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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
|X|* QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 333-64641
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Phibro Animal Health Corporation
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(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X|* No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Number of shares of each class of common stock outstanding as of March 31, 2004:
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
* By virtue of Section 15(d) of the Securities Act of 1934, the Registrant
is not subject to such filing requirements and not required to file this
Quarterly Report, but has provided all such reports as if so required
during the preceding 12 months.
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PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Consolidated Financial Statements............... 3
Condensed Consolidated Balance Sheets..................... 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss)............................. 5
Condensed Consolidated Statements of Changes in
Stockholders' Deficit................................... 6
Condensed Consolidated Statements of Cash Flows........... 7
Notes to Condensed Consolidated Financial Statements...... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 31
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................. 41
Item 4. Controls and Procedures................................... 42
PART II OTHER INFORMATION
Item 5. Other Information......................................... 42
Item 6. Exhibits and Reports on Form 8-K......................... 42
SIGNATURES.................................................................. 43
2
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed in the
Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2003
and/or throughout this Form 10-Q and in particular in Item 2 of Part I of this
Form 10-Q under the caption "Certain Factors Affecting Future Operating
Results." Unless the context otherwise requires, references in this report to
the "Company" or to "we" or "our" refers to Phibro Animal Health Corporation
and/or one or more of its subsidiaries, as applicable.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
3
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
March 31, June 30,
2004 2003
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,190 $ 11,179
Trade receivables, less allowance for doubtful
accounts of $1,369 at March 31, 2004 and $1,445
at June 30, 2003 57,548 55,671
Other receivables 3,363 3,642
Inventories 88,443 88,767
Prepaid expenses and other current assets 10,202 10,188
Current assets from discontinued operations -- 4,942
--------- ---------
TOTAL CURRENT ASSETS 165,746 174,389
PROPERTY, PLANT AND EQUIPMENT, net 62,687 66,440
INTANGIBLES 7,477 8,669
OTHER ASSETS 17,001 14,199
OTHER ASSETS FROM DISCONTINUED OPERATIONS -- 10,650
--------- ---------
$ 252,911 $ 274,347
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 4,040 $ 1,686
Loans payable to banks 10,302 38,914
Current portion of long-term debt 1,945 24,124
Accounts payable 40,354 56,915
Accrued expenses and other current liabilities 45,676 41,609
Current liabilities from discontinued operations -- 2,051
--------- ---------
TOTAL CURRENT LIABILITIES 102,317 165,299
LONG-TERM DEBT 158,348 102,391
OTHER LIABILITIES 19,142 22,088
OTHER LIABILITIES FROM DISCONTINUED OPERATIONS -- 198
--------- ---------
TOTAL LIABILITIES 279,807 289,976
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Series B and C preferred stock 21,288 68,881
--------- ---------
STOCKHOLDERS' DEFICIT:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 860 860
Accumulated deficit (45,279) (79,489)
Accumulated other comprehensive income (loss):
Gain on derivative instruments 117 81
Cumulative currency translation adjustment (4,405) (6,485)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (48,184) (84,510)
--------- ---------
$ 252,911 $ 274,347
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
4
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
NET SALES $ 91,198 $ 90,197 $ 274,411 $ 266,613
COST OF GOODS SOLD 67,893 66,915 207,089 197,143
--------- --------- --------- ---------
GROSS PROFIT 23,305 23,282 67,322 69,470
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 16,639 17,822 50,036 49,875
--------- --------- --------- ---------
OPERATING INCOME 6,666 5,460 17,286 19,595
OTHER:
Interest expense 4,941 3,978 13,465 12,138
Interest (income) (44) (39) (118) (135)
Other (income) expense, net (63) 112 (764) 1,317
Net (gain) on extinguishment of debt -- -- (23,226) --
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,832 1,409 27,929 6,275
PROVISION FOR INCOME TAXES 2,227 599 5,890 2,440
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (395) 810 22,039 3,835
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations (net of income
taxes) -- (1,740) (124) (12,757)
Gain (loss) on disposal of discontinued operations
(net of income taxes) -- (1,342) 231 (1,342)
--------- --------- --------- ---------
NET INCOME (LOSS) (395) (2,272) 22,146 (10,264)
OTHER COMPREHENSIVE INCOME (LOSS):
Derivative instruments (383) 230 36 (1,011)
Currency translation adjustment (92) 7,930 2,080 4,276
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (870) $ 5,888 $ 24,262 $ (6,999)
========= ========= ========= =========
NET INCOME (LOSS) (395) (2,272) 22,146 (10,264)
Excess of the reduction of redeemable preferred stock
over total assets divested and costs and liabilities
incurred on the Prince Transactions -- -- 20,138 --
Preferred dividends (4,223) (2,282) (8,074) (6,526)
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (4,618) $ (4,554) $ 34,210 $ (16,790)
========= ========= ========= =========
See notes to unaudited Condensed Consolidated Financial Statements
5
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT (Unaudited)
For the Three Months and Nine Months Ended March 31, 2004
(In Thousands)
Accumulated
Preferred Common Stock Other
Stock ---------------- Paid-in Accumulated Comprehensive
Series A Class A Class B Capital Deficit Income (Loss) Total
----------- ---------------------------- -------------- ------------- ----------
Balance, June 30, 2003 $ 521 $ 1 $ 1 $ 860 $ (79,489) $ (6,404) $ (84,510)
Dividends on Series B and C
redeemable preferred stock (2,453) (2,453)
Equity value accreted on
Series B and C redeemable
preferred stock 1,466 1,466
Derivative instruments 317 317
Foreign currency translation
adjustment (859) (859)
Net income 1,255 1,255
----- --- --- ----- --------- -------- ---------
Balance, September 30, 2003 $ 521 $ 1 $ 1 $ 860 $ (79,221) $ (6,946) $ (84,784)
===== === === ===== ========= ======== =========
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 (2,348) (2,348)
Equity value accreted on
Series B and C redeemable
preferred stock (516) (516)
Derivative instruments 102 102
Foreign currency translation
adjustment 3,031 3,031
Net income 21,286 21,286
----- --- --- ----- --------- -------- ---------
Balance, December 30, 2003 $ 521 $ 1 $ 1 $ 860 $ (40,661) $ (3,813) $ (43,091)
===== === === ===== ========= ======== =========
Dividends on Series B and C
redeemable preferred stock (621) (621)
Equity value accreted on
Series B and C redeemable
preferred stock (3,602) (3,602)
Derivative instruments (383) (383)
Foreign currency translation
adjustment (92) (92)
Net (loss) (395) (395)
----- --- --- ----- --------- -------- ---------
$ 521 $ 1 $ 1 $ 860 $ (45,279) $ (4,288) $ (48,184)
===== === === ===== ========= ======== =========
See notes to unaudited Condensed Consolidated Financial Statements
6
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended March 31, 2004 and 2003
(In Thousands)
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 22,146 $ (10,264)
Adjustment for discontinued operations (107) 14,099
--------- ---------
Income from continuing operations 22,039 3,835
Adjustments to reconcile income from continuing
operations to net cash
provided (used) by operating activities:
Depreciation and amortization 10,103 9,918
Deferred income taxes 263 131
Net (gain) on extinguishment of debt (23,226) --
Unrealized foreign currency (gains) and other (632) (637)
Changes in operating assets and liabilities:
Accounts receivable (2,780) 112
Inventories (2,658) (5,898)
Prepaid expenses and other current assets (1,151) 264
Other assets 977 (2,016)
Accounts payable (12,710) 15,542
Accrued expenses and other liabilities 8,781 5,865
Cash provided (used) by discontinued operations (421) 1,531
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,415) 28,647
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (4,132) (7,301)
Proceeds from sale of assets 1,081 2,556
Other investing (1) 765
Discontinued operations 14,951 1,400
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 11,899 (2,580)
--------- ---------
FINANCING ACTIVITIES:
Cash overdraft 2,354 (3,121)
Net (decrease) in short-term debt (28,868) (6,012)
Proceeds from long-term debt 109,622 2,125
Payments of long-term debt (34,632) (13,720)
Payment of Pfizer obligations (28,300) --
Payments relating to the Prince Transactions and
transaction costs (21,023) --
Debt refinancing costs (14,945) --
--------- ---------
NET CASH (USED) BY FINANCING ACTIVITIES (15,792) (20,728)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 319 273
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,989) 5,612
CASH AND CASH EQUIVALENTS at beginning of period 11,179 6,419
--------- ---------
CASH AND CASH EQUIVALENTS at end of period $ 6,190 $ 12,031
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
7
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
1. General
Principles of Consolidation and Basis of Presentation
In the opinion of Phibro Animal Health Corporation ("PAHC"), the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly its financial position as of March 31, 2004 and its results of
operations and cash flows for the three months and nine months ended March 31,
2004 and 2003. PAHC and/or its subsidiaries are referred to as the "Company".
The condensed consolidated balance sheet as of June 30, 2003 was derived
from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States. Additionally,
it should be noted that the accompanying condensed consolidated financial
statements and notes thereto have been prepared in accordance with accounting
standards appropriate for interim financial statements. While the Company
believes that the disclosures presented are adequate to make the information
contained herein not misleading, it is suggested that these financial statements
be read in conjunction with the Company's audited consolidated financial
statements for the year ended June 30, 2003.
The Company's Odda, Carbide, and MRT businesses have been classified as
discontinued operations, as discussed in Note 7. These footnotes present
information only for continuing operations, unless otherwise indicated.
The results of operations for the three months and nine months ended March
31, 2004 may not be indicative of results for the full year.
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 settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 did not result in a material
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment to
FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This
revision to SFAS No. 132 relates to employers' disclosures about pension plans
and other postretirement benefit plans. SFAS No. 132 now requires additional
disclosures to describe the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods of defined pension plans
and other defined postretirement plans. The additional disclosures required by
this revision to SFAS No. 132 have been provided.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
8
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
2. Risks and Uncertainties
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain 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 expose the Company and its subsidiaries
to the risk of claims with respect to such matters.
3. Refinancing
On October 21, 2003, the Company issued 105,000 units consisting of
$85,000 of 13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and
$20,000 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III
B.V. (the "Dutch Senior Notes" and, together with the US Senior Notes, the
"Senior Secured Notes"), an indirect wholly-owned subsidiary of PAHC (the "Dutch
issuer"). The Company used the proceeds from the issuance to: (i) repurchase
$51,971 of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal to 60%
of the principal amount thereof, plus accrued and unpaid interest; (ii) repay
its senior credit facility of $34,888 outstanding at the repayment date; (iii)
satisfy, for a payment of approximately $29,315, certain of its outstanding
obligations to Pfizer Inc., including: (a) $20,075 aggregate principal amount of
its promissory note plus accrued and unpaid interest, (b) $9,748 of accounts
payable, (c) $9,040 of accrued expenses, and (d) future contingent purchase
price obligations under its agreements with Pfizer Inc. by which the Company
acquired Pfizer's medicated feed additive business; and (iv) pay fees and
expenses relating to the above transactions.
