820
Work-in-process............................................. 166 60
Finished goods.............................................. 22,083 12,580
------- -------
Total inventory............................................. $23,159 $13,460
======= =======
</Table>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost.
Depreciation is charged to results of operations using the straight-line
method based upon the assets' estimated useful lives ranging from 8 to 20 years
for buildings and improvements and 3 to 10 years for machinery and equipment.
The Company capitalizes costs that extend the useful life or productive
capacity of an asset. Repair and maintenance costs are expensed as incurred. In
the case of disposals, the assets and related accumulated depreciation are
removed from the accounts, and the net amounts, less proceeds from disposal, are
included in the statements of operations and comprehensive income (loss).
INTANGIBLES:
Product intangibles cost arising from the MFA acquisition was $2,191 and
$2,069 at June 30, 2004 and 2003, respectively, and accumulated amortization of
$622 and $251 at June 30, 2004 and 2003, respectively.
F-88
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense was $252, $156 and $201 for 2004, 2003 and 2002,
respectively. Amortization expense from the MFA acquisition for each of the next
five years from 2005 to 2009 is expected to be approximately $250 per year.
These product intangible costs are being amortized on a straight-line basis over
ten years with 6 1/2 years remaining at June 30, 2004.
FOREIGN CURRENCY TRANSLATION:
Financial position and results of operations of the Company are measured
using the Euro as the functional currency. Assets and liabilities are translated
at the exchange rates in effect at each fiscal year end. The translation
adjustments related to assets and liabilities that arise from the use of
differing exchange rates from period to period are included in cumulative
foreign currency translation adjustment on the Company's balance sheet. Income
statement accounts are translated at the average rates of exchange prevailing
during the year.
Foreign currency transaction gains and losses primarily arise from
short-term intercompany balances. Net foreign currency transaction (gains)
losses were $(264), $1,268 and $1,912 for 2004, 2003 and 2002, respectively, and
were included in other (income) expense, net in the statements of operations and
comprehensive income (loss).
PAHC considers long-term notes payable with related parties to be balances
for which settlement is not planned or anticipated in the foreseeable future.
PAHC considers these balances to be part of the net investment and, accordingly,
foreign currency transaction (gains) losses from such items are recorded in
cumulative foreign currency translation adjustment on the Company's balance
sheet.
RECOVERABILITY OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of long-lived assets, including
intangible assets, when events or circumstances indicate that a diminution in
value may have occurred, using financial indicators such as historical and
future ability to generate cash flows from operations. The Company's policy is
to record an impairment loss in the period it is determined the carrying amount
of the asset may not be recoverable. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in the environment in which the business operates, or if the
expected future net cash flows (undiscounted and without interest or income
taxes) are less than the carrying amount of the assets.
INCOME TAXES:
Income tax expense includes Belgium income taxes. The tax effect of certain
temporary differences between amounts recognized for financial reporting
purposes and amounts recognized for tax purposes are reported as deferred income
taxes. Deferred tax balances are adjusted to reflect tax rates, based on current
tax laws, which will be in effect in the years in which the temporary
differences are expected to reverse. Valuation allowances are established as
necessary to reduce deferred tax assets to amounts more likely than not to be
realized.
RESEARCH AND DEVELOPMENT EXPENDITURES:
Research and development expenditures are expensed as incurred, recorded in
selling, general and administrative expenses and were $122 for 2004. There were
no research and development expenditures in 2003 and 2002.
F-89
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS:
The Company adopted the following new and revised accounting pronouncements
in fiscal 2004:
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment to
FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This
revision to SFAS No. 132 relates to employers' disclosures about pension plans
and other postretirement benefit plans. SFAS No. 132 now requires additional
disclosures to describe the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods of defined pension plans
and other defined postretirement plans. The additional disclosures required by
this revision to SFAS No. 132 have been provided.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
The Company will adopt the following new accounting pronouncements during
2005:
Statement of Financial Accounting Standards No. 151, "Inventory Costs, an
amendment to Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151").
SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No.
43, Chapter 4, previously stated that ". . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period
charges. . . ." SFAS No. 151 requires that those items be recognized as current
period charges regardless of whether they meet the criterion of "so abnormal".
In addition, SFAS No. 151 requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 30, 2005 and the provisions of this statement shall
be applied prospectively. The Company is currently assessing the impact of this
statement.
Statement of Financial Accounting Standards No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS
No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after December 2004. The provisions of this statement shall be applied
prospectively. The Company is currently assessing the impact of this statement.
3. REFINANCING
On October 21, 2003, PAHC issued 105,000 units consisting of $85,000 of 13%
Senior Secured Notes due 2007 of PAHC and $20,000 13% Senior Secured Notes due
2007 of Philipp Brothers Netherlands III B.V., the direct parent of the Company.
Certain proceeds from the issuance were to satisfy its outstanding obligations
to Pfizer Inc., including $8,225 of accounts payable.
F-90
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Land........................................................ $ 1,912 $ 1,806
Buildings and improvements.................................. 6,153 5,811
Machinery and equipment..................................... 16,425 14,133
------- -------
24,490 21,750
Less: accumulated depreciation.............................. (7,169) (4,701)
------- -------
$17,321 $17,049
======= =======
</Table>
Depreciation expense was $2,417, $1,863 and $2,051 for 2004, 2003 and 2002,
respectively.
