UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| * ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-64641
Phibro Animal Health Corporation
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: none
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant computed by reference to the price at which such voting stock was
sold was $0 as of June 30, 2004.
The number of shares outstanding of the Registrant's Common Stock as of June 30,
2004: 24,488.50
Class A Common Stock, $.10 par value: 12,600.00
Class B Common Stock, $.10 par value: 11,888.50
* By virtue of Section 15(d) of the Securities Act of 1934, the Registrant is
not required to file this Annual Report pursuant thereto, but has filed all
reports as if so required during the preceding 12 months.
PHIBRO ANIMAL HEALTH CORPORATION
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39
Item 9A. Controls and Procedures 39
Item 9B. Other Information 40
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 52
Index to Financial Statements F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements
Consolidated Balance Sheets
as of June 30, 2004 and 2003 F-3
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended June 30, 2004, 2003 and 2002 F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the years ended June 30, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows
for the years ended June 30, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
Signatures II-1
PART I
Item 1. Business
General
We are a leading diversified global manufacturer and marketer of a broad
range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which we sell throughout
the world predominantly to the poultry, swine and cattle markets. MFAs are used
preventively and therapeutically in animal feed to produce healthy livestock. We
believe we are the third largest manufacturer and marketer of MFAs in the world,
and we believe that certain of our MFA products have leading positions in the
marketplace. We are also a specialty chemicals manufacturer and marketer,
serving primarily the United States pressure-treated wood and chemical
industries. We have several proprietary products, and many of our products
provide critical performance attributes to our customers' products, while
representing a relatively small percentage of total end-product cost. We operate
in over 17 countries around the world and sell our animal health and nutrition
products and specialty chemicals products into over 40 countries. Approximately
76% of our fiscal 2004 net sales were from our Animal Health and Nutrition
business, and approximately 24% of our fiscal 2004 net sales were from our
Specialty Chemicals business.
Our Animal Health and Nutrition segment manufactures and markets more than
500 formulations and concentrations of medicated and nutritional feed additives,
including antibiotics, antibacterials, anticoccidials, anthelmintics, trace
minerals, vitamins, vitamin premixes and other animal health and nutrition
products, to the livestock and pet food industries. Our MFA products are
internationally recognized for quality and efficacy in the prevention and
treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in
swine and acidosis in cattle. We market our Animal Health and Nutrition products
under approximately 450 governmental product registrations, approving our MFA
products with respect to animal drug safety and effectiveness.
Our Specialty Chemicals business manufactures and markets a number of
specialty chemicals for use in the pressure-treated wood, chemical catalyst,
semiconductor, automotive, aerospace and agricultural industries. We anticipate
that our proprietary manufacturing process to produce a copper-based solution
for one of the leading new products for manufacturing pressure-treated wood will
represent our largest growth opportunity in our Specialty Chemicals business.
Over 39% of our fiscal 2004 net sales in our Specialty Chemicals business was
derived from copper-based compounds, solutions or mixes.
We have in recent years focused our business on animal health and nutrition
products. As a result of the rapid decline of the printed circuit board industry
in the United States, we have substantially exited that business, including our
etchant recycling operations, and re-directed our productive capacity in niche
markets. We have also sold other non-strategic businesses, such as our Agtrol
copper fungicide business and our subsidiaries, Mineral Resource Technologies,
Inc. ("MRT") and The Prince Manufacturing Company ("PMC"). In addition, we
closed our operations in Odda, Norway ("Odda") and Bordeaux, France ("La
Cornubia").
In August 2003, the Company completed the sale of MRT for net proceeds after
transaction costs of approximately $13.8 million. MRT managed and sold coal
combustion by-products, including fly ash.
Effective December 26, 2003, the Company completed the divestiture of
substantially all of the business and assets of The Prince Manufacturing Company
("PMC") to a company formed by Palladium Equity Partners II, LP and certain of
its affiliates (the "Palladium Investors"), and the related reduction of the
Company's preferred stock held by the Palladium Investors. PMC manufactured and
marketed various mineral oxides, including iron compounds and manganese
compounds (see Item 7 "Prince Transactions"). Unless otherwise indicated, the
information in this Item 1 does not include PMC.
On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA
("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The
Company believes that as a result of the bankruptcy filing by La Cornubia, it is
possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding
company with no assets except for its investment in La Cornubia, may also file
for bankruptcy in France.