9
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
A net gain on extinguishment of debt is included in the Company's
condensed consolidated statement of operations, calculated as follows:
Net Gain on Repurchase of 9 7/8% Senior
Subordinated Notes due 2008:
Principal amount of repurchased notes $ 51,971
Repurchased at 60% of principal amount (31,183)
Transaction costs (4,107)
--------
Net gain on repurchase of notes 16,681
--------
Loss on repayment of senior credit facility (1,018)
--------
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note 20,075
-accrued interest on promissory note 1,015
-accounts payable and accrued expenses 18,788
--------
Total obligations paid 39,878
Cash payment to Pfizer (29,315)
Transaction costs (3,000)
--------
Net gain on payment of Pfizer obligations 7,563
--------
Net gain on extinguishment of debt $ 23,226
========
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of PAHC (the "US Issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all PAHC's domestic restricted subsidiaries, and the
Dutch Senior Notes are guaranteed on a senior secured basis by PAHC and by the
restricted subsidiaries of the Dutch issuer, presently consisting of Phibro
Animal Health SA. The US Senior Notes and related guarantees are secured by
substantially all of PAHC's assets and the assets of its domestic restricted
subsidiaries, other than real property and interests therein, including a pledge
of all the capital stock of such domestic restricted subsidiaries. The Dutch
Senior Notes and related guarantees are secured by a pledge of all the accounts
receivable, a security interest or floating charge on the inventory to the
extent permitted by applicable law, and a mortgage on substantially all of the
real property of the Dutch issuer and each of its restricted subsidiaries, a
pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a
pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries and substantially all of the assets of the U.S. guarantors, other
than real property and interests therein. The indenture governing the Senior
Secured Notes provides for optional make-whole redemptions at any time prior to
June 1, 2005, optional redemption on or after June 1, 2005, and requires the
Company to make certain offers to purchase Senior Secured Notes upon a change of
control, upon certain asset sales and from fifty percent (50%) of excess cash
flow (as such terms are defined in the indenture).
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("senior credit facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities may not exceed $25,000, including aggregate
borrowings under the working capital facility up to $15,000. On April 29, 2004,
the Company amended the senior credit facility to increase the aggregate amount
of borrowings available under such working capital and letter of credit
facilities from $25,000 to $27,500 and to increase the amount of aggregate
borrowings available under the working capital facility from $15,000 to $17,500.
10
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Borrowings under the senior credit facility are subject to a borrowing
base formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
Pursuant to the terms of an intercreditor agreement, the security interest
securing the Senior Secured Notes and the guarantees made by the Company's
domestic restricted subsidiaries are subordinated to a lien securing the senior
credit facility.
The Company believes that, through the refinancings referred to above, the
liquidity issues mentioned in the Company's June 30, 2003 consolidated financial
statements have been resolved. The Company's replaced senior credit facility and
its note payable to Pfizer were to mature in November 2003 and March 2004,
respectively.
The Company's ability to fund its operating plan relies upon its ability
to continue to successfully implement its efforts to improve its overall
liquidity (through cost reduction activities, working capital improvement plans,
shutdown of unprofitable operations and sales of certain business operations and
other assets) and the continued availability of borrowing under the senior
credit facility. The Company believes that it will be able to comply with the
terms of its covenants under the senior credit facility based on its forecasted
operating plan. In the event of adverse operating results and/or violation of
covenants under this facility, there can be no assurance that the Company would
be able to obtain waivers or consents on favorable terms, if at all.
4. Prince Transactions
Effective December 26, 2003 (the "Closing Date"), the Company completed
the divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72,184 to $16,517 (accreted through the
Closing Date) by means of the redemption of all of its shares of Series B
Preferred Stock and a portion of its Series C Preferred Stock; (iii) the
termination of $2,250 in annual management advisory fees payable by the Company
to Palladium; (iv) a cash payment of $10,000 to the Palladium Investors in
respect of the portion of the Company's Preferred Stock not exchanged in
consideration of the business and assets of PMC; (v) the agreement of the Buyer
to pay the Company for advisory fees for the next three years of $1,000, $500,
and $200, respectively (which were pre-paid at closing by the Buyer and
satisfied for $1,300, the net present value of such payments); and (vi) the
Buyer agreed to supply manganous oxide and red iron oxide products and to
provide certain mineral blending services to the Company's Prince Agriproducts
subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer
with certain laboratory, MIS and telephone services, all on terms substantially
consistent with the historic relationship between Prince Agri and PMC, and to
lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an
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
11
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the
amount they receive in respect of the disposition of Buyer for less than
$21,000, up to a maximum payment by the Company of $4,000 (the "Backstop
Indemnification Amount"). The Backstop Indemnification Amount would be payable
on the earlier to occur of July 1, 2008 or six months after the redemption date
of all of the Company's Senior Secured Notes due 2007 if such a disposition
closes prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5. The
amount of consideration paid and payable in connection with the Prince
Transactions and all matters in connection therewith were determined pursuant to
arm's length negotiations.
The excess of the reduction in redeemable preferred stock over total
assets divested and costs and liabilities incurred on the Prince Transactions
was recorded as a decrease to accumulated deficit on the Company's condensed
consolidated balance sheet at December 31, 2003, and was calculated as follows:
Series B & C Redeemable Preferred Stock:
Accreted value pre-transaction $72,184
Accreted value post-transaction 16,517
-------
Reduction in redeemable preferred stock 55,667
-------
Assets Divested and Costs Incurred:
PMC net assets divested 7,430
Cash paid to Palladium Investors for:
-reduction of redeemable preferred stock 10,000
-settlement of PMC intercompany debt 3,958
-working capital adjustment 1,331
-closing fee 500
Transaction costs 8,310
Contingent Backstop Indemnification Amount accrued 4,000
-------
Total assets divested and costs and liabilities incurred 35,529
-------
Excess amount recorded as a decrease to accumulated deficit $20,138
=======
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC for the three months and nine months ended March 31, 2004
and 2003 were:
Three Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
----------------- -------------------
Net sales $ -- $ 5,743 $11,118 $16,784
Operating income -- 839 2,278 2,867
Depreciation and amortization -- 240 487 711
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.
12
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
5. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
principally under the first-in, first-out (FIFO) and average methods; however
certain of the Company's subsidiaries used the last-in, first-out (LIFO) method
of valuing inventories. Obsolete and unsaleable inventories are reflected at
estimated net realizable value. Inventory costs include materials, direct labor
and manufacturing overhead. Inventories consisted of the following:
As of
--------------------------------
March 31, 2004 June 30, 2003
-------------- -------------
Raw materials $ 21,482 $ 22,277
Work-in-process 2,004 1,765
Finished goods 64,957 65,357
Excess of FIFO cost over LIFO cost -- (632)
-------- --------
Total inventory $ 88,443 $ 88,767
======== ========
5. Intangibles
Product intangibles cost arising from the acquisition of the medicated
feed additives business of Pfizer Inc. was $10,424 and $10,449 at March 31, 2004
and June 30, 2003, respectively, and accumulated amortization was $2,947 and
$1,780 at March 31, 2004 and June 30, 2003, respectively. Amortization expense
was $313 and $244 for the three months ended March 31, 2004 and 2003,
respectively, and $921 and $868 for the nine months ended March 31, 2004 and
2003, respectively.
6. Debt
Loans Payable to Banks
At March 31, 2004, loans payable to banks included $8,004 under the senior
credit facility with Wells Fargo Foothill, Inc., and $2,298 under foreign
revolving lines of credit. The weighted average interest rate under the senior
credit facility from its inception at October 21, 2003 through March 31, 2004
was 5.7%. At March 31, 2004, the Company had $6,996 of borrowings available
under the borrowing base formula in effect for the working capital facility that
is provided under the senior credit facility.
On October 21, 2003, the Company entered into a new senior credit facility
with Wells Fargo Foothill, Inc., providing for a working capital facility plus a
letter of credit facility. The aggregate amount of borrowings under such working
capital and letter of credit facilities may not exceed $25,000, including
aggregate borrowings under the working capital facility of up to $15,000. On
April 29, 2004, the Company amended the senior credit facility to increase the
aggregate amount of borrowings available under such working capital and letter
of credit facilities from $25,000 to $27,500 and to increase the amount of
aggregate borrowings available under the working capital facility from $15,000
to $17,500.
Borrowings under the senior credit facility are subject to a borrowing
base formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
13
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
As of March 31, 2004, the Company was in compliance with the financial
covenants of the senior credit facility. The senior credit facility requires,
among other things, the maintenance of certain levels of trailing consolidated
and domestic EBITDA (earnings before interest, taxes, depreciation and
amortization) calculated on a monthly basis, and an acceleration clause should
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 senior credit facility contains a lock-box requirement and an
acceleration clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the condensed consolidated balance
sheet.
Long-Term Debt
As of
--------------------------------
March, 31, 2004 June 30, 2003
--------------- -------------
Senior secured notes due December 1, 2007 $105,000 $ --
Senior subordinated notes due June 1, 2008 48,029 100,000
Foreign bank loans 6,950 3,750
Pfizer promissory note -- 20,075
Bank capital expenditure facility -- 1,496
Capitalized lease obligations and other 314 1,194
-------- --------
160,293 126,515
Less: current maturities 1,945 24,124
-------- --------
$158,348 $102,391
======== ========
Senior Secured Notes due 2007
In October 2003 the Company issued 105,000 units, consisting of $85,000 of
13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and $20,000 of
13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the
"Dutch Senior Notes" and, together with the US Senior Notes, the "Senior Secured
Notes"), an indirect wholly-owned subsidiary of PAHC (the "Dutch issuer").
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of PAHC (the "US issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all PAHC's domestic restricted subsidiaries, and the
Dutch Senior Notes are guaranteed on a senior secured basis by PAHC and by the
restricted subsidiaries of the Dutch issuer, presently consisting of Phibro
Animal Health SA. The US Senior Notes and related guarantees are secured by
substantially all of PAHC's assets and the assets of its domestic restricted
subsidiaries, other than real property and interests therein, including a pledge
of all the capital stock of such domestic restricted subsidiaries. The Dutch
Senior Notes and related guarantees are secured by a pledge of all the accounts
receivable, a security interest or floating charge on the inventory to the
extent permitted by applicable law, and a mortgage on substantially all of the
real property of the Dutch issuer and each of its restricted subsidiaries, a
pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a
pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries and substantially all of the assets of the U.S. guarantors, other
than real property and interests therein. The indenture governing the Senior
Secured Notes provides for optional make-whole redemptions at any time prior to
June 1, 2005, optional redemption on or after June 1, 2005, and requires the
Company to make certain offers to purchase Senior Secured Notes upon a change of
control, upon certain asset sales and from fifty percent (50%) of excess cash
flow (as such terms are defined in the indenture).