5. RELATED PARTY TRANSACTIONS
The Company transacts business with PAHC and certain of its subsidiaries.
The amounts of these transactions, and the related receivables and payables,
reflected in the Company's financial statements are as follows:
<Table>
<Caption>
2004 2003 2002
------- ------- -------
Product sales........................................... $28,970 $26,994 $21,509
Product purchases....................................... 3,553 5,344 3,498
Receivables at June 30.................................. 4,527 8,553 9,770
Payables at June 30..................................... 2,879 1,835 1,371
</Table>
The Company has notes payable to related parties. These notes bear interest
at 13.125% per annum and interest is payable annually on December 31. The
Company's related interest obligations to related parties will be payable only
to the extent that the Company's cash flows are sufficient to service such
obligations. These notes mature on December 7, 2007 and July 2, 2011. These
notes payable are included in notes payable -- related parties on the Company's
balance sheet.
Cost allocations from PAHC and certain other related parties are included
in selling, general and administrative expenses on the Company's statements of
operations and comprehensive income (loss). These allocations are based upon the
ratio of the Company's third party sales to the third party sales of PAHC and
certain other related parties, and represent administrative costs incurred by
these entities in support of the operations of the Company. These cost
allocations amounted to $658, $727 and $459 for 2004, 2003 and 2002,
respectively. PAHC and the certain other related parties have elected not to
seek repayment for these amounts from the Company and have contributed these
amounts as additional capital to the Company.
F-91
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of:
<Table>
<Caption>
AS OF JUNE 30,
---------------
2004 2003
------ ------
Employee related expenses................................... $2,507 $2,053
Tax accruals................................................ 4,059 2,072
Other accrued liabilities................................... 1,725 679
------ ------
$8,291 $4,804
====== ======
</Table>
7. DEBT GUARANTEED
In October 2003 PAHC 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"), (the "Dutch issuer"), the direct parent of the Company.
The Dutch Senior Notes are senior secured obligations of the Dutch issuer
and are guaranteed on a senior secured basis by PAHC and by the restricted
subsidiaries of the Dutch issuer, presently consisting of the Company. 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, and
a pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires PAHC to make certain offers to purchase
Senior Secured Notes upon a change of control, upon certain asset sales and from
fifty percent (50%) of excess cash flow (as such terms are defined in the
indenture).
The indenture contains certain covenants with respect to PAHC, the Company
and the guarantors, which restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of dividends and other restricted
payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain
payment restrictions affecting subsidiaries, and (f) transactions with
affiliates. The indenture restricts the Company's ability to consolidate, or
merge with or into, or to transfer all or substantially all of its assets to,
another person.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a defined benefit plan for eligible employees. The
benefits provided by the plan are based upon years of service and the employees'
average compensation, as defined. The measurement date for the plan was June 30,
2004 and 2003, respectively.
F-92
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of changes in benefit obligations, plan assets, and funded
status of the plans were:
<Table>
<Caption>
JUNE 2004 JUNE 2003
--------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $6,595 $4,251
Service cost................................................ 467 310
Employee contributions...................................... 27 100
Interest cost............................................... 374 259
Benefits paid............................................... (3) (29)
Actuarial (gain) or loss.................................... (475) 879
Exchange rate impact........................................ 338 825
------ ------
Benefit obligation at end of year........................... $7,323 $6,595
====== ======
</Table>
At June 30, 2004 and 2003, the accumulated benefit obligations were $4,383
and $4,248, respectively.
<Table>
<Caption>
JUNE 2004 JUNE 2003
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $4,566 $2,882
Actual return on plan assets................................ 435 204
Employer contributions...................................... 558 841
Employee contributions...................................... 27 100
Benefits paid............................................... (3) (29)
Exchange rate impact........................................ 245 568
------ ------
Fair value of plan assets at end of year.................... $5,828 $4,566
====== ======
</Table>
<Table>
<Caption>
JUNE 2004 JUNE 2003
--------- ---------
FUNDED STATUS
Funded status of the plan................................... $(1,495) $(2,029)
Unrecognized net actuarial (gain) or loss................... 368 961
------- -------
(Accrued) pension cost...................................... $(1,127) $(1,068)
======= =======
</Table>
The Company expects to contribute $602 to the plan during fiscal 2005. The
Company's policy is to fund the plan in amounts which comply with contribution
limits imposed by law.