1
Our Animal Health and Nutrition Business -- Medicated Feed Additives
We manufacture and market a broad range of medicated feed additive products
to the global livestock industry, either directly to large integrated producers
or through a network of independent distributors. Feed additives provide both
therapeutic benefits and increased conversion efficiency -- key drivers of
profitability for livestock producers.
Our MFA products can be grouped into five principal categories: antibiotics,
antibacterials, anticoccidials, anthelmintics and other medicated feed
additives. In fiscal 2004, antibiotics and antibacterials generated sales for us
of approximately $79 million, anticoccidials generated sales for us of
approximately $44 million, and anthelmintics and other medicated feed additives
generated sales for us of approximately $9 million.
Our core MFA products are listed in the table below:
Brand Active/Antigen Market Entry Comment
- ----------------------------- -------------- ------------ -------
Terramycin(R)/Neo- oxytetracycline, 1951 Antibiotic with multiple
Terramycin(R)/Neo-TM(R) neomycin applications for a wide
number of species
CLTC(R) chlortetracycline 1954 Antibiotic with multiple
applications for a wide
number of species
Nicarb(R) nicarbazin 1955 Anticoccidial for poultry
Amprol(R) amprolium 1960 Anticoccidial for poultry
and cattle
Bloatguard(R) poloxalene 1966 Anti-bloat treatment for cattle
Banminth(R) pyrantel tartrate 1969 Anthelmintic for livestock
Mecadox(R) carbadox 1971 Antibacterial used in swine
feeds to control
salmonellosis and dysentery
Stafac(R)/Eskalin(R)/V-Max(R) virginiamycin 1972 Antibiotic with multiple
applications for a wide
number of species
Coxistac(R)/Posistac(R) salinomycin 1979 Anticoccidial for poultry;
disease preventative in swine
Rumatel(R) morantel tartrate 1981 Anthelmintic for livestock
Oxibendazole(R) oxibendazole 1982 Anthelmintic for livestock
Aviax(R) semduramicin 1995 Anticoccidial for poultry
Antibiotics
Antibiotics are natural products produced by fermentation and are used to
treat or to prevent diseases, thereby promoting more efficient growth. Several
factors contribute to limit the efficiency, the weight gain and feed conversions
of livestock production, including poor nutrition, environmental and management
problems, heat stress and subclinical disease.
Virginiamycin. Virginiamycin is an antibiotic marketed under our brand names
Stafac(R) for treating swine, cows, broilers and turkeys, Eskalin(R) for dairy
cows and V-Max(R) for feed lot cattle. We formulate virginiamycin to improve
health in poultry, swine and cattle and prevent necrotic enteritis in poultry,
dysentery in swine and liver abscesses in cattle. The product is sold to large
poultry and swine producers and feed companies in North America, Latin America
and Asia.
First discovered in Belgium in 1954, virginiamycin is an antimicrobial
produced from the streptomyces virginiae fungus. Virginiamycin has been
successful due to a number of strong product features. For example, no
withdrawal period is required since it is virtually unabsorbed from the
digestive tract. It is excreted in very low concentrations and rapidly degraded.
It alleviates some of the production limiting effects of certain diseases of
livestock and poultry. To date, no generic competition has been introduced due
to our proprietary virginiamycin manufacturing technology.
Terramycin and Neo-Terramycin. Terramycin(R) and Neo-Terramycin(R), which
are derived from the active ingredient oxytetracycline, are effective against a
range of diseases including:
o fowl cholera in chickens,
o airsacculitis in turkeys,
o pneumonia and enteritis in swine, and
o pneumonia, enteritis and liver abscesses in cattle.
2
We sell Terramycin(R) and Neo-Terramycin(R) feed additive products in
various concentrations. Terramycin(R) is approved for use for poultry, swine,
cattle and sheep. Neo-Terramycin(R) combines the active ingredients
oxytetracycline and neomycin to prevent and treat a wide range of diseases
caused by gram positive and gram negative organisms, including bacterial
enteritis in chickens and turkeys, baby pig diarrhea in swine and calf diarrhea.
These Terramycin products are sold mostly in the United States to livestock
producers, feed companies and distributors. Limited quantities are sold in
selected countries in Latin America and Asia.
Antibacterials
Antibacterials are produced through chemistry and are used to treat and
prevent diseases.