14
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
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 1.09% at March 31, 2004.
7. Discontinued Operations
The Company shutdown Odda Smelteverk (Norway) ("Odda") and divested
Carbide Industries (U.K.) ("Carbide"), during the 2003 fiscal year, and sold
Mineral Resource Technologies, Inc. ("MRT") in August 2003. These businesses
have been classified as discontinued operations. The Company's consolidated
financial statements have been reclassified to report separately the operating
results, financial position and cash flows of the discontinued operations.
15
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Odda and Carbide
Operating results and loss on disposal of Odda and Carbide were:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2003
------------------ -----------------
OPERATING RESULTS:
Net sales $ 1,933 $ 11,217
Cost of goods sold 1,623 13,723
Selling, general and
administrative expenses 883 3,175
Asset writedown -- 7,781
Other income (expense) (59) 2,327
-------- --------
Loss before income taxes (632) (11,135)
(Benefit) for income taxes (84) (58)
-------- --------
(Loss) from operations $ (548) $(11,077)
======== ========
Depreciation and amortization $ 192 $ 894
======== ========
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2003
------------------ -----------------
LOSS ON DISPOSAL:
Assets $ (4,018) $ (4,018)
Liabilities 6,432 6,432
Unsecured debt 2,488 2,488
Currency translation adjustment (6,244) (6,244)
-------- --------
Loss on disposal $ (1,342) $ (1,342)
======== ========
16
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Mineral Resource Technologies, Inc.
The Company sold MRT on August 28, 2003. Net proceeds, after transaction
costs, were approximately $13,836. Operating results and gain on sale of MRT
were:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2004 2003
----------------- --------- --------
OPERATING RESULTS:
Net sales $ 3,542 $ 3,327 $ 14,001
Cost of goods sold 4,103 3,135 13,997
Selling, general and
administrative expenses 631 316 1,684
-------- -------- --------
Loss before income taxes (1,192) (124) (1,680)
Provision for income taxes -- -- --
-------- -------- --------
Income (loss) from operations $ (1,192) $ (124) $ (1,680)
======== ======== ========
Depreciation and amortization $ 337 $ -- $ 973
======== ======== ========
Nine Months Ended
March 31,
2004
-----------------
GAIN ON SALE:
Current assets $ 5,813
Property, plant & equipment - net and other assets 10,703
Current liabilities (2,511)
Other liabilities (400)
Net proceeds of sale (13,836)
--------
(Gain) on sale $ (231)
========
17
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
As of
June 30, 2003
-------------
BALANCE SHEET:
Trade receivables $ 2,633
Other receivables 304
Inventories 1,643
Prepaid expenses and other current assets 362
-------
Current assets from discontinued operations $ 4,942
=======
Property, plant and equipment - net $ 9,999
Other assets 651
-------
Other assets from discontinued operations $10,650
=======
Accounts payable $ 1,466
Accrued expenses and other current liabilities 585
-------
Current liabilities from discontinued operations $ 2,051
=======
Other liabilities $ 198
-------
Other liabilities from discontinued operations $ 198
=======
8. Employee Benefit Plans
Components of net periodic pension expense were:
Three Months Ended Nine Months Ended
March 31, March 31,
Domestic 2004 2003 2004 2003
-------- ---- ---- ---- ----
Service cost - benefits earned during
the year $ 290 $ 416 $ 971 $ 844
Interest cost on benefit obligation 218 279 673 615
Expected return on plan assets (213) (260) (633) (591)
Amortization of initial unrecognized net
transition (asset) (1) (1) (2) (3)
Amortization of prior service costs (35) (53) (117) (126)
Amortization of loss (gain) 2 (14) 23 (42)
----- ----- ----- -----
Net periodic pension cost $ 261 $ 367 $ 915 $ 697
===== ===== ===== =====
18
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
International 2004 2003 2004 2003
------------- ---- ---- ---- ----
Service cost - benefits earned during
the year $ 123 $ 77 $ 350 $ 231
Interest cost on benefit obligation 98 65 280 195
Expected return on plan assets (79) (51) (225) (153)
Amortization of loss (gain) 6 -- 17 --
----- ----- ----- -----
Net periodic pension cost $ 148 $ 91 $ 422 $ 273
===== ===== ===== =====
Employer contributions to the domestic and international pension plans for
the nine months ended March 31, 2004 were $524 and $568, respectively. The
Company anticipates additional funding to the domestic and international pension
plans of $230 and $0, respectively, during the fourth quarter of fiscal 2004.
9. Contingencies
Litigation
On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and the
Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in
the United States District Court for the District of New Jersey, alleging that
the operations of CP at its Sewaren plant affected adjoining property owned by
Chevron and alleging that the Company, as the parent of CP, is also responsible
to Chevron. In July 2002, a phased settlement agreement was reached and a
Consent Order entered by the Court. That settlement is in the process of being
implemented. The Company's and CP's portion of the settlement for past costs and
expenses through the entry of the Consent Order was $495 and was included in
selling, general and administrative expenses in fiscal 2002 and was paid in
fiscal 2003. The Consent Order then provides for a period of due diligence
investigation of the property owned by Chevron. The investigation has been
conducted and the results are under review. The investigation costs are being
split with one other defendant, Vulcan Materials Company. Upon completion of the
review of the results of the investigation, a decision will be made whether to
opt out of the settlement or proceed. If no party opts out of the settlement,
the Company and CP will take title to the adjoining Chevron property, probably
through the use of a three-member New Jersey limited liability company. The
third member of the limited liability company will be Vulcan Materials Company.
The Company also has commenced negotiations with Chevron regarding its
allocation of responsibility and associated costs under the Consent Order. While
the costs cannot be estimated with any degree of certainty at this time, the
Company believes that insurance recoveries will be available to offset some of
those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") by the United States Environmental Protection Agency ("the EPA"),
involving a former third-party fertilizer manufacturing site in Jericho, South
Carolina. An agreement has been reached under which such subsidiary agreed to
contribute up to $900 of which $635 has been paid as of June 30, 2003. Some
recovery from insurance and other sources is expected 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 of the
settlement amount.
19
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company is investigating the
matter, which relates to events in the 1950's and 1960's, but management does
not believe that the Company has any liability in this matter.
The Company and its subsidiaries are party to a number of claims and
lawsuits arising out of the normal course of business including product
liabilities and governmental regulation. Certain of these actions seek damages
in various amounts. In most cases, such claims are covered by insurance. The
Company believes that none of the claims or pending lawsuits, either
individually or in the aggregate, will have a material adverse effect on its
financial position.
Environmental Remediation
The Company's operations, properties and subsidiaries are subject to a wide
variety of complex and stringent federal, state, local and foreign environmental
laws and regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
materials and wastes, the remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters. Under certain circumstances, the Company or any of
its subsidiaries might be required to curtail operations until a particular
problem is remedied. Known costs and expenses under environmental laws
incidental to ongoing operations are generally included within operating
results. Potential costs and expenses may also be incurred in connection with
the repair or upgrade of facilities to meet existing or new requirements under
environmental laws or to investigate or remediate potential or actual
contamination and from time to time the Company establishes reserves for such
contemplated investigation and remediation costs. In many instances, the
ultimate costs under environmental laws and the time period during which such
costs are likely to be incurred are difficult to predict.
The Company's subsidiaries have, from time to time, implemented procedures
at their facilities designed to respond to obligations to comply with
environmental laws. The Company believes that its operations are currently in
material compliance with such environmental laws, although at various sites its
subsidiaries are engaged in continuing investigation, remediation and/or
monitoring efforts to address contamination associated with their historic
operations.
The nature of the Company's and its subsidiaries' current and former
operations exposes the Company and its subsidiaries to the risk of claims with
respect to environmental matters and the Company cannot assure it will not incur
material costs and liabilities in connection with such claims. Based upon its
experience to date, the Company believes that the future cost of compliance with
existing environmental laws, and liability for known environmental claims
pursuant to such environmental laws, will not have a material adverse effect on
the Company's financial position.
Based upon information available, the Company estimates the cost of
litigation proceedings described above and the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, and closure costs for closed sites to be
approximately $2,743, which is included in current and long-term liabilities in
the March 31, 2004 condensed consolidated balance sheet (approximately $2,791 at
June 30, 2003).
10. Guarantees
As part of the Prince Transactions, 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.
20
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
The Company agreed to indemnify the Palladium Investors for a portion, at
the rate of $0.65 for every dollar, of the amount they receive in respect of the
disposition of Buyer for less than $21,000, up to a maximum payment by the
Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop
Indemnification Amount would be payable on the earlier to occur of July 1, 2008
or six months after the redemption date of all of the Company's Senior Secured
Notes due 2007 if such a disposition closes prior to such redemption and six
months after the closing of any such disposition if the disposition closes after
any such redemption. The Company's obligations with respect to the Backstop
Indemnification Amount will cease if the Palladium Investors do not close the
disposition of Buyer by January 1, 2009. The maximum potential Backstop
Indemnification Amount is included in other liabilities on the Company's
condensed consolidated balance sheet at March 31, 2004.
The Company established a $1,000 letter of credit escrow for two years to
secure its working capital adjustment and certain other indemnification
obligations relating to the Prince Transactions.
11. Business Segments
The Company's reportable segments are Animal Health and Nutrition,
Industrial Chemicals, Distribution and All Other. Reportable segments have been
determined primarily on the basis of the nature of products and services and
certain similar operating units have been aggregated. The Company's Animal
Health and Nutrition segment manufactures and markets more than 500 formulations
and concentrations of medicated feed additives and nutritional feed additives
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products. The Industrial Chemicals segment manufactures and markets a number of
chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, and aerospace industries. The Distribution segment
markets and distributes a variety of industrial, specialty and fine organic
chemicals and intermediates produced primarily by third parties. The All Other
segment manufactures and markets a variety of specialty custom chemicals and
copper-based fungicides. Intersegment sales and transfers were not significant.
The following segment data includes information only for continuing operations.