Components of net periodic pension expense were:
<Table>
<Caption>
2004 2003 2002
----- ----- -----
Service cost -- benefits earned during the year............. $ 467 $ 310 $ 217
Interest cost on benefit obligation......................... 374 259 164
Expected return on plan assets.............................. (300) (203) (123)
Amortization of net actuarial loss.......................... 22 -- --
----- ----- -----
Net periodic pension cost................................... $ 563 $ 366 $ 258
===== ===== =====
</Table>
F-93
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant actuarial assumptions for the plan were:
<Table>
<Caption>
2004 2003 2002
---- ---- ----
Discount rate for service and interest...................... 5.5% 5.8% 5.8%
Expected rate of return on plan assets...................... 6.0% 6.0% 6.0%
Rate of compensation increase............................... 3.0% 3.0% 3.0%
Discount rate for year-end benefit obligation............... 5.5% 5.5% 5.8%
</Table>
Estimated future benefit payments, including benefits attributable to
future service, are as follows:
<Table>
2005........................................................ $ 37
2006........................................................ 38
2007........................................................ 40
2008........................................................ 41
2009........................................................ 42
2010-2014................................................... 1,817
</Table>
The Company's plan target allocations for fiscal 2005 and the weighted
asset allocation of plan assets as of June 30, 2004 and 2003 are as follows:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
Debt securities............................................. 59% 62% 79%
Equity securities........................................... 25% 21% 20%
Other....................................................... 16% 17% 1%
</Table>
The expected long-term rate of return for the plan's total assets is based
on the expected return of each of the above categories, weighted based on the
target allocation for each class. Equity securities are expected to return 7.5%
over the long-term, while debt securities are expected to return 5.5%.
The Company assumed the liability for the plan during 2002 as part of the
MFA acquisition from Pfizer.
9. INCOME TAXES
<Table>
<Caption>
2004 2003 2002
------ ------- -------
Income (loss) before income taxes........................ $2,920 $(4,605) $(3,089)
====== ======= =======
Current tax provision (benefit).......................... $1,502 $(1,228) $ (920)
Deferred tax provision (benefit)......................... 112 142 (178)
------ ------- -------
Provision (benefit) for income taxes..................... $1,614 $(1,086) $(1,098)
====== ======= =======
</Table>
Reconciliations of the statutory income tax rate to the Company's effective
tax rate are:
<Table>
<Caption>
2004 2003 2002
---- ----- -----
% % %
Statutory income tax rate................................... 34.0 (34.0) (40.0)
Expenses with no tax benefit................................ 16.9 5.4 6.0
Changes in valuation allowance.............................. (6.5) 4.1 --
Other....................................................... 10.9 0.9 (1.5)
---- ----- -----
Effective income tax rate................................... 55.3 (23.6) (35.5)
==== ===== =====
</Table>
F-94
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant temporary differences that comprise deferred
tax assets and deferred tax liabilities at June 30, 2004 and 2003 were:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Deferred tax assets:
Depreciation.............................................. $ 7 $ 7
Inventory................................................. 615 615
Net operating loss carry forwards......................... -- 191
Other..................................................... 97 11
------- -------
719 824
Less: valuation allowance................................. -- (191)
------- -------
719 633
------- -------
Deferred tax liabilities:
Depreciation.............................................. (1,022) (990)
Other..................................................... (1,143) (977)
------- -------
(2,165) (1,967)
------- -------
Net deferred tax liability.................................. $(1,446) $(1,334)
======= =======
</Table>
Deferred taxes are included in the following line items on the Company's
balance sheets:
<Table>
<Caption>
AS OF JUNE 30,
-----------------
2004 2003
------- -------
Prepaid expenses and other current assets................... $ 315 $ 315
Other liabilities........................................... (1,761) (1,649)
------- -------
$(1,446) $(1,334)
======= =======
</Table>
The Company incurred losses in 2003 and prior years and assessed the
likelihood of recovering net deferred tax assets, which resulted in the
recording of valuation allowances. In 2004 the Company had taxable income and
utilized the net operating loss carry forwards from 2003 and prior years. The
Company will continue to evaluate the likelihood of recoverability of the
remaining deferred tax assets based upon actual and expected operating
performance.
10. SUBSEQUENT EVENTS
ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES:
On December 21, 2004, PAHC completed a private offering of 22,491
additional units consisting of $18,207 13% Senior Secured Notes due 2007 of PAHC
(the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 (the "Dutch
Notes" and together with the U.S. Notes, the "Additional Notes") of Philipp
Brothers Netherlands III B.V., the direct parent of the Company (the "Dutch
Issuer" and together with PAHC, the "Issuers"). The Additional Notes were issued
under the Indenture dated October 21, 2003, as amended and supplemented (the
"Indenture") under which the Issuers previously issued 105,000 units consisting
of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate
principal amount of Dutch Notes. The proceeds from the sale of the Additional
Notes will be used to refinance a portion of PAHC's indebtedness under its
domestic senior credit facility.