Carbadox. We market carbadox under the brand name Mecadox(R). Carbadox is an
antibacterial compound recommended for use in swine feeds to promote and to
control swine salmonellosis and swine dysentry. In swine production, the primary
objective of producers is the rapid and efficient development of swine at
minimal cost. Since 1970, Mecadox(R) has been a leader in reducing livestock
production costs through meaningful performance enhancement. Mecadox(R) is a
leading product for starter/grower swine in the United States. In addition to
its antimicrobial properties, it also improves nitrogen retention and increases
the efficiency of amino acid metabolism, two critical factors in the development
of young swine. Mecadox(R) is chemically unrelated to any other antibacterial
that is used in animals or humans. Mecadox(R) is sold primarily in North America
to feed companies and large integrated swine producers.
Anticoccidials
Anticoccidials are produced through fermentation and chemistry, and are
primarily used to prevent and control the disease coccidiosis in poultry and in
cattle. Coccidiosis is a disease of the digestive tract that is of great concern
to animal producers. Caused by protozoan parasites such as Eimeria spp.,
coccidiosis is one of the most destructive diseases facing the world's poultry
producers. Common effects of this disease (such as weight loss, wet droppings,
poor feed utilization and higher mortality rates) rapidly affect an entire flock
of poultry, resulting in annual losses of hundreds of millions of dollars for
the poultry industry.
Modern, large scale poultry production is based on intensive animal
management practices. This type of animal production requires routine preventive
medications in order to prevent health problems. Coccidiosis is one of the
critical disease challenges which poultry producers face globally. We sell our
anticoccidials globally, primarily to integrated poultry producers and feed
companies in North America, the Middle East, Latin America and Asia, and to
international animal health companies.
Nicarbazin and Amprolium. We produce nicarbazin and amprolium for
distribution to the world-wide poultry industry through major multinational life
science and veterinary companies. Nicarbazin is a broad-spectrum anticoccidial
which works by interfering with mitochondrial metabolism. It is classified as an
oxidative phosphorylation uncoupler and is used for coccidiosis prevention in
broiler chickens.
We believe that we are the largest volume world-wide producer of amprolium,
and the largest volume world-wide producer of nicarbazin. We are also the sole
Latin American producer of nicarbazin. Nicarbazin and amprolium, along with
salinomycin and semduramicin, are among the most effective medications for the
prevention of coccidiosis in chickens when used in rotation with other
anticoccidials. In the United States, we market nicarbazin under the trademark
Nicarb(R).
Other Anticoccidials. From a class of compounds known as ionophores, we
developed Aviax(R) and Coxistac(R) to combat coccidiosis. These two products
have demonstrated increased feed efficiency, the ability to suppress coccidial
lesions, and provide reliable reserve potency with minimal side-effects. Through
a third product, Posistac(R), we have extended the application of the active
ingredient in Coxistac(R) to swine.
Aviax(R) contains the ionophore semduramicin which provides protection for
poultry against all major coccidial parasites. The product can be incorporated
into virtually any type of feed, and provided to broilers of any production
stage. We have received regulatory approval to sell Aviax(R) in the EU and have
applied in the United States for the sale of Aviax(R) in mycelial dosage form.
This dosage form is significantly more cost-effective and may improve
profitability significantly.
Coxistac(R) contains the ionophore salinomycin. The product acts early in
the coccidial life cycle by killing sporozoites, trophozoites and early
developing schizonts before poultry can be severely damaged. Coxistac(R) has
proven to be effective and safe with minimal resistance development evident in
commercial studies. The recommended dosage provides a high level of protection
against coccidiosis even through temporary periods of low feed intake caused by
disease or adverse climatic conditions. No withdrawal period is required for
poultry before slaughter. Coxistac(R) is a leading anticoccidial in Asia, Latin
America, the Middle East and Canada.
3
Posistac(R) contains salinomycin which acts as a productivity enhancer for
grower/finisher swine. The compound increases the utilization and digestion of
feed ingredients by mature swine thereby allowing swine to reach market weight
earlier and at less cost than swine fed conventional feed additives. Posistac(R)
can be used up to the slaughter phase without the need for withdrawal.
Anthelmintics
Anthelmintics protect against internal parasites. Our anthelmintic products
are marketed under the Rumatel(R) and Banminth(R) brand names.
Rumatel(R). Rumatel(R) is a potent broad-spectrum anthelmintic that
effectively eliminates the major internal nematode parasites in cattle. Unlike
other single-dose dewormers, Rumatel(R) may be administered to lactating dairy
cattle with no milk withdrawal. Dairy cattle may be treated with Rumatel(R) at
any time during their production cycle, whether dry, pregnant or lactating.