Animal
Health & Industrial All Corporate &
Three Months Ended March 31, 2004 Nutrition Chemicals Distribution Other Other Total
--------- --------- ------------ ----- ----------- -----
Net sales $ 64,819 $ 10,000 $ 7,916 $ 8,463 $ -- $ 91,198
Operating income (loss) 8,370 1,136 789 194 (3,823) 6,666
Depreciation and amortization 2,086 403 3 206 660 3,358
Animal
Health & Industrial All Corporate &
Three Months Ended March 31, 2003 Nutrition Chemicals Distribution Other Other Total
--------- --------- ------------ ----- ----------- -----
Net sales $ 62,675 $ 12,192 $ 7,612 $ 7,718 $ -- $ 90,197
Operating income (loss) 8,902 (716) 900 346 (3,972) 5,460
Depreciation and amortization 1,890 738 2 196 405 3,231
Animal
Health & Industrial All Corporate &
Nine Months Ended March 31, 2004 Nutrition Chemicals Distribution Other Other Total
--------- --------- ------------ ----- ----------- -----
Net sales $ 193,347 $ 33,661 $ 23,511 $ 23,892 $ -- $ 274,411
Operating income/(loss) 22,925 2,736 2,322 1,040 (11,737) 17,286
Depreciation and amortization 6,174 1,691 10 620 1,608 10,103
21
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
Animal
Health & Industrial All Corporate &
Nine Months Ended March 31, 2003 Nutrition Chemicals Distribution Other Other Total
--------- --------- ------------ ----- ----------- -----
Net sales $ 189,301 $ 37,317 $ 22,905 $ 17,090 $ -- $ 266,613
Operating income/(loss) 29,915 (1,538) 2,452 216 (11,450) 19,595
Depreciation and amortization 5,702 2,495 8 558 1,155 9,918
Animal
Identifiable Assets of Health & Industrial All Corporate &
Continuing Operations Nutrition Chemicals Distribution Other Other Total
--------- --------- ------------ ----- ----------- -----
At March 31, 2004 $ 185,298 $ 26,768 $ 7,518 $ 14,230 $ 19,097 $ 252,911
At June 30, 2003 190,864 33,191 9,154 12,735 12,811 258,755
12. Consolidating Financial Statements
The units of Senior Secured Notes due 2007, consisting of US Senior Notes
issued by the Company (the "Parent Issuer") and Dutch Senior Notes issued by
Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are guaranteed by
certain subsidiaries. The Company and its U.S. subsidiaries ("U.S. Guarantor
Subsidiaries"), excluding 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
Notes. The Dutch issuer and the Belgium Guarantor do not guarantee the US Senior
Notes. Other foreign subsidiaries ("Non-Guarantor Subsidiaries") do not
presently guarantee the Senior Secured Notes. The U.S. Guarantor Subsidiaries
include all domestic subsidiaries of the Company other than the Unrestricted
Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc, Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium
Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc.
The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are
guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including
the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and
unconditionally guarantee the Senior Subordinated Notes on a joint and several
basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not
presently guarantee the Senior Subordinated Notes. The U.S. Guarantor
Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of
the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince
Agriproducts, Inc., 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. Separate financial
statements of the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries are
not presented because management has determined that such financial statements
would not be material to investors.
22
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,462 $ -- $ 409 $ 19 $ 229 $ 4,071 $ -- $ 6,190
Trade receivables 2,596 -- 27,866 -- 1,386 25,700 -- 57,548
Other receivables 421 414 1,297 -- 57 1,174 -- 3,363
Inventory 2,108 -- 39,357 -- 19,684 27,294 88,443
Prepaid expenses and other 1,633 110 1,278 -- 35 7,146 -- 10,202
--------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,220 524 70,207 19 21,391 65,385 -- 165,746
--------------------------------------------------------------------------------------------
Property, plant & equipment, net 118 -- 13,154 -- 17,693 31,722 -- 62,687
Intangibles -- -- -- -- 1,358 6,119 -- 7,477
Investment in subsidiaries 131,896 -- 3,619 (407) -- -- (135,108) --
Intercompany (17,277) 20,968 61,897 21,167 3,909 (11,785) (78,879) --
Other assets 15,258 -- 860 -- -- 883 -- 17,001
--------------------------------------------------------------------------------------------
$ 138,215 $ 21,492 $ 149,737 $ 20,779 $ 44,351 $ 92,324 $(213,987) $ 252,911
============================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ -- $ 12 $ 4,028 $ -- $-- $ -- $ -- $ 4,040
Loan payable to banks 8,004 -- -- -- -- 2,298 -- 10,302
Current portion of long-term debt -- -- 195 -- -- 1,750 -- 1,945
Accounts payable 691 5 23,760 -- 1,847 14,051 -- 40,354
Accrued expenses and other 14,816 9 7,902 1,156 9,642 12,151 45,676
--------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 23,511 26 35,885 1,156 11,489 30,250 -- 102,317
--------------------------------------------------------------------------------------------
Long-term debt 133,029 -- 3 20,000 -- 5,316 -- 158,348
Intercompany debt -- -- -- 57 32,193 46,629 (78,879) --
Other liabilities 8,571 -- 6,493 -- 1,076 3,002 -- 19,142
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES 165,111 26 42,381 21,213 44,758 85,197 (78,879) 279,807
--------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Series C preferred stock 21,288 -- -- -- -- -- -- 21,288
--------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 521 -- -- -- -- -- -- 521
Common stock 2 1 31 -- -- -- (32) 2
Paid-in capital 860 -- 108,363 23 57 5,176 (113,619) 860
Retained earnings
(accumulated deficit) (45,279) 21,465 (937) (5,445) (5,452) 11,125 (20,756) (45,279)
Accumulated other comprehensive --
income (loss):
Gain on derivative instruments 117 -- 117 -- -- -- (117) 117
Cumulative currency translation
adjustment (4,405) -- (218) 4,988 4,988 (9,174) (584) (4,405)
--------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (48,184) 21,466 107,356 (434) (407) 7,127 (135,108) (48,184)
--------------------------------------------------------------------------------------------
$ 138,215 $ 21,492 $ 149,737 $ 20,779 $ 44,351 $ 92,324 $(213,987) $ 252,911
============================================================================================
23
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Three Months Ended March 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------------------------------------------------------------------------------------------
NET SALES $ 5,331 $ -- $ 55,374 $ -- $ 1,162 $ 29,331 $ -- $ 91,198
NET SALES-- INTERCOMPANY 16 -- 32 -- 7,534 418 (8,000) --
COST OF GOODS SOLD 4,176 -- 40,301 -- 6,461 24,955 (8,000) 67,893
----------------------------------------------------------------------------------------
GROSS PROFIT 1,171 -- 15,105 -- 2,235 4,794 -- 23,305
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,868 -- 6,476 2 776 4,517 -- 16,639
----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (3,697) -- 8,629 (2) 1,459 277 -- 6,666
OTHER:
Interest expense 4,179 -- -- 650 60 52 -- 4,941
Interest (income) (1) -- -- -- -- (43) -- (44)
Other (income) expense, net 112 -- (350) -- 118 57 -- (63)
Net (gain) on extinguishment of debt -- -- -- -- -- -- -- --
Intercompany interest and other (4,407) -- 2,345 (657) 943 1,776 -- --
Loss (profit) relating to subsidiaries (3,185) -- -- 2 -- -- 3,183 --
----------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES (395) -- 6,634 3 338 (1,565) (3,183) 1,832
PROVISION FOR INCOME TAXES -- -- 211 -- 340 1,676 -- 2,227
----------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (395) -- 6,423 3 (2) (3,241) (3,183) (395)
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations -- -- -- -- -- -- --
(Loss) from discontinued operations
(net of income taxes) -- -- -- -- -- -- --
Gain from disposal of discontinued
operations (net of income taxes) -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (395) $ -- $ 6,423 $ 3 $ (2) $ (3,241) $ (3,183) $ (395)
========================================================================================
24
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Nine Months Ended March 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------------------------------------------------------------------------------------------
NET SALES $ 16,453 $ 11,118 $ 158,070 $ -- $ 3,402 $ 85,368 $ -- $ 274,411
NET SALES - INTERCOMPANY 113 2,598 425 -- 20,530 2,593 (26,259) --
COST OF GOODS SOLD 12,995 10,139 117,520 -- 20,432 72,262 (26,259) 207,089
--------------------------------------------------------------------------------------------
GROSS PROFIT 3,571 3,577 40,975 -- 3,500 15,699 -- 67,322
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,936 1,299 18,851 4 1,860 13,086 -- 50,036
--------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (11,365) 2,278 22,124 (4) 1,640 2,613 -- 17,286
OTHER:
Interest expense 11,920 18 -- 1,156 79 292 -- 13,465
Interest (income) (4) -- -- -- -- (114) -- (118)
Other (income) expense, net 640 -- (626) -- (294) (484) -- (764)
Net (gain) on extinguishment of debt (23,226) -- -- -- -- -- (23,226)
Intercompany interest and other (16,152) 1,892 7,833 (1,167) 2,389 5,205 -- --
Loss (profit) relating to
subsidiaries (8,533) -- -- 534 -- -- 7,999 --
--------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 23,990 368 14,917 (527) (534) (2,286) (7,999) 27,929
PROVISION FOR INCOME TAXES 1,951 96 883 -- -- 2,960 -- 5,890
--------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 22,039 272 14,034 (527) (534) (5,246) (7,999) 22,039
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations (124) -- -- -- -- -- 124 --
(Loss) from discontinued operations
(net of income taxes) -- (124) -- -- -- -- -- (124)
Gain from disposal of discontinued
operations (net of income taxes) 231 -- -- -- -- -- -- 231
--------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 22,146 $ 148 $ 14,034 $ (527) $ (534) $ (5,246) $ (7,875) $ 22,146
============================================================================================
25
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended March 31, 2004
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
--------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 22,146 $ 148 $14,034 $ (527) $ (534) $(5,246) $ (7,875) $ 22,146
Adjustment for discontinued operation (107) 124 -- -- -- -- (124) (107)
----------------------------------------------------------------------------------------
Income (loss) from continuing operations 22,039 272 14,034 (527) (534) (5,246) (7,999) 22,039
Adjustments to reconcile income (loss)
from continuing operations to net cash
provided (used) by operating activities:
Depreciation and amortization 1,608 487 1,864 -- 1,900 4,244 -- 10,103
Deferred income taxes -- -- -- -- -- 263 -- 263
Net (gain) on extinguishment of debt (23,226) -- -- -- -- -- -- (23,226)
Unrealized foreign currency (gains)
losses and other 391 -- (606) -- (1,177) 760 -- (632)
--
Changes in operating assets and liabilities: --
Accounts receivable 156 336 (5,405) -- 260 1,873 -- (2,780)
Inventory 504 (543) 2,052 -- (5,238) 567 -- (2,658)
Prepaid expenses and other 1,190 188 (1,163) -- (35) (1,331) -- (1,151)
Other assets 1,020 -- (4) -- -- (39) -- 977
Intercompany (1,883) 17,358 (13,553) (20,610) 13,145 (2,456) 7,999 --
Accounts payable (2,613) (332) (7,045) -- (2,751) 31 -- (12,710)
Accrued expenses and other 5,033 (276) 6,317 1,156 3,849 (7,298) -- 8,781
Cash provided (used) by discontinued