F-95
PHIBRO ANIMAL HEALTH SA (BELGIUM)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SALE OF BELGIUM PLANT:
On December 16, 2004 the Company entered into an agreement with
GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of the
Company's facilities in Rixensart, Belgium ("the Belgium Plant") as follows
(U.S. dollar amounts at the December 16, 2004 exchange rate): (i) the transfer
of substantially all of the land and buildings and certain equipment of the
Company at the Belgium Plant, as well as the industrial activities and
intellectual property relating to certain solvent technology of the Company for
a purchase price of EUR 6,200 ($8,238), payable at closing; (ii) the transfer to
GSK of a majority of the employees of the Belgium Plant and the corresponding
responsibility for statutory severance obligations; (iii) GSK agreeing to be
responsible for costs of removal, by demolition or otherwise, certain buildings
not to be used by it, but for the Company to reimburse GSK up to a maximum of
EUR 700 ($930) for such removal costs; (iv) in recognition of the benefits to
PAHC from the proposed transaction, the Company agreeing to pay to GSK EUR 1,500
($1,993) within six months from the closing date, EUR 1,500 ($1,993) within
eighteen months from the closing date, EUR 1,500 ($1,993) within thirty months
from the closing date, and EUR 500 ($664) within forty-two months from the
closing date; (v) the Company retaining certain excess land (valued at
approximately EUR 400 ($531)) and being able to sell such land for its own
account; (vi) the Company being responsible for certain plant closure costs and
legally required severance indemnities in connection with workforce reductions,
estimated in total to be EUR 7,700 ($10,231), of which an amount estimated to be
approximately EUR 4,100 ($5,448) would be payable at or around the closing and
an aggregate amount so estimated to be approximately EUR 3,600 ($4,783) would be
payable over periods up to thirteen years; and (vii) the Company retaining any
or all equipment at the Belgium Plant, and being able to sell such equipment for
the account of the Company or transfer such equipment, together with other
assets and rights related to the production of virginiamycin, to Philipp
Brothers Brasil Holdings Ltda., a related party, which owns a facility in
Guarulhos, Brazil or in connection with alternative production arrangements.
The foregoing transactions and agreements are subject to a closing that is
expected to occur no earlier than July 1, 2005 nor later than June 30, 2006.
The Dutch Notes and related guarantees are secured by a mortgage on the
Belgium Plant which will be released in connection with the closing of the sale
of the Belgium Plant to GSK.
The carrying value of the Belgium Plant and related assets at September 30,
2004 is EUR 13,908 ($18,480). The Company is in the process of evaluating the
accounting for this transaction and will record an impairment loss, if required,
in the second quarter ended December 31, 2004. In addition, the Company will
expense severance, plant closure and other related costs in the period in which
such liabilities are incurred in accordance with Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". As of the date of this filing, estimates of such costs are
in process of being determined.
11. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and trade receivables. The Company places its cash
with high quality financial institutions. The Company sells to customers in a
variety of industries, markets and countries. Concentrations of credit risk with
respect to receivables arising from these sales are limited due to the large
number of customers comprising the Company's customer base. Ongoing credit
evaluations of customers' financial conditions are performed and, generally, no
collateral is required. The Company maintains appropriate reserves for
uncollectible receivables.
The carrying amounts of cash, trade receivables and trade payables is
considered to be representative of their fair value because of their short
maturities.
F-96
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
II-1
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, 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-2
(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.
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
II-3
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 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
II-4
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 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
II-5
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 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
II-6
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 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.
5. Philipp Brothers Netherlands III B.V.
Dutch law in general provides that a company organized under Dutch law in
The Netherlands may indemnify its managing directors against managing directors'
liability, provided, however, that such indemnity cannot include; acts of wilful
intent (opzet) by the managing directors; intentional violations of law, gaining
of personal profits or other advantages to which the managing director(s) was
not entitled (including violation of insider trading rules insofar these have
been committed intentionally and whereby the director has relied on internal or
external correct advice).
Further, under Dutch law, it is uncertain whether such indemnity can cover
liability of a managing director for grossly negligent (grove nalatigheid) or
intentionally reckless (bewuste roekeloosheid) wrongful acts committed by that
managing director. In bankruptcy situations, the indemnity may not always be
upheld
II-7
in cases where gross negligence can be proven. Furthermore, it is uncertain
whether the indemnity can cover liability of a managing director vis-a-vis the
Company in case of serious fault (ernstig verwijt) on the basis of article 2:9
Dutch Civil Code, but generally speaking leading legal doctrine has taken the
view that granting of an indemnity of internal liability vis-a-vis the Company
on the basis of article 2:9 Dutch Civil Code is not permitted. The criterium of
serious fault relates to the criterium gross negligence.
6. Phibro Animal Health SA
Under Belgian law, directors and the statutory auditor may be liable for
damages to the company, a trustee in bankruptcy and third parties in case of
improper performance of their duties, violation of the company's Articles of
Association or the Companies Act, or tortious misconduct. Under certain
circumstances, directors may also be criminally liable. One or more stockholders
holding at least one percent of our common stock or holding shares representing
a fractional value in our capital of at least EUR 1,250,000 can, under certain
conditions provided in the Companies Act, sue the directors and the statutory
auditor derivatively on behalf of the company.
A simple majority of the stockholders at a duly convened stockholders
meeting may discharge directors and the statutory auditor from liability to the
company relating to the performance of their respective duties after the
presentation of a management report and the annual accounts by the company's
directors and presentation of the statutory auditors' report to the company's
stockholders. This discharge prohibits stockholders who voted in favor of the
discharge from bringing derivative suits on behalf of the company on such
grounds. A general discharge of director or auditor liability does not relieve
such persons from liability to third parties or for violations of the Companies
Act or the Articles of Association. Violations of the Articles of Association
may only be discharged if specifically disclosed to the stockholders.
Notwithstanding a general discharge, directors and auditors may be held liable
in the performance of their duties for the company, if the stockholders were not
aware of the true situation of the company at the time the discharge was voted.