Banminth(R). Banminth(R) is an anthelmintic compound, a member of the class
of synthetic compounds called tetra-hydropyrimidines. Banminth(R) has a mode of
action that works effectively in protecting swine against the two major internal
parasites, large roundworms (Ascaris suum) and nodular worms (Oesophagostomum
spp.). Banminth(R) kills adult parasites and prevents roundworm larval
migration, preventing damage to the liver and lungs of swine. When used
continuously in feeds, Banminth(R) prevents re-infection of swine raised on
dirt.
Other Medicated Feed Additives
Our other medicated feed additives include a range of products sold under
the Bloat Guard(R) brand name. Bloat Guard(R) controls legume or wheat pasture
bloat in cattle. The products control bloat for at least 12 hours after a single
dose with no adverse effect on reproduction, rumen function or milk production.
We manufacture bulk active ingredients for our MFA products primarily in
four modern facilities located in:
o Guarulhos, Brazil (salinomycin and semduramicin),
o Rixensart, Belgium (virginiamycin and semduramicin),
o Ramat Hovav, Israel (nicarbazin and amprolium), and
o Braganca Paulista, Brazil (nicarbazin).
Active ingredients are further processed in our facilities and in contract
premix facilities located in each major region of the world.
We have established sales and technical offices for our MFA products in 14
countries including: the United States, Canada, Mexico, Venezuela, Brazil,
Argentina, Chile, Australia, China, Thailand, Malaysia, South Africa, Belgium
and Israel. The business is not dependent on any one customer.
The use of MFAs is controlled by regulatory authorities that are specific to
each country (e.g., the Food and Drug Administration ("FDA") in the United
States, Health Canada in Canada, EFSA/EMEA authorities in Europe, etc.),
responsible for the safety and wholesomeness of the human food supply, including
feed additives for animals from which human foods are derived. Each product is
registered separately in each country where it is sold. The appropriate
registration files pertaining to such regulations and approvals are continuously
monitored, maintained and updated by us. In certain countries where we are
working with a third party distributor, local regulatory requirements may
require registration in the name of such distributor.
Animal Health and Nutrition -- Nutritional Feed Additives
We manufacture and market trace minerals, trace mineral premixes, vitamins
and other nutritional ingredients to the livestock feed and pet food industries,
predominantly in the United States and Israel. These products generally fortify,
enhance or make more nutritious or palatable the livestock feeds and pet foods
with which they are mixed. The majority of the other ingredients that we sell
are nutrients that are used as supplements for animal feed. We serve customers
in major feed segments, including swine, dairy, poultry and beef. We customize
trace mineral premixes at our blending facilities in Marion, Iowa, Bremen,
Indiana and Petach Tikva, Israel, and market a diverse line of other trace
minerals and macro-minerals. Our major customers for these products are
medium-to-large feed companies, co-ops, blenders, integrated poultry operations
and pet food companies. We sell other ingredients, such as buffers, yeast,
palatants, vitamin K and amino acids, including lysine, tryptophan and
threonine. We also market copper sulfate as an animal feed supplement.
4
Our Specialty Chemicals Business
We manufacture and market a number of specialty chemicals for use in the
wood treatment, chemical catalyst, semiconductor, automotive, aerospace and
agricultural industries. Our manufacturing customers incorporate our specialty
chemicals products into their finished products in various industrial markets.
We seek to take advantage of opportunistic niche markets where we believe that
our expertise and capabilities can be leveraged.
Copper Wood Treatment Products
For many years, we were a major supplier of an important ingredient (copper
oxide) used in the manufacture of CCA (chromated-copper-arsenic) wood treating
solutions for the pressure-treated wood industry. Pursuant to a United States
Environmental Protection Agency ("EPA") ruling, since December 31, 2003, all
pressure-treated wood for the residential and recreational markets can no longer
be treated using the standard chromated-copper-arsenic (CCA) solution. A leading
replacement solution for CCA pressure-treated wood is a copper carbonate
compound. We currently estimate that the total potential size of this copper
solution to the pressure-treated wood market is approximately $120 million
annually. We have already signed a multi-year, take-or-pay contract with a major
chemicals supplier to the pressure-treated wood industry to provide it with this
new product, which we estimate will increase our sales by approximately $30
million over the life of the contract, based on existing forecasts. A patent
with respect to the manufacturing process of our solution, and the claims in our
patent application was granted and issued on November 11, 2003. We believe that
our manufacturing process allows us to operate in this market with a lower cost
of capital and higher factory through-put than our competition. To take
advantage of this potential new market, we have constructed and are operating
commercial production facilities in Sumter, South Carolina and in Joliet,
Illinois. In addition, we have filed a provisional patent for a new, large
molecule pressure-treated wood copper compound product. We believe that this new
product may be the next generation in copper-based wood treatment products, with
the potential to substantially increase the duration of protection for treated
wood.