operations 231 (652) -- -- -- -- -- (421)
----------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 4,450 16,838 (3,509) (19,981) 9,419 (8,632) -- (1,415)
----------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (44) (62) (1,334) -- (1,163) (1,529) -- (4,132)
Proceeds from sale of assets -- -- 1,057 -- -- 23 -- 1,080
Discontinued operations 14,351 -- -- -- -- 600 -- 14,951
----------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 14,307 (62) (277) -- (1,163) (906) -- 11,899
----------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash overdraft (350) (274) 2,987 -- -- (9) -- 2,354
Net increase (decrease) in short-term debt(29,874) -- -- -- -- 1,006 -- (28,868)
Proceeds from long-term debt 85,000 -- -- 20,000 -- 4,622 -- 109,622
Payments of long-term debt (32,679) (13) (960) -- -- (980) -- (34,632)
Payment of Pfizer obligations (20,075) -- -- -- (8,225) -- -- (28,300)
Payments relating to the Prince
Transactions and transaction costs (4,415) (16,608) -- -- -- -- -- (21,023)
Debt refinancing costs (14,945) -- -- -- -- -- -- (14,945)
----------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (17,338) (16,895) 2,027 20,000 (8,225) 4,639 -- (15,792)
----------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH -- -- 1 -- 13 305 319
----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,419 (119) (1,758) 19 44 (4,594) -- (4,989)
CASH AND CASH EQUIVALENTS
at beginning of period 43 119 2,167 -- 185 8,665 11,179
----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
at end of period $ 1,462 $ -- $ 409 $ 19 $ 229 $ 4,071 $ -- $ 6,190
========================================================================================
26
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2003
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 $ 11,179
Trade receivables 2,759 2,452 22,071 -- 1,542 26,847 55,671
Other receivables 957 3 733 -- 518 1,431 3,642
Inventory 2,612 4,278 41,266 -- 13,459 27,152 88,767
Prepaid expenses and other 3,267 458 981 -- (68) 5,550 10,188
Current assets from discontinued
operations -- 4,942 -- -- -- -- 4,942
------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 9,638 12,252 67,218 -- 15,636 69,645 -- 174,389
------------------------------------------------------------------------------------------
Property, plant & equipment, net 153 3,269 13,297 -- 17,049 32,672 66,440
Intangibles -- -- -- -- 1,818 6,851 8,669
Investment in subsidiaries 96,672 -- 3,619 -- -- -- (100,291) --
Intercompany 35,186 (19,431) 59,765 -- 6,881 (9,418) (72,983) --
Other assets 11,516 710 1,122 -- -- 851 14,199
Other assets from discontinued
operations -- 10,650 -- -- -- -- 10,650
------------------------------------------------------------------------------------------
$ 153,165 $ 7,450 $145,021 $ -- $41,384 $100,601 $(173,274) 274,347
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 350 $ 286 $ 1,041 $ -- $ -- $ 9 1,686
Loan payable to banks 32,147 -- -- -- -- 6,767 38,914
Current portion of long-term debt 21,599 66 381 -- -- 2,078 24,124
Accounts payable 3,304 2,350 25,926 -- 12,115 13,220 56,915
Accrued expenses and other 6,924 1,151 9,931 -- 6,715 16,888 41,609
Current liabilities from
discontinued operations -- 2,051 -- -- -- -- 2,051
------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 64,324 5,904 37,279 -- 18,830 38,962 -- 165,299
------------------------------------------------------------------------------------------
Long-term debt 100,073 213 149 -- -- 1,956 102,391
Intercompany debt -- -- -- -- 22,302 50,681 (72,983) --
Other liabilities 4,397 114 13,289 -- 1,256 3,032 22,088
Other liabilities from discontinued
operations -- 198 -- -- -- -- 198
------------------------------------------------------------------------------------------
TOTAL LIABILITIES 168,794 6,429 50,717 -- 42,388 94,631 (72,983) 289,976
------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Series B and C preferred stock 68,881 -- -- -- -- -- 68,881
------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A preferred stock 521 -- -- -- -- -- 521
Common stock 2 1 31 -- -- -- (32) 2
Paid-in capital 860 -- 110,883 -- -- 5,179 (116,062) 860
Reatined earnings (accumulated
deficit) (79,489) 1,020 (16,499) -- (4,781) 10,860 9,400 (79,489)
Accumulated other comprehensive --
income (loss):
Gain on derivative instruments 81 -- 81 -- -- -- (81) 81
Cumulative currency translation
adjustment (6,485) -- (192) -- 3,777 (10,069) 6,484 (6,485)
----------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) (84,510) 1,021 94,304 -- (1,004) 5,970 (100,291) (84,510)
----------------------------------------------------------------------------------------
$153,165 $ 7,450 $145,021 $ -- $41,384 $100,601 $(173,274) $274,347
===========================================================================================
27
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Three Months Ended March 31, 2003
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
---------------------------------------------------------------------------------------------
NET SALES $ 6,001 $ 5,743 $ 48,232 $ -- $ 3,647 $ 26,574 $ -- $ 90,197
NET SALES - INTERCOMPANY 499 1,141 190 -- 16,357 1,712 (19,899) --
COST OF GOODS SOLD 5,065 5,405 37,093 -- 19,305 19,946 (19,899) 66,915
---------------------------------------------------------------------------------------------
GROSS PROFIT 1,435 1,479 11,329 -- 699 8,340 -- 23,282
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,680 640 7,689 -- 1,065 3,748 17,822
---------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (3,245) 839 3,640 -- (366) 4,592 -- 5,460
OTHER:
Interest expense 3,785 19 -- -- (105) 279 3,978
Interest (income) (1) -- -- -- (15) (23) (39)
Other expense, net 129 -- (308) -- 756 (465) 112
Intercompany interest and other (6,996) 1,240 3,000 -- 1,478 1,278 --
Loss (profit) relating to subsidiaries (972) -- -- -- -- -- 972 --
---------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 810 (420) 948 -- (2,480) 3,523 (972) 1,409
PROVISION (BENEFIT) FOR INCOME TAXES -- 20 261 -- (992) 1,310 599
---------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 810 (440) 687 -- (1,488) 2,213 (972) 810
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations 26,937 -- -- -- -- -- (26,937) --
(Loss) from discontinued operations
(net of income taxes) -- (1,192) -- -- -- (548) (1,740)
Income (loss) on disposal of
discontinued operations
(net of income taxes) (30,019) -- -- -- -- 28,677 (1,342)
---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(2,272) $ (1,632) $ 687 $ -- $ (1,488) $ 30,342 $ (27,909) $ (2,272)
=============================================================================================
28
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For The Nine Months Ended March 31, 2003
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
----------------------------------------------------------------------------------------------
NET SALES $ 18,667 $ 16,784 $ 141,693 $-- $ 5,390 $ 84,079 $ -- $ 266,613
NET SALES - INTERCOMPANY 976 3,232 514 -- 22,844 6,212 (33,778) --
COST OF GOODS SOLD 15,605 15,224 109,227 -- 25,568 65,297 (33,778) 197,143
----------------------------------------------------------------------------------------------
GROSS PROFIT 4,038 4,792 32,980 -- 2,666 24,994 -- 69,470
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,863 1,925 20,272 -- 1,499 12,316 49,875
----------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (9,825) 2,867 12,708 -- 1,167 12,678 -- 19,595
OTHER:
Interest expense 11,222 67 1 -- -- 848 12,138
Interest (income) (2) -- -- -- (15) (118) (135)
Other expense, net 438 -- (308) -- 849 338 1,317
Intercompany interest and other (22,402) 3,717 10,296 -- 2,162 6,227 --
Loss (profit) relating to
subsidiaries (3,072) -- -- -- -- -- 3,072 --
----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES 3,991 (917) 2,719 -- (1,829) 5,383 (3,072) 6,275
PROVISION (BENEFIT) FOR
INCOME TAXES 156 40 467 -- (732) 2,509 2,440
----------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS 3,835 (957) 2,252 -- (1,097) 2,874 (3,072) 3,835
DISCONTINUED OPERATIONS:
Profit (loss) relating to
discontinued operations 15,920 -- -- -- -- -- (15,920) --
(Loss) from discontinued operations
(net of income taxes) -- (1,680) -- -- -- (11,077) (12,757)
Income (loss) on disposal of
discontinued operations
(net of income taxes) (30,019) -- -- -- -- 28,677 (1,342)
----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(10,264) $ (2,637) $ 2,252 $-- $ (1,097) $ 20,474 $ (18,992) $ (10,264)
==============================================================================================
29
PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In Thousands)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended March 31, 2003
U.S.
Parent Unrestricted Guarantor Dutch Belgium Non-Guarantor Consolidation Consolidated
Issuer Subsidiaries Subsidiaries Issuer Guarantor Subsidiaries Adjustments Balance
----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(10,264) $ (2,637) $ 2,252 $-- $ (1,097) $ 20,474 $ (18,992) $ (10,264)
Adjustment for discontinued
operation 14,099 1,680 -- -- -- (17,600) 15,920 14,099
----------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 3,835 (957) 2,252 -- (1,097) 2,874 (3,072) 3,835
Adjustments to reconcile income
(loss) from continuing operations
to net cash provided by operating
activities:
Depreciation and amortization 1,155 711 2,486 -- 1,913 3,653 9,918
Deferred income taxes -- -- -- -- -- 131 131
Unrealized foreign currency (gains)
losses and other 319 6 (581) -- (1,123) 742 (637)
Changes in operating assets and
liabilities:
Accounts receivable (137) 149 (291) -- (1,208) 1,599 112
Inventory (167) 203 (10,056) -- 1,869 2,253 (5,898)
Prepaid expenses and other 1,112 191 491 -- (1,497) (33) 264
Other assets (2,135) -- 1,068 -- -- (949) (2,016)
Intercompany 825 2,102 (5,216) -- 704 (1,487) 3,072 --
Accounts payable 1,241 (240) 13,851 -- 3,150 (2,460) 15,542
Accrued expenses and other 4,274 36 (1,096) -- (1,077) 3,728 5,865
Cash provided (used) by discontinued
operations -- (1,439) -- -- -- 2,970 1,531
----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 10,322 762 2,908 -- 1,634 13,021 -- 28,647
----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures -- (343) (2,306) -- (1,640) (3,012) (7,301)
Proceeds from sale of assets -- -- 2,530 -- -- 26 2,556
Other investing -- -- -- -- -- 765 765
Discontinued operations -- (477) -- -- -- 1,877 1,400
----------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES -- (820) 224 -- (1,640) (344) -- (2,580)
----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash overdraft 2 234 (1,668) -- -- (1,689) (3,121)
Net (decrease) in short-term debt (5,609) -- -- -- -- (403) (6,012)
Proceeds from long-term debt -- -- -- -- -- 2,125 2,125
Payments of long-term debt (5,129) (92) (318) -- -- (8,181) (13,720)
---------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (10,736) 142 (1,986) -- -- (8,148) -- (20,728)
---------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH -- -- 2 -- 65 206 273
----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (414) 84 1,148 -- 59 4,735 -- 5,612
CASH AND CASH EQUIVALENTS
at beginning of period 457 52 600 -- 618 4,692 6,419
----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
at end of period $ 43 $ 136 $ 1,748 $-- $ 677 $ 9,427 $ -- $ 12,031
==============================================================================================
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This information should be read in conjunction with the condensed
consolidated financial statements and related notes contained in this Report.