II-8
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<Table>
<Caption>
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.(19)
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.(19)
3.10 By-Laws of Phibro Animal Health Holdings, Inc.(19)
3.11 Certificate of Incorporation of Phibro Animal Health U.S.,
Inc.(19)
3.12 By-Laws of Phibro Animal Health U.S., Inc.(19)
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 Articles of Association and Deed of Incorporation of Philipp
Brothers Netherlands III B.V.(19)
3.21 Articles of Association of Phibro Animal Health SA.(19)
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 Registrant, 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 Registrant, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2008 of Registrant.(12)
4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004,
among Registrant, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2008 of Registrant.(16)
4.2 Indenture, dated as of October 21, 2003, by and among Phibro
Animal Health Corporation and Philipp Brothers Netherlands
III B.V., as Issuers, the Guarantors named therein, and HSBC
Bank USA, as Trustee and Collateral Agent.(13)
</Table>
II-9
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by
and among Phibro Animal Health Corporation and Philipp
Brothers Netherlands III B.V., as Issuers, the Guarantors
named therein, and HSBC Bank USA, National Association as
Trustee and Collateral Agent.(16)
4.2.2 Second Supplemental Indenture, dated as of December 8, 2004,
by and among Phibro Animal Health Corporation and Philipp
Brothers Netherlands III B.V., as Issuers, the Guarantors
named therein, and HSBC Bank USA, National Association as
Trustee and Collateral Agent.(18)
Certain instruments which define the rights of holders of
long-term debt of Registrant and its consolidated
subsidiaries have not been filed as Exhibits to this Report
since the total amount of securities authorized under any
such instrument does not exceed 10% of the total assets of
Registrant and its subsidiaries on a consolidated basis, as
of June 30, 2004. For a description of such indebtedness,
see Note 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.
5.1 Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP.(20)
5.2 Opinion of Allen & Overy LLP.(20)
5.3 Opinion of Allen & Overy LLP.(20)
10.1 Manufacturing and Supply Distributorship Agreement, dated
August 5, 1996, by and between Merck & Co., Inc. and
Koffolk, Inc.: assigned by Merck & Co., Inc. to Merial
Limited.(1)
10.2 Lease, dated September 27, 2004 between Phibro Animal Health
Corporation and Hartz Mountain Industries, Inc.(19)
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 Phibro Animal Health Corporation 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 Phibro Animal Health Corporation 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)
</Table>
II-10
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
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 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)+
10.17.1 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)
10.18 Stock Purchase Agreement, dated as of November 30, 2000,
between Registrant and the Purchasers (as defined
therein).(4)
10.19 Stockholders' Agreement, dated as of November 30, 2000,
among Registrant, the Investor Stockholders (as defined
therein) and Jack C. Bendheim.(4)
10.20 United States Asset Purchase Agreement between Phibro-Tech,
Inc. and Nufarm, Inc. dated as of May 1, 2001.(5)
10.20.1 Amendment No. 1 to United States Asset Purchase Agreement
between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June
14, 2001.(6)
10.21 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001.(5)
10.22 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001.(5)
10.23 Management and Advisory Services Agreement dated November
30, 2000 between Registrant and Palladium Equity Partners,
L.L.C.(7)++
10.24 Employment Agreement, dated May 28, 2002, by and between
Registrant and Gerald K. Carlson.(8)++
10.25 Consulting Agreement dated as of November 1, 2004, by and
between Phibro Animal Health Corporation and David
McBeath.(19)++
10.26 Stock Purchase Agreement, dated August 14, 2003, by and
between Registrant and Cemex, Inc.(9)
10.27 Loan and Security Agreement, dated October 21, 2003, by and
among, the lenders identified on the signature pages
thereto, Wells Fargo Foothill, Inc., and Phibro Animal
Health Corporation ("Parent), and each of Parent's
Subsidiaries identified on the signature pages thereto.(13)
10.27.1 Amendment Number One to Loan and Security Agreement dated
November 14, 2003.(12)
10.27.2 Amendment Number Two to Loan and Security Agreement dated
April 29, 2004.(14)
10.27.3 Amendment Number Three to Loan and Security Agreement dated
September 24, 2004.(16)
10.27.4 Amendment Number Four to Loan and Security Agreement dated
December 20, 2004.(18)
10.28 Intercreditor and Lien Subordination Agreement, dated as of
October 21, 2003, made by and among Wells Fargo Foothill,
Inc., HSBC Bank USA, Phibro Animal Health Corporation ("Par-
ent") and those certain subsidiaries of the Parent party
thereto.(12)
10.28.1 Amendment One to Intercreditor Agreement dated December 20,
2004.(18)
10.29 Purchase and Sale Agreement dated as of December 26, 2003 by
and among Phibro Animal Health Corporation ("PAHC"), Prince
MFG, LLC ("Prince MFG"), The Prince Manufacturing Company
("Prince" and together with PAHC and Prince MFG, the "Phibro
Parties"), Palladium Equity Partners II, L.P. ("PEP II"),
Palladium Equity Partners II-A, L.P., ("PEP II-A"),
Palladium Equity Investors II, L.P. ("PEI II", and together
with PEP II and PEP II-A, the "Investor Stockholders", and
Prince Mineral Company, Inc. ("Buyer")(15)
10.30 Environmental Indemnification Agreement dated as of December
26, 2003 between the Phibro Parties and Buyer.(15)
10.31 Amendment to Stockholders Agreement dated as of December 26,
2003 between PAHC, the Investor Stockholders and Jack
Bendheim.(15)
</Table>
II-11
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.32 Advisory Fee Agreement dated as of December 26, 2003 between
Buyer and PAHC.(15)
12 Computation of Ratio of Earnings to Fixed Charges.(19)
21 List of Subsidiaries.(19)
23.1 Consent of PricewaterhouseCoopers LLP.(19)
23.2 Consent of Golenbock Eiseman Assor Bell & Peskoe LLP
(included in Exhibit 5.1).(20)