Other Copper Products
We manufacture on a contract basis copper compounds for use primarily in
agricultural fungicides from our Sumter, South Carolina facility. This contract
was part of the sale by us of our Agtrol business to Nufarm, Inc. in the fourth
quarter of fiscal 2001. Utilizing our over fifty-year history in producing
copper chemicals, we supply various metal-based chemicals to the catalyst and
electronics industries. We also manufacture copper compounds for a broad variety
of industrial customers.
Other Specialty Chemicals Products
We market and distribute fine and specialty chemicals to manufacturers of
health and personal care products and chemical coating products to customers in
the automotive, metal finishing and chemical intermediate markets. Among our
products for such applications are sodium fluoride and stannous fluoride, DL
Panthenol and selenium disulfide. Sodium fluoride is the active anti-cavity
ingredient in fluoride toothpaste, powders and mouthwashes. Selenium disulfide
is used as a dandricide in shampoo and hair care preparations.
Sales, Marketing and Distribution
We have approximately 2,800 customers. Sales to our top ten customers
represented approximately 22% of our fiscal 2004 net sales and no single
customer represented more than 5% of our fiscal 2004 net sales.
Our world-wide sales and marketing network consists of approximately 118
employees, 5 independent agents and 125 distributors who specialize in
particular markets.
Our products are often critical to the performance of our customers'
products, while representing a relatively small percentage of the total
end-product cost. We believe the three key factors to marketing our products
successfully are high quality products, a highly trained and technical sales
force, and customer service.
Most of our plants have chemists and technicians on staff involved in
product development, quality assurance, quality control and also providing
technical services to customers. Technical assurance is an important aspect of
our overall sales effort. We field Animal Health and Nutrition technical service
people throughout the world, with capabilities to interface with all key
customers on a marketing, sales training and technical (product) basis, and who
work directly with commercial feed manufacturers and integrated
5
poultry, swine and cattle producers to promote animal health. Our MFA and NFA
field personnel are skilled in the area of product differentiation and have
extensive application knowledge so as to work closely with customers in
determining optimum benefits from product usage. As agricultural food production
will continue to intensify and will adopt evolving technologies, our MFA and NFA
personnel are constantly working with customers to better understand their needs
in order to best utilize the products existing within our portfolio. This
commercial knowledge also plays a pivotal role within the research and
development function to ensure that research results are applicable to customer
needs and concerns.
Product Registrations, Patents and Trademarks
We own certain product registrations, patents, tradenames and trademarks,
and use know-how, trade secrets, formulae and manufacturing techniques which
assist in maintaining the competitive positions of certain of our products.
Product registrations are required to manufacture and sell medicated feed
additives. Formulae and know-how are of particular importance in the manufacture
of a number of the products sold in our specialty chemicals business. We believe
that no single patent or trademark is of material importance to our business
and, accordingly, that the expiration or termination thereof would not
materially affect our business. See "Government Regulation."
The following trademarks and service marks used throughout this Report
belong to, are licensed to, or are otherwise used by us in our medicated feed
additives business: Stafac(R); Eskalin(R); V-Max(R); Terramycin(R);
Neo-Terramycin(R); CLTC(R); Mecadox(R); Nicarb(R); Amprol(R); Bloatguard(R);
Aviax(R); Coxistac(R); Posistac(R); Banminth(R); Oxibendazole(R); Rumatel(R).
Raw Materials
The raw materials used in our business include certain active drug
ingredients, a wide variety of chemicals, mineral ores and copper metal that are
purchased from manufacturers and suppliers in the United States, Europe and
Asia. In fiscal 2004, no single raw material accounted for more than 5% of our
cost of goods sold. Total raw materials cost was approximately $133 million or
38% of net sales in fiscal 2004. We believe that for most of our raw materials,
alternate sources of supply are available to us at competitive prices.
Research and Development
Research, development and technical service efforts are conducted at our
various facilities. We operate research and development facilities in Rixensart,
Belgium, Sumter, South Carolina, Ramat Hovav, Israel and Stradishall, England.