The Company's Odda, Carbide and MRT businesses have been classified as
discontinued operations. This discussion presents information only for
continuing operations, unless otherwise indicated.
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.
Refinancing
On October 21, 2003, the Company issued 105,000 units consisting of $85.0
million of 13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and
$20.0 million 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands
III B.V. (the "Dutch Senior Notes" and, together with the US Senior Notes, the
"Senior Secured Notes"), an indirect wholly-owned subsidiary of PAHC (the "Dutch
issuer"). The Company used the proceeds from the issuance to: (i) repurchase
$52.0 million of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal
to 60% of the principal amount thereof, plus accrued and unpaid interest; (ii)
repay its senior credit facility of $34.9 million outstanding at the repayment
date; (iii) satisfy, for a payment of approximately $29.3 million certain of its
outstanding obligations to Pfizer Inc., including: (a) $20.1 million aggregate
principal amount of its promissory note plus accrued and unpaid interest, (b)
$9.7 million of accounts payable, (c) $9.0 million of accrued expenses, and (d)
future contingent purchase price obligations under its agreements with Pfizer
Inc. by which the Company acquired Pfizer's medicated feed additive business;
and (iv) pay fees and expenses relating to the above transactions.
A net gain on extinguishment of debt is included in the Company's condensed
consolidated statement of operations, calculated as follows (amounts in
thousands):
Net Gain on Repurchase of 9 7/8% Senior Subordinated
Notes due 2008:
Principal amount of repurchased notes $ 51,971
Repurchased at 60% of principal amount (31,183)
Transaction costs (4,107)
--------
Net gain on repurchase of notes 16,681
--------
Loss on repayment of senior credit facility (1,018)
--------
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note 20,075
-accrued interest on promissory note 1,015
-accounts payable and accrued expenses 18,788
--------
Total obligations paid 39,878
Cash payment to Pfizer (29,315)
Transaction costs (3,000)
--------
Net gain on payment of Pfizer obligations 7,563
--------
Net gain on extinguishment of debt $ 23,226
========
31
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of PAHC (the "US Issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all PAHC's domestic restricted subsidiaries, and the
Dutch Senior Notes are guaranteed on a senior secured basis by PAHC and by the
restricted subsidiaries of the Dutch issuer, presently consisting of Phibro
Animal Health SA. The US Senior Notes and related guarantees are secured by
substantially all of PAHC's assets and the assets of its domestic restricted
subsidiaries, other than real property and interests therein, including a pledge
of all the capital stock of such domestic restricted subsidiaries. The Dutch
Senior Notes and related guarantees are secured by a pledge of all the accounts
receivable, a security interest or floating charge on the inventory to the
extent permitted by applicable law, and a mortgage on substantially all of the
real property of the Dutch issuer and each of its restricted subsidiaries, a
pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a
pledge of the intercompany loans made by the Dutch issuer to its restricted
subsidiaries and substantially all of the assets of the U.S. guarantors, other
than real property and interests therein. The indenture governing the Senior
Secured Notes provides for optional make-whole redemptions at any time prior to
June 1, 2005, optional redemption on or after June 1, 2005, and requires the
Company to make certain offers to purchase Senior Secured Notes upon a change of
control, upon certain asset sales and from fifty percent (50%) of excess cash
flow (as such terms are defined in the indenture).
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("senior credit facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities may not exceed $25.0 million including aggregate
borrowings under the working capital facility up to $15.0 million. On April 29,
2004, the Company amended the senior credit facility to increase the aggregate
amount of borrowings available under such working capital and letter of credit
facilities from $25.0 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.
Borrowings under the senior credit facility are subject to a borrowing base
formula based on percentages of eligible domestic receivables and domestic
inventory. Under the senior credit facility, the Company may choose between two
interest rate options: (i) the applicable base rate as defined plus 0.50% and
(ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the senior credit
facility is secured by a first priority lien on substantially all of the
Company's assets and assets of substantially all of the Company's domestic
subsidiaries. The Company is required to pay an unused line fee of 0.375% on the
unused portion of the senior credit facility, a monthly servicing fee and
standard letter of credit fees to issuing banks. Borrowings under the senior
credit facility are available until, and are repayable no later than, October
31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of
the Senior Secured Notes has not been extended, as required by the senior credit
facility, by that date.
Pursuant to the terms of an intercreditor agreement, the security interest
securing the Senior Secured Notes and the guarantees made by the Company's
domestic restricted subsidiaries is subordinated to a lien securing the senior
credit facility.
The Company believes that, through the refinancings referred to above, the
liquidity issues mentioned in the Company's June 30, 2003 consolidated financial
statements have been resolved. The Company's replaced senior credit facility and
its note payable to Pfizer were to mature in November 2003 and March 2004,
respectively.
The Company's ability to fund its operating plan relies upon its ability to
continue to successfully implement its efforts to improve its overall liquidity
(through cost reduction activities, working capital improvement plans, shutdown
of unprofitable operations and sales of certain business operations and other
assets) and the continued availability of borrowing under the senior credit
facility. The Company believes that it will be able to comply with the terms of
its covenants under the senior credit facility based on its forecasted operating
plan. In the event of adverse operating results and/or violation of covenants
under this facility, there can be no assurance that the Company would be able to
obtain waivers or consents on favorable terms, if at all.
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").
32
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 amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5. The
amount of consideration paid and payable in connection with the Prince
Transactions and all matters in connection therewith were determined pursuant to
arm's length negotiations.
The excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions was
recorded as a decrease to accumulated deficit on the Company's condensed
consolidated balance sheet at December 31, 2003, and was calculated as follows
(amounts in thousands):
Series B & C Redeemable Preferred Stock:
Accreted value pre-transaction $72,184
Accreted value post-transaction 16,517
-------
Reduction in redeemable preferred stock 55,667
-------
Assets Divested and Costs Incurred:
PMC net assets divested 7,430
Cash paid to Palladium Investors for:
-reduction of redeemable preferred stock 10,000
-settlement of PMC intercompany debt 3,958
-working capital adjustment 1,331
-closing fee 500
Transaction costs 8,310
Contingent Backstop Indemnification Amount accrued 4,000
-------
Total assets divested and costs and liabilities incurred 35,529
-------
Excess amount recorded as a decrease to accumulated deficit $20,138
=======
33
PMC is included in the Company's Industrial Chemicals segment. The results
of operations of PMC for the three months and nine months ended March 31, 2004
and 2003 were:
Three Months Nine Months
Ended March 31, Ended March 31,
---------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands) (Thousands)
Net sales $ -- $ 5,743 $11,118 $16,784
Operating income -- 839 2,278 2,867
Depreciation and amortization -- 240 487 711
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.
Summary Consolidated Results of Continuing Operations
Three Months Nine Months
Ended March 31, Ended March 31,
---------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands) (Thousands)
Net sales $ 91,198 $ 90,197 $ 274,411 $ 266,613
Gross profit 23,305 23,282 67,322 69,470
Selling, general and administrative 16,639 17,822 50,036 49,875
Operating income 6,666 5,460 17,286 19,595
Interest expense, net 4,897 3,939 13,347 12,003
Other expense (income), net (63) 112 (764) 1,317
Gain on extinguishment of debt -- (23,226)
Provision for income taxes 2,227 599 5,890 2,440
Income (loss) from continuing operations $ (395) $ 810 $ 22,039 $ 3,835
Comparison of Three Months Ended March 31, 2004 and 2003
Net Sales of $91.2 million increased $1.0 million, or 1%. Animal Health and
Nutrition sales of $64.8 million increased $2.1 million from the prior year.
Specialty Chemical sales of $26.4 million decreased $1.1 million primarily due
to the divestiture of Prince Manufacturing which generated revenues of $5.7
million in 2003. Excluding the divestiture, sales increased for all segments
primarily due to volume increases.
Gross Profit of $23.3 million approximated the prior year and was 25.6% of
net sales, compared with 25.8% 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. Specialty Chemicals
gross profit increased due to increased unit volumes and favorable product mix,
primarily due to increased sales of wood treatment products. PMC's operations
generated $1.5 million of gross profit in fiscal 2003,
Selling, General and Administrative Expenses of $16.6 million decreased
$1.2 million, or 7%, in part due to $0.6 million of PMC expense last year.
Expenses in the operating segments, excluding PMC, declined from 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
period reflect the elimination of the Palladium annual management fee of $2.25
million ($0.6 million per quarter) and income of $0.25 million from the PMC
Advisory fee. Corporate expenses in the third quarter of fiscal 2003 included a
vitamin settlement income of $2.2 million, an actuarial increase in pension
expense of $0.3 million, higher insurance costs of $0.4 million and increased
costs related to debt restructuring activities.
Operating Income of $6.7 million increased $1.2 million to 7.3% of sales.
The increase was primarily due to improved operating performance of the
Specialty Chemical group offset in part by gross profit declines in the Animal
Health and Nutrition segment. PMC contributed $0.8 million of operating income
last year.
34
Interest Expense, Net of $4.9 million increased $1.0 million from the prior
year, primarily due to higher average interest rates associated with the
issuance of the Company's Senior Secured Notes.
Other (Income) Expense, Net of ($0.1) million improved in comparison with
expense of $0.1 million last year. In March 2004, the Company's Phibro-Tech
subsidiary sold its customer list, inventory and other 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 (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 $2.2 million were 121.5% of consolidated pre-tax income of
$1.8 million. The estimated annual effective tax rate increased during the third
quarter to 21% due to increased income tax provisions in profitable foreign
jurisdictions and for state income taxes. A provision for U.S. federal income
taxes has not been recorded due to the utilization of net operating loss
carryforwards. The Company previously had recorded valuation allowances related
to substantially all deferred tax assets. The Company will continue to evaluate
the likelihood of recoverability of these deferred tax assets based upon actual
and expected operating performance.
Comparison of Nine Months Ended March 31, 2004 and 2003
Net Sales of $274.4 million increased $7.8 million, or 3%. Animal Health
and Nutrition sales of $193.3 million increased $4.0 million from the prior
year. Specialty Chemical sales of $81.1 million increased $3.8 million,
primarily due to volume increases in the All Other businesses. The Specialty
Chemical group included PMC sales of $11.1 million and $16.8 million,
respectively, for the fiscal 2004 and 2003 periods.