23.3 Consent of Allen & Overy LLP (included in Exhibit 5.2).(20)
23.4 Consent of Allen & Overy LLP (included in Exhibit 5.3).(20)
24.1 Powers of Attorney (included on signature pages hereof).
25.1 Statement of Eligibility of HSBC Bank USA, National
Association on Form T-1.(19)
99.1 Form of Letter of Transmittal.(20)
99.2 Form of Notice of Guaranteed Delivery.(20)
99.3 Form of Letter to Holders of Units.(20)
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees Concerning Offer For All
Outstanding.(20)
99.5 Form of Letter to Clients Concerning Offer For All
Outstanding Units.(20)
99.6 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.(20)
</Table>
- ---------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4,
No. 333-64641.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
(3) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2000.
(4) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
(5) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2001.
(6) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
(7) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
(8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
(9) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2,
2004.
(10) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003.
(11) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 2, 2003.
(12) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2003.
(13) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 31, 2003.
(14) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2004.
(15) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
January 12, 2004.
(16) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2004.
(17) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
December 9, 2004.
(18) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
December 23, 2004.
(19) Previously filed.
II-12
(20) Filed with this 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).
(++) 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 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 indemnifica-
II-13
tion 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-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
PHIBRO ANIMAL HEALTH CORPORATION
By: /s/ JACK C. BENDHEIM
------------------------------------
Jack C. Bendheim
Chairman of the Board
By: /s/ GERALD K. CARLSON
------------------------------------
Gerald K. Carlson
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GERALD K. CARLSON Chief Executive Officer February 2, 2005
- -------------------------------------- (Principal Executive Officer)
Gerald K. Carlson
/s/ JACK C. BENDHEIM Director, Chairman of the Board February 2, 2005
- -------------------------------------- (Principal Executive Officer)
Jack C. Bendheim
/s/ RICHARD G. JOHNSON Chief Financial Officer February 2, 2005
- -------------------------------------- (Principal Financial Officer and
Richard G. Johnson Principal Accounting Officer)
* Director , 2005
- --------------------------------------
Marvin S. Sussman
* Director , 2005
- --------------------------------------
James O. Herlands
* Director , 2005
- --------------------------------------
Sam Gejdenson
Director
- --------------------------------------
Mary Lou Melanoski
Director
- --------------------------------------
Marcos Rodriguez
*By: /s/ JACK C. BENDHEIM February 2, 2005
------------------------------
Jack C. Bendheim
Attorney-in-fact
</Table>
II-15
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
PHILIPP BROTHERS NETHERLANDS III B.V.
By: /s/ JACK C. BENDHEIM
------------------------------------
Jack C. Bendheim
Managing Director
By: /s/ JOSEPH KATZENSTEIN
------------------------------------
Joseph Katzenstein
Managing Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK C. BENDHEIM Managing Director (Principal February 2, 2005
------------------------------------------------ Executive Officer, Principal
Jack C. Bendheim Financial Officer and Principal
Accounting Officer)
/s/ JOSEPH KATZENSTEIN Managing Director February 2, 2005
------------------------------------------------
Joseph Katzenstein
</Table>
II-16
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
PHIBRO-TECH, INC.
By: /s/ JACK C. BENDHEIM
------------------------------------
Jack C. Bendheim
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK C. BENDHEIM Director and Chief February 2, 2005
------------------------------------------------ Executive Officer (Principal
Jack C. Bendheim Executive Officer)
* Director February 2, 2005
------------------------------------------------
Marvin S. Sussman
* Director February 2, 2005
------------------------------------------------
James O. Herlands
* President February 2, 2005
------------------------------------------------
W. Dwight Glover
* Vice President, Chief Financial February 2, 2005
------------------------------------------------ Officer (Principal Financial
David C. Storbeck Officer and Principal Accounting
Officer)
*By: /s/ JACK C. BENDHEIM February 2, 2005
------------------------------------------
Jack C. Bendheim
Attorney-in-fact
</Table>
II-17
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
PRINCE AGRIPRODUCTS, INC.