These facilities provide research and development services relating to
fermentation development in the areas of micro-biological strain improvement as
well as: process scale-up; wood treatment products; and organic chemical
intermediates.
Technology is an important component of our competitive position, providing
us unique and low cost positions enabling us to produce high quality products.
Patents protect some of our technology, but a great deal of our competitive
advantage revolves around know-how built up over many years of commercial
operation.
Customers
We do not consider our business to be dependent on a single customer or a
few customers, and the loss of any of our customers would not have a material
adverse effect on our results. No single customer accounted for more than 5% of
our fiscal 2004 net sales. We typically do not enter into long-term contracts
with our customers.
Competition
We are engaged in highly competitive industries and, with respect to all of
our major products, we face competition from a substantial number of global and
regional competitors. Some of our competitors have greater financial, research
and development, production and other resources than we do. Our competitive
position is based principally on customer service and support, product quality,
manufacturing technology, facility location and price. We have competitors in
every market in which we participate. Many of our products face competition from
products that may be used as an alternative or substitute.
Employees
As of June 30, 2004, we had 1,051 employees worldwide. Of these, 210
employees were in management and administration, 118 were in sales and
marketing, 132 were chemists, technicians or quality control personnel, and 591
were in production. Certain
6
employees are covered by individual employment agreements. Our Israeli
operations continue to operate under the terms of Israel's national collective
bargaining agreement, portions of which expired in 1994. We consider our
relations with both our union and non-union employees to be good.
Environmental Matters
We and our subsidiaries are subject to a wide variety of complex and
stringent federal, state, local and foreign environmental laws and regulations,
including those governing the use, storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials and wastes, the
manufacture, sale and use of pesticides and the health and safety of employees.
Pursuant to environmental laws, our subsidiaries are required to obtain and
retain numerous governmental permits and approvals to conduct various aspects of
their operations, any of which may be subject to revocation, modification or
denial under certain circumstances. Under certain circumstances, we or any of
our subsidiaries might be required to curtail operations until a particular
problem is remedied. Known costs and expenses under environmental laws
incidental to ongoing operations are generally included within operating
budgets. Potential costs and expenses may also be incurred in connection with
the repair or upgrade of facilities to meet existing or new requirements under
environmental laws or to investigate or remediate potential or actual
contamination and from time to time we establish reserves for such contemplated
investigation and remediation costs. In many instances, the ultimate costs under
environmental laws and the time period during which such costs are likely to be
incurred are difficult to predict.
Our subsidiaries have, from time to time, implemented procedures at their
facilities designed to respond to obligations to comply with environmental laws.
We believe that our operations are currently in material compliance with such
environmental laws, although at various sites our subsidiaries are engaged in
continuing investigation, remediation and/or monitoring efforts to address
contamination associated with their historic operations. As many environmental
laws impose a strict liability standard, however, we can provide no assurance
that future environmental liability will not arise.
In addition, we cannot predict the extent to which any future environmental
laws may affect any market for our products or services or our costs of doing
business. Alternatively, changes in environmental laws might increase the cost
of our products and services by imposing additional requirements on us. States
that have received authorization to administer their own hazardous waste
management programs may also amend their applicable statutes or regulations, and
may impose requirements which are stricter than those imposed by the EPA. We can
provide no assurance that such changes will not adversely affect our ability to
provide products and services at competitive prices and thereby reduce the
market for our products and services.
The nature of our and our subsidiaries' current and former operations
exposes us and our subsidiaries to the risk of claims with respect to
environmental matters and we can provide no assurance that we will not incur
material costs and liabilities in connection with such claims. Based upon our
experience to date, we believe that the future cost of compliance with existing
environmental laws, and liability for known environmental claims pursuant to
such environmental laws, will not have a material adverse effect on us. Based
upon information available, we estimate the cost of further investigation and
remediation of identified soil and groundwater problems at operating sites,
closed sites and third-party sites, (including the litigation referred to under
"-- Legal Proceedings") to be approximately $2.9 million, which is included in
current and long-term liabilities in our June 30, 2004 consolidated balance
sheet. However, future events, such as new information, changes in existing
environmental laws or their interpretation, and more vigorous enforcement
policies of regulatory agencies, may give rise to additional expenditures or
liabilities that could be material. For all purposes of the discussion under
this caption, under Item 3, Legal Proceedings and elsewhere in this Report, it
should be noted that we take and have taken the position that neither Phibro
Animal Health Corporation, nor any of our subsidiaries is liable for
environmental or other claims made against one or more of our other subsidiaries
or for which any of such other subsidiaries may ultimately be responsible.