Gross Profit of $67.3 million decreased $2.1 million to 24.5% of net sales,
compared with 26.0% 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 $4.7
million for the fiscal 2004 and 2003 periods, respectively.
Selling, General and Administrative Expenses of $50.0 million increased
$0.2 million. Expenses in the operating segments, excluding PMC, declined from
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 period reflect the elimination of the Palladium annual management
fee of $2.25 million ($0.6 million per quarter) and income of $0.25 million from
the PMC Advisory fee. Corporate expenses in fiscal 2003 included a vitamin
settlement income of $2.8 million, an actuarial increase in pension expense of
$0.3 million, higher insurance costs of $0.4 million and increased costs related
to debt restructuring activities. PMC expenses were $1.3 million and $1.9
million for the fiscal 2004 and 2003 periods, respectively.
Operating Income of $17.3 million decreased $2.3 million to 6.3% of sales.
The decrease was primarily due to gross profit declines in the Animal Health and
Nutrition segment offset in part by improved operating performance of the
Specialty Chemical group. PMC contributed $2.3 million and $2.9 million in
fiscal 2004 and 2003, respectively.
Interest Expense, Net of $13.3 million increased $1.3 million, from the
prior year, primarily due to 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
expense of $1.3 million last year. During fiscal 2004, the Company's Phibro-Tech
subsidiary sold its customer list, inventory and other 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 (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 $5.9 million were 21.1% of consolidated pre-tax income of
$27.9 million. Income taxes primarily were due to income tax provisions in
profitable foreign jurisdictions and for state income taxes. A provision for
U.S. federal income taxes has not been recorded due to the utilization of net
operating loss carryforwards. The Company previously had recorded valuation
allowances related to substantially all deferred tax assets. The Company will
continue to evaluate the likelihood of recoverability of these deferred tax
assets based upon actual and expected operating performance.
35
Operating Segments
The Animal Health and Nutrition segment manufactures and markets MFAs and
NFAs to the poultry, swine and cattle markets, and includes the operations of
the Phibro Animal Health business unit, Prince AgriProducts, Koffolk Israel, and
Koffolk Brazil. 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, until its divestiture, PMC.
The Distribution segment markets a variety of specialty chemicals, and includes
PhibroChem and Ferro operations. The All Other segment includes contract
manufacturing of crop protection chemicals, Wychem and all other operations.
Three Months Nine Months
Ended March 31, Ended March 31,
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands) (Thousands)
Net Sales
Animal Health & Nutrition $ 64,819 $ 62,675 $ 193,347 $ 189,301
Specialty Chemicals:
Industrial Chemicals 10,000 6,449 22,543 20,533
PMC -- 5,743 11,118 16,784
Distribution 7,916 7,612 23,511 22,905
All other 8,463 7,718 23,892 17,090
--------- --------- --------- ---------
$ 91,198 $ 90,197 $ 274,411 $ 266,613
========= ========= ========= =========
Three Months Nine Months
Ended March 31, Ended March 31,
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
(Thousands) (Thousands)
Operating Income
Animal Health & Nutrition $ 8,370 $ 8,902 $ 22,925 $ 29,915
Specialty Chemicals:
Industrial Chemicals 1,136 (1,555) 458 (4,405)
PMC 839 2,278 2,867
Distribution 789 900 2,322 2,452
All other 194 346 1,040 216
Corporate (3,823) (3,972) (11,737) (11,450)
--------- --------- --------- ---------
$ 6,666 $ 5,460 $ 17,286 $ 19,595
========= ========= ========= =========
Operating Segments Comparison of Three Months Ended March 31, 2004 and 2003
Animal Health and Nutrition
Net Sales of $64.8 million increased $2.1 million. MFA net sales decreased
by $2.9 million. MFA revenues were lower for anticoccidials, antibiotics and
other medicated feed additives but were offset in part by higher sales of
antibacterials and anthelmintics. The decrease in MFA revenues was due to lower
average selling prices offset in part by favorable currency effect on
international sales. In addition, sales of anticcoccidial products were lower
due to pending contract negotiations with a major customer. Nutritional Feed
Additives net sales increased by $5.0 million, principally due to volume
increases in core inorganic minerals, trace mineral premixes and other
ingredients.
Operating Income of $8.4 million decreased $0.5 million. 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.
36
Specialty Chemicals
Industrial Chemicals net sales of $10.0 million, excluding PMC, increased
by $3.6 million. 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-fiscal 2003. The Company continues its existing etchant business
at one remaining facility. PMC, divested in December 2003, generated revenues of
$5.7 million in the year earlier fiscal period. Operating income of $1.1 million
was due to new product introductions and savings from headcount reductions and
facility restructurings in Phibro-Tech operations.
Distribution net sales of $7.9 million increased $0.3 million, or 4%.
Higher unit sales volumes in Europe were partially offset by lower sales volumes
in the U.S. Operating income of $0.8 million decreased $0.1 million. As a
percentage of sales, operating income decreased to 10% in 2003 from 12% in 2002.
The decline in operating income margins resulted principally from increased
sales of lower margin products.
All Other net sales of $8.5 million increased $0.7 million, or 10%.
Revenues for contract manufacturing increased $0.9 million due to increased
volumes and average selling prices. Specialized lab projects and formulations
decreased $0.2 million. Other operating income of $0.2 million decreased by $0.2
million from the prior year due to higher manufacturing and operating costs for
contract manufacturing.
Operating Segments Comparison of Nine Months Ended March 31, 2004 and 2003
Animal Health and Nutrition
Net Sales of $193.3 million increased $4.0 million. Medicated Feed
Additives net sales decreased by $9.1 million. Revenues were lower for
anticoccidials, antibiotics and other medicated feed additives but were offset
in part by higher sales of antibacterials and anthelmintics. The decrease in MFA
revenues was due to lower average selling prices offset in part by favorable
currency effect on international sales. In addition, sales of anticcoccidial
products were lower due to pending contract negotiations with a major customer.
Nutritional Feed Additives net sales increased by $13.1 million, principally due
to volume increases in core inorganic minerals, trace mineral premixes and other
ingredients.
Operating Income of $22.9 million decreased $7.0 million. Operating income
declined due to higher cost of goods reflecting the stronger Euro's effect on
Belgian manufacturing cost and unfavorable currency effects on international
selling, general and administrative expense. Lower average selling prices also
contributed to the decrease.
Specialty Chemicals
Industrial Chemicals net sales of $22.5 million, excluding PMC, increased
$2.0 million, or 10%. 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-fiscal 2003. The Company continues its existing etchant
business at one remaining facility. PMC, divested in December 2003, generated
revenues of $11.1 million and $16.8 million for fiscal periods 2004 and 2003,
respectively. Operating income of $0.5 million improved by $4.8 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 $2.9 million for fiscal
periods 2004 and 2003, respectively.
Distribution net sales of $23.5 million increased $0.6 million, or 3%.
Higher unit sales volumes in Europe were partially offset by lower sales volumes
in the U.S. Operating income of $2.3 million decreased by $0.1 million from the
prior year. As a percentage of sales, operating income was 10% and 11% in 2004
and 2003, respectively.
All Other net sales of $23.9 million increased $6.8 million, or 40%.
Revenues for contract manufacturing increased $6.8 million due to increased
volumes and average selling prices. Specialized lab projects and formulations
approximated the prior year. Operating income of $1.0 million improved by $0.8
million from the prior year due to higher revenues and increased margins on
contract manufacturing.
37
Discontinued Operations
During fiscal 2003, the Company decided to shutdown or divest Odda
Smelteverk (Norway), Carbide Industries (U.K.) and Mineral Resource
Technologies, Inc. These businesses have been classified as discontinued
operations. The sale of MRT was completed on August 28, 2003 for net proceeds,
after transaction costs, of approximately $13.8 million and the Company recorded
a gain of approximately $0.2 million. MRT was included in the Company's All
Other segment. The Company's consolidated financial statements have been
reclassified to report separately the operating results, financial position and
cash flows of the discontinued operations. Amounts in thousands.
Nine Months Ended
March 31, 2004
-----------------
MRT
---
Net sales $ 3,327
=======
Pre-tax income (loss) from discontinued operations $ (124)
Provision (benefit) for income tax $ --
-------
Net Income (loss) from discontinued operations $ (124)
=======
Depreciation and Amortization $ --
=======
Nine Months Ended March 31, 2003
--------------------------------------------
Odda Carbide MRT Total
Net sales $ 6,110 $ 5,107 $ 14,001 $ 25,218
========= ======== ======== ========
Pre-tax income (loss) from discontinued operations $ (11,193) $ 58 $ (1,680) $(12,815)
Benefit for income tax $ -- $ (58) $- $ (58)
--------- -------- -------- --------
Net Income (loss) from discontinued operations $ (11,193) $ 116 $ (1,680) $(12,757)
========= ======== ======== ========
Depreciation and Amortization $ 643 $ 251 $ 973 $ 1,867
========= ======== ======== ========
Three Months Ended March 31, 2003
--------------------------------------------
Odda Carbide MRT Total
Net sales $ -- $ 1,933 $ 3,542 $ 5,475
========= ======== ======== ========
Pre-tax income from discontinued operations $ (500) $ (132) $ (1,192) $ (1,824)
Benefit for income tax $ -- $ (84) -- $ (84)
--------- -------- -------- --------
Net Income (loss) from discontinued operations $ (500) $ (48) $ (1,192) $ (1,740)
========= ======== ======== ========
Depreciation and Amortization $ -- $ 192 $ 337 $ 529
========= ======== ======== ========
Liquidity and Capital Resources
Net Cash (Used) Provided by Operating Activities. Cash (used) provided by
operations for the nine months ended March 31, 2004 and 2003 was ($1.4) million
and $28.6 million, respectively. Cash used in 2004 was attributable to lower
income and increased working capital requirements. Cash provided in 2003 was due
to improved income from continuing operations and aggressive working capital
management. The increase in cash overdrafts of $2.4 million in 2004 is a partial
offset to the use of funds by operations and is included in the financing
section of the cash flow statement.
38
Net Cash Provided (Used) by Investing Activities. Net cash provided (used)
by investing activities for the nine months ended March 31, 2004 and 2003 was
$11.9 million and ($2.6) million, respectively. Discontinued operations,
primarily from the sale of MRT, provided funds of $14.9 million in 2004.
Discontinued operations provided $1.4 million in 2003. Capital expenditures of
$4.1 million and $7.3 million in the respective 2004 and 2003 periods were for
new product capacity, for maintaining the Company's existing asset base and for
environmental, health and safety projects.