By: /s/ JACK C. BENDHEIM
------------------------------------
Jack C. Bendheim
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE DATE TITLE
--------- ---- -----
/s/ JACK C. BENDHEIM Director, President and Chief February 2, 2005
------------------------------------------------ Executive Officer (Principal
Jack C. Bendheim Executive Officer)
* Director and President February 2, 2005
------------------------------------------------
Marvin S. Sussman
* Director February 2, 2005
------------------------------------------------
James O. Herlands
* Vice President, Chief Financial February 2, 2005
------------------------------------------------ Officer (Principal Financial
David C. Storbeck Officer and Principal Accounting
Officer)
*By: /s/ JACK C. BENDHEIM February 2, 2005
------------------------------------------
Jack C. Bendheim
Attorney-in-fact
</Table>
II-18
Pursuant to the requirements of the Securities Act of 1933, the registrants
have caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
PHIBRO ANIMAL HEALTH HOLDINGS, INC.
PHIBRO ANIMAL HEALTH U.S., INC.
By: /s/ JACK C. BENDHEIM
------------------------------------
Jack C. Bendheim
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK C. BENDHEIM Director and Chief Executive February 2, 2005
------------------------------------------------ Officer (Principal
Jack C. Bendheim Executive Officer)
* Director , 2005
------------------------------------------------
Marvin S. Sussman
* Director , 2005
------------------------------------------------
James O. Herlands
* Vice President, Chief Financial , 2005
------------------------------------------------ Officer (Principal Financial
David C. Storbeck Officer and Principal
Accounting Officer)
*By: /s/ JACK C. BENDHEIM February 2, 2005
------------------------------------------
Jack C. Bendheim
Attorney-in-fact
</Table>
II-19
Pursuant to the requirements of the Securities Act of 1933, the registrants
have caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
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
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK C. BENDHEIM Director and Chief Executive February 2, 2005
------------------------------------------------ Officer (Principal
Jack C. Bendheim Executive Officer)
* Director , 2005
------------------------------------------------
Marvin S. Sussman
* Director , 2005
------------------------------------------------
James O. Herlands
* Vice President, Chief Financial , 2005
------------------------------------------------ Officer (Principal Financial
David C. Storbeck Officer and Principal
Accounting Officer
*By: /s/ JACK C. BENDHEIM February 2, 2005
------------------------------------------
Jack C. Bendheim
Attorney-in-fact
</Table>
II-20
Pursuant to the requirements of the Securities Act of 1933, the registrant
has caused this amendment to this registration statement to be signed by the
undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of
New Jersey on February 2, 2005.
PHIBRO ANIMAL HEALTH SA
By: /s/ JACK C. BENDHEIM
------------------------------------
Jack C. Bendheim
Director
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK C. BENDHEIM (Principal Executive Officer, February 2, 2005
- -------------------------------------- Principal Financial Officer and
Jack C. Bendheim Principal Accounting Officer)
* Director , 2005
- --------------------------------------
Marvin S. Sussman
* Director , 2005
- --------------------------------------
James O. Herlands
*By: /s/ JACK C. BENDHEIM February 2, 2005
------------------------------
Jack C. Bendheim
Attorney-in-fact
</Table>
II-21
EXHIBIT INDEX
<Table>
<Caption>
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.(19)
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.(19)
3.10 By-Laws of Phibro Animal Health Holdings, Inc.(19)
3.11 Certificate of Incorporation of Phibro Animal Health U.S.,
Inc.(19)
3.12 By-Laws of Phibro Animal Health U.S., Inc.(19)
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 Articles of Association and Deed of Incorporation of Philipp
Brothers Netherlands III B.V.(19)
3.21 Articles of Association of Phibro Animal Health SA.(19)
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 Registrant, 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 Registrant, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2008 of Registrant.(12)
4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004,
among Registrant, the Guarantors named therein and JPMorgan
Chase Bank, as trustee, relating to the 9 7/8% Senior
Subordinated Notes due 2008 of Registrant.(16)
4.2 Indenture, dated as of October 21, 2003, by and among Phibro
Animal Health Corporation and Philipp Brothers Netherlands
III B.V., as Issuers, the Guarantors named therein, and HSBC
Bank USA, as Trustee and Collateral Agent.(13)
4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by
and among Phibro Animal Health Corporation and Philipp
Brothers Netherlands III B.V., as Issuers, the Guarantors
named therein, and HSBC Bank USA, National Association as
Trustee and Collateral Agent.(16)
</Table>
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
4.2.2 Second Supplemental Indenture, dated as of December 8, 2004,
by and among Phibro Animal Health Corporation and Philipp
Brothers Netherlands III B.V., as Issuers, the Guarantors
named therein, and HSBC Bank USA, National Association as
Trustee and Collateral Agent.(18)
Certain instruments which define the rights of holders of
long-term debt of Registrant and its consolidated
subsidiaries have not been filed as Exhibits to this Report
since the total amount of securities authorized under any
such instrument does not exceed 10% of the total assets of
Registrant and its subsidiaries on a consolidated basis, as
of June 30, 2004. For a description of such indebtedness,
see Note 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.