Federal Regulation
The following summarizes the principal federal environmental laws affecting
our business:
Resource Conservation and Recovery Act of 1976, as amended ("RCRA").
Congress enacted RCRA to regulate, among other things, the generation,
transportation, treatment, storage and disposal of solid and hazardous wastes.
RCRA required the EPA to promulgate regulations governing the management of
hazardous wastes, and to allow individual states to administer and enforce their
own hazardous waste management programs as long as such programs were equivalent
to and no less stringent than the federal program. Such facilities are also
subject to closure and post-closure requirements.
The EPA's regulations, and most state regulations in authorized states,
establish categories of regulated entities and set standards and procedures
those entities must follow in their handling of hazardous wastes. The three
general categories of waste handlers governed by the regulations are hazardous
waste generators, hazardous waste transporters, and owners and operators of
hazardous waste treatment, storage and/or disposal facilities. Generators are
required, among other things, to obtain identification numbers and to
7
arrange for the proper treatment and/or disposal of their wastes by licensed or
permitted operators and all three categories of waste handlers are required to
utilize a document tracking system to maintain records of their activities.
Transporters must obtain permits, transport hazardous waste only to properly
permitted treatment, storage or disposal facilities, and maintain required
records of their activities. Treatment, storage and disposal facilities are
subject to extensive regulations concerning their location, design and
construction, as well as the operating methods, techniques and practices they
may use. Such facilities are also required to demonstrate their financial
responsibility with respect to compliance with RCRA, including closure and
post-closure requirements.
The Federal Water Pollution Control Act, as amended (the "Clean Water Act").
The Clean Water Act prohibits the discharge of pollutants to the waters of the
United States without governmental authorization. Like RCRA, the Clean Water Act
provides that states with programs approved by the EPA may administer and
enforce their own water pollution control programs. Pursuant to the mandate of
the Clean Water Act, the EPA has promulgated "pre-treatment" regulations, which
establish standards and limitations for the introduction of pollutants into
publicly-owned treatment works.
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws,
we and our subsidiaries may have strict and, under certain circumstances, joint
and several liability for the investigation and remediation of environmental
pollution and natural resource damages associated with real property currently
and formerly-owned or operated by us or a subsidiary and at third-party sites at
which our subsidiaries disposed of or treated, or arranged for the disposal of
or treatment of, hazardous substances.
Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA").
FIFRA governs the manufacture, sale and use of pesticides, including the
copper-based fungicides sold by us. FIFRA requires such products and the
facilities at which they are formulated to be registered with the EPA before
they may be sold. If the product in question is generic in nature (i.e.,
chemically identical or substantially similar to a previously registered
product), the new applicant for registration is entitled to cite and rely on the
test data supporting the original registrant's product in lieu of submitting
data of its own. Should the generic applicant choose this citation option, it
must offer monetary compensation to the original registrant and must agree to
binding arbitration if the parties are unable to agree on the terms and amount
of compensation. We have elected this citation option in the past and may use
the citation option in the future should we conclude it is, in some instances,
economically desirable to do so. While there are cost savings associated with
the opportunity to avoid one's own testing and demonstration to the EPA of test
data, there is, in each instance, a risk that the level of compensation
ultimately required to be paid to the original registrant will be substantial.
Under FIFRA, the EPA also has the right to "call in" additional data from
existing registrants of a pesticide, should the EPA determine, for example, that
the data already in the file need to be updated or that a specific issue or
concern needs to be addressed. The existing registrants have the option of
submitting data separately or by joint agreement. Alternatively, if one
registrant agrees to generate and submit the data, the other(s) may meet their
obligations under the statute by making a statutory offer to jointly develop or
share in the costs of developing the data. In that event, the offering party
must, again, agree to binding arbitration to resolve any dispute as to the terms
of the data development arrangement.
The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and
amendments to the Clean Air Act, and corresponding state laws regulate the
emissions of materials into the air. Such laws affect the coal industry both
directly and indirectly and, therefore, the operations of MRT, which was
divested in August 2003. Phibro-Tech is also impacted by the Clean Air Act and
has various air quality permits, including a Title V operating air permit at its
Sumter, South Carolina facility.
State and Local Regulation
In addition to those federal programs described above, a number of states
and some local governments have also enacted laws and regulations similar to the
federal laws described above governing hazardous waste generation, handling and
disposal, emissions to the water and air and the design, operation and
maintenance of recycling facilities.