Net Cash (Used) by Financing Activities. Net cash (used) by financing
activities for the nine months ended March 31, 2004 and 2003 was ($15.8) million
and ($20.7) million, respectively. Short-term debt decreased due to the
reduction of the senior credit facility of $24.1 million, debt payments related
to Odda of $5.7 million, and offset by other increases of $0.9 million. Proceeds
from long-term debt reflect the issuance of $105.0 million Senior Secured Notes
and an increase of $4.6 million in foreign bank loans. Payments of long-term
debt primarily reflect the retirement of senior subordinated debt. Payments of
the Pfizer obligations, the Prince transactions and costs related to the
refinancing account for the remainder of funds used by financing activities.
Working Capital and Capital Expenditures. Working capital as of March 31,
2004 was $63.4 million compared to $9.1 million at fiscal year end June 30,
2003, an increase of $54.3 million. The increase in working capital was due to
reduced current debt, accounts payable and accrued expense levels, principally
as a result of the Company's refinancing and satisfaction of its obligations due
Pfizer.
The Company anticipates spending approximately $6.0 million for capital
expenditures related to continuing operations in fiscal 2004, primarily to cover
the Company's asset replacement needs, to improve processes, and for
environmental and regulatory compliance, subject to the availability of funds.
Liquidity. At March 31, 2004, the Company was in compliance with the
financial covenants included in its senior credit facility. At March 31, 2004,
the amount of credit extended under the Company's senior credit facility totaled
$8.0 million under the revolving credit facility and $8.1 million under the
letter of credit facility, and the Company had $7.0 million available under the
borrowing base formula in effect. In addition, certain of the Company's foreign
subsidiaries also had availability totaling $4.3 million under their respective
loan agreements. On April 29, 2004, the Company amended the senior credit
facility to increase the aggregate amount of borrowings available under such
working capital and letter of credit facilities from $25.0 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.
The senior credit facility contains a lock-box requirement and an
acceleration clause should an event of default (as defined in the agreement)
occur. Accordingly, the amounts outstanding have been classified as short-term
and are included in loans payable to banks in the condensed consolidated balance
sheet.
The Company's ability to fund its operating plan relies upon its ability to
continue to successfully implement its efforts to improve its overall liquidity
(through cost reduction activities, working capital improvement plans, shutdown
of unprofitable operations and sales of certain business operations and other
assets) and the continued availability of borrowing under the senior credit
facility. The Company believes that it will be able to comply with the terms of
its covenants under the senior credit facility based on its forecasted operating
plan. In the event of adverse operating results and/or violation of covenants
under this facility, there can be no assurance that the Company would be able to
obtain waivers or consents on favorable terms, if at all.
The Company anticipates taxable gains on extinguishment of debt and other
aspects of the refinancing structure will be substantially offset by existing
net operating loss carry forwards, and that the Company will not incur
significant cash income tax payments related to these gains.
The Company's contractual obligations (in millions) at March 31, 2004 mature
as follows:
Years
--------------------------------------------
Within 1 Over 1 to 3 Over 3 to 5 Total
-------- ----------- ----------- -----
Loans payable to Banks $ 10.3 $ -- $ -- $ 10.3
Lease commitments 1.8 1.4 0.6 3.8
Long-term debt (including
current portion) 2.0 5.3 153.0 160.3
----- ---- ------ ------
Total contractual obligations $14.1 $6.7 $153.6 $174.4
===== ==== ====== ======
39
Critical Accounting Policies
The Company's discussion of results of operations and financial condition
relies on consolidated financial statements that are prepared based on certain
critical accounting policies that require management to make judgments and
estimates that are subject to varying degrees of uncertainty. The Company
believes that investors need to be aware of these policies and how they impact
our financial statements as a whole, as well as our related discussion and
analysis presented herein. While the Company believes that these accounting
policies are based on sound measurement criteria, future events can and often do
result in outcomes that can be materially different from these estimates or
forecasts. The accounting policies and related risk described in our Annual
Report on Form 10-K for the year ended June 30, 2003 are those that depend most
heavily on these judgments and estimates. As of March 31, 2004 there have been
no material changes to any of the critical accounting policies contained
therein.
New Accounting Pronouncements
The Company adopted the following new accounting pronouncements in fiscal
2004:
Statement of Financial Accounting Standards No. 149, "Amendment of SFAS No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No.
149 amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not
result in a material impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a
financial instrument, that is within its scope, as a liability (or an asset in
some circumstances). SFAS No. 150 also revises the definition of liabilities to
encompass certain obligations that can, or must, be settled by issuing equity
shares, depending on the nature of the relationship established between the
holder and the issuer. The adoption of SFAS No. 150 did not result in a material
impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment to
FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This
revision to SFAS No. 132 relates to employers' disclosures about pension plans
and other postretirement benefit plans. SFAS No. 132 now requires additional
disclosures to describe the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows, and components of net
periodic benefit cost recognized during interim periods of defined pension plans
and other defined postretirement plans. The additional disclosures required by
this revision to SFAS No. 132 have been provided.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
(revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. The adoption of FIN No. 46 did not result in a
material impact on the Company's financial statements.
Certain Factors Affecting Future Operating Results
Forward-Looking Statements
This Report on Form 10-Q contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Statements that are not
historical facts, including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words "may," "could," "would,"
"should," "believe," "expect," "anticipate," "plan," "estimate," "target,"
"project," "intend," or similar expressions. These statements include, among
others, statements regarding our expected business outlook, anticipated
financial and operating results, our business strategy and means to implement
the strategy, our objectives, the amount and timing of capital expenditures, the
likelihood of our success in expanding our business, financing plans, budgets,
working capital needs and sources of liquidity.
40
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on our management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include, among
others, assumptions regarding demand for our products, the expansion of product
offerings geographically or through new applications, the timing and cost of
planned capital expenditures, competitive conditions and general economic
conditions. These assumptions could prove inaccurate. Forward-looking statements
also involve risks and uncertainties, which could cause actual results that
differ materially from those contained in any forward-looking statement. Many of
these factors are beyond our ability to control or predict. Such factors
include, but are not limited to, the following:
o our substantial leverage and potential inability to service our debt
o our dependence on distributions from our subsidiaries
o risks associated with our international operations and significant
foreign assets
o our dependence on our Israeli operations
o competition in each of our markets
o potential environmental liability
o potential legislation affecting the use of medicated feed additives
o extensive regulation by numerous government authorities in the United
States and other countries
o our reliance on the continued operation and sufficiency of our
manufacturing facilities
o our reliance upon unpatented trade secrets
o the risks of legal proceedings and general litigation expenses
o potential operating hazards and uninsured risks
o the risk of work stoppages
o our dependence on key personnel
See also the discussion under "Risks and Uncertainties" in Note 2 of our
Condensed Consolidated Financial Statements included in this Report.
In addition, the issue of the potential for increased bacterial resistance
to certain antibiotics used in certain food producing animals is the subject of
discussions on a worldwide basis and, in certain instances, has led to
government restrictions on the use of antibiotics in these food producing
animals. The sale of feed additives containing antibiotics is a material portion
of our business. Should regulatory or other developments result in further
restrictions on the sale of such products, it could have a material adverse
impact on our financial position, results of operations and cash flows.
We believe the forward-looking statements in this Report are reasonable;
however, no undue reliance should be placed on any forward-looking statements,
as they are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates, foreign currency exchange rates,
and commodity prices. As a result, future earnings, cash flows and fair values
of assets and liabilities are subject to uncertainty. The Company uses, from
time to time, foreign currency forward contracts as a means of hedging exposure
to foreign currency risks. The Company also utilizes, on a limited basis,
certain commodity derivatives,
41
primarily on copper used in its manufacturing processes, to hedge the cost of
its anticipated purchase requirements. The Company does not utilize derivative
instruments for trading purposes. The Company does not hedge its exposure to
market risks in a manner that completely eliminates the effects of changing
market conditions on earnings, cash flows and fair values. The Company monitors
the financial stability and credit standing of its major counterparties.
The Company's debt portfolio is comprised of fixed rate and variable rate
debt of approximately $170.9 million as of March 31, 2004. Approximately 10% of
the debt is variable and would be interest rate sensitive.
Item 4. Controls and Procedures
(a) Based upon an evaluation, under the supervision and with the participation
of the Company's Principal Executive Officers and Principal Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-Q, they have concluded that the Company's
disclosure controls and procedures as defined in Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended, are effective for gathering,
analyzing and disclosing information the Company is required to disclose in
its periodic reports filed under such Act.
(b) During the most recent fiscal quarter, there have been no significant
changes in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II -- OTHER INFORMATION
Item 5. Other Information
Subsequent Events
On April 29, 2004, the Company amended it senior credit facility with Wells
Fargo Foothill, Inc., which provides for a working capital facility and a letter
of credit facility, to, among other things, increase the aggregate amount of
borrowings available under the senior credit facility from $25 million to $27.5
million and increase the amount of aggregate borrowings available under the
working capital facility from up to $15 million to up to $17.5 million.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
10.31.2 Amendment Number Two to Loan and Security Agreement dated April 29,
2004.
31.1 Certification of Gerald K. Carlson, Chief Executive Officer required
by Rule 15d-14(a) of the Act.
31.2 Certification of Jack C. Bendheim, Chairman of the Board required by
Rule 15d-14(a) of the Act.
31.3 Certification of Richard G. Johnson, Chief Financial Officer required
by Rule 15d-14(a) of the Act.
Since the Company does not have securities registered under Section 12 of the
Securities Exchange Act of 1934 and is not required to file periodic reports
pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company submits periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its 9 7/8% Senior Subordinated Notes due 2008.
(b) Reports on Form 8-K.
On January 12, 2004, the Company furnished a report on Form 8-K reporting
items 2 and 7.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HIBRO ANIMAL HEALTH CORPORATION.
Date: May 14, 2004 By: /s/ JACK C. BENDHEIM
-----------------------------------
Jack C. Bendheim
Chairman of the Board
Date: May 14, 2004 By: /S/ GERALD K. CARLSON
-----------------------------------
Gerald K. Carlson
Chief Executive Officer
Date: May 14, 2004 By: /s/ RICHARD G. JOHNSON
-----------------------------------
Richard G. Johnson
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
43
Exhibit Index
Exhibit No Description
---------- -----------
10.31.2 Amendment Number Two to Loan and Security Agreement dated
April 29, 2004.
31.1 Certification of Gerald K. Carlson, Chief Executive Officer
required by Rule 15d-14(a) of the Act.
31.2 Certification of Jack C. Bendheim, Chairman of the Board required
by Rule 15d-14(a) of the Act.
31.3 Certification of Richard G. Johnson, Chief Financial Officer
required by Rule 15d-14(a) of the Act.
Since the Company does not have securities registered under Section 12 of
the Securities Exchange Act of 1934 and is not required to file periodic reports
pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company submits periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its 9 7/8% Senior Subordinated Notes due 2008.
44