5.1 Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP.(20)
5.2 Opinion of Allen & Overy LLP.(20)
5.3 Opinion of Allen & Overy LLP.(20)
10.1 Manufacturing and Supply Distributorship Agreement, dated
August 5, 1996, by and between Merck & Co., Inc. and
Koffolk, Inc.: assigned by Merck & Co., Inc. to Merial
Limited.(1)
10.2 Lease, dated September 27, 2004 between Phibro Animal Health
Corporation and Hartz Mountain Industries, Inc.(19)
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 Phibro Animal Health Corporation 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 Phibro Animal Health Corporation 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 CP 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)
</Table>
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
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 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)+
10.17.1 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)
10.18 Stock Purchase Agreement, dated as of November 30, 2000,
between Registrant and the Purchasers (as defined
therein).(4)
10.19 Stockholders' Agreement, dated as of November 30, 2000,
among Registrant, the Investor Stockholders (as defined
therein) and Jack C. Bendheim.(4)
10.20 United States Asset Purchase Agreement between Phibro-Tech,
Inc. and Nufarm, Inc. dated as of May 1, 2001.(5)
10.20.1 Amendment No. 1 to United States Asset Purchase Agreement
between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June
14, 2001.(6)
10.21 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001.(5)
10.22 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc.
dated as of May 1, 2001.(5)
10.23 Management and Advisory Services Agreement dated November
30, 2000 between Registrant and Palladium Equity Partners,
L.L.C.(7)++
10.24 Employment Agreement, dated May 28, 2002, by and between
Registrant and Gerald K. Carlson.(8)++
10.25 Consulting Agreement dated as of November 1, 2004, by and
between Phibro Animal Health Corporation and David
McBeath.(19)++
10.26 Stock Purchase Agreement, dated August 14, 2003, by and
between Registrant and Cemex, Inc.(9)
10.27 Loan and Security Agreement, dated October 21, 2003, by and
among, the lenders identified on the signature pages
thereto, Wells Fargo Foothill, Inc., and Phibro Animal
Health Corporation ("Parent"), and each of Parent's
Subsidiaries identified on the signature pages thereto.(13)
10.27.1 Amendment Number One to Loan and Security Agreement dated
November 14, 2003.(12)
10.27.2 Amendment Number Two to Loan and Security Agreement dated
April 29, 2004.(14)
10.27.3 Amendment Number Three to Loan and Security Agreement dated
September 24, 2004.(16)
10.27.4 Amendment Number Four to Loan and Security Agreement dated
December 20, 2004.(18)
10.28 Intercreditor and Lien Subordination Agreement, dated as of
October 21, 2003, made by and among Wells Fargo Foothill,
Inc., HSBC Bank USA, Phibro Animal Health Corporation
("Parent") and those certain subsidiaries of the Parent
party thereto.(12)
10.28.1 Amendment One to Intercreditor Agreement dated December 20,
2004.(18)
10.29 Purchase and Sale Agreement dated as of December 26, 2003 by
and among Phibro Animal Health Corporation ("PAHC"), Prince
MFG, LLC ("Prince MFG"), The Prince Manufacturing Company
("Prince" and together with PAHC and Prince MFG, the "Phibro
Parties"), Palladium Equity Partners II, L.P. ("PEP II"),
Palladium Equity Partners II-A, L.P., ("PEP II-A"),
Palladium Equity Investors II, L.P. ("PEI II", and together
with PEP II and PEP II-A, the "Investor Stockholders", and
Prince Mineral Company, Inc.("Buyer")(15)
10.30 Environmental Indemnification Agreement dated as of December
26, 2003 between the Phibro Parties and Buyer.(15)
10.31 Amendment to Stockholders Agreement dated as of December 26,
2003 between PAHC, the Investor Stockholders and Jack
Bendheim.(15)
10.32 Advisory Fee Agreement dated as of December 26, 2003 between
Buyer and PAHC.(15)
12 Computation of Ratio of Earnings to Fixed Charges.(19)
21 List of Subsidiaries.(19)
23.1 Consent of PricewaterhouseCoopers LLP.(19)
</Table>
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
23.2 Consent of Golenbock Eiseman Assor Bell & Peskoe LLP
(included in Exhibit 5.1).(20)
23.3 Consent of Allen & Overy LLP (included in Exhibit 5.2).(20)
23.4 Consent of Allen & Overy LLP (included in Exhibit 5.3).(20)
24.1 Powers of Attorney (included on signature pages hereof).
25.1 Statement of Eligibility of HSBC Bank USA, National
Association on Form T-1.(19)
99.1 Form of Letter of Transmittal.(20)
99.2 Form of Notice of Guaranteed Delivery.(20)
99.3 Form of Letter to Holders of Units.(20)
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees Concerning Offer For All
Outstanding(20)
99.5 Form of Letter to Clients Concerning Offer For All
Outstanding Units(20)
99.6 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.(20)
</Table>
- ---------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4,
No. 333-64641.
(2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
(3) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2000.
(4) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
November 30, 2000.
(5) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2001.
(6) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
June 14, 2001.
(7) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.
(8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002.
(9) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2,
2004.
(10) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003.
(11) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 2, 2003.
(12) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended September 30, 2003.
(13) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
October 31, 2003.
(14) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2004.
(15) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
January 12, 2004.
(16) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2004.
(17) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
December 9, 2004.
(18) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
December 23, 2004.
(19) Previously filed.
(20) Filed with this 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).
(++) This Exhibit is a management compensatory plan or arrangement.