Foreign Regulation
Our foreign subsidiaries are subject to a variety of foreign environmental
laws relating to pollution and protection of the environment, including the
generation, handling, storage, management, transportation, treatment and
disposal of solid and hazardous materials and wastes, the manufacture and
processing of pesticides and animal feed additives, emissions to the air,
discharges to land, surface water and subsurface water, human exposure to
hazardous and toxic materials and the remediation of environmental pollution
relating to their past and present properties and operations.
Regulation of Recycling Activities
We have substantially reduced our recycling activities at our Joliet,
Illinois; Garland, Texas; Sumter, South Carolina; and Sewaren, New Jersey sites.
Our recycling activities may be broken down into the following segments for
purposes of regulation under RCRA or
8
equivalent state programs: (i) transport of wastes to our facilities; (ii)
storage of wastes prior to processing; (iii) treatment and/or recycling of
wastes; (iv) corrective action at our RCRA facilities; and (v) management of
wastes and residues from the recycling process. Although all aspects of the
treatment and recycling of waste at our recycling facilities are not currently
the subject of federal RCRA regulation, our subsidiaries decided to permit our
recycling facilities as RCRA regulated facilities. Final RCRA "Part B" permits
to operate as hazardous waste treatment and storage facilities have been issued
at our facilities in Santa Fe Springs, California; Garland, Texas; Joliet,
Illinois; Sumter, South Carolina; and Sewaren, New Jersey (expired August 2003,
see "Particular Facilities - Sewaren, NJ" below). Part B renewal applications
have been submitted for the Santa Fe Springs, Garland and Joliet sites. The
applications are being reviewed.
In connection with RCRA Part B permits for the waste storage and treatment
units of various facilities, our subsidiaries have been required to perform
extensive site investigations at such facilities to identify possible
contamination and to provide regulatory authorities with plans and schedules for
remediation. Soil and groundwater contamination has been identified at several
plant sites and has required and will continue to require corrective action and
monitoring over future years. In order to maintain compliance with RCRA Part B
permits, which are subject to suspension, revocation, modification or denial
under certain circumstances, we have been, and in the future may be, required to
undertake additional capital improvements or corrective action.
Our subsidiaries involved in recycling activities are required by the RCRA
and their Part B permits to develop and incorporate in their Part B permits
estimates of the cost of closure and post-closure monitoring for their operating
facilities. In general, in order to close a facility which has been the subject
of a RCRA Part B permit, a RCRA Part B closure permit is required which approves
the investigation, remediation and monitoring closure plan, and requires
post-closure monitoring and maintenance for up to 30 years. Accordingly, we
incur additional costs in connection with any such closure. These cost estimates
are updated annually for inflation, developments in available technology and
corrective actions already undertaken. We have, in most instances, chosen to
provide the regulatory guarantees required in connection with these matters by
means of our coverage under an environmental impairment liability insurance
policy. We can provide no assurance that such policy will continue to be
available in the future at economically acceptable rates, in which event other
methods of financial assurance will be necessary.
In addition to certain operating facilities, we or our subsidiaries have
been and will be required to investigate and remediate certain environmental
contamination at shutdown plant sites. We or our subsidiaries are also required
to monitor such sites and continue to develop controls to manage these sites
within the requirements of RCRA corrective action programs.
Waste Byproducts
In connection with our subsidiaries' production of finished chemical
products, limited quantities of waste by-products are generated. Depending on
the composition of the by-product, our subsidiaries either sell it, send it to
smelters for metal recovery or send it for treatment or disposal to regulated
facilities.
Particular Facilities
The following is a description of certain environmental matters relating to
certain facilities of certain of our subsidiaries. References to "we" or "us"
throughout this section is intended to refer only to the applicable subsidiary
unless the context otherwise requires. These matters should be read in
conjunction with the description of Legal Proceedings in Item 3 below, certain
of which involve such facilities, and Note 15 to our Consolidated Financial
Statements.
In 1984, Congress enacted certain amendments to RCRA under which facilities
with RCRA permits were required to have RCRA facility assessments ("RFA") by the
EPA or the authorized state agency. Following an RFA, a RCRA facility
investigation, a corrective measures study, and corrective measure
implementation must, if warranted, be developed and implemented. As indicated
below, certain of our subsidiaries are in the process of developing or
completing various actions associated with these regulatory phases at certain of
their facilities.
Sumter, SC. In 2003, the South Carolina Department of Health and
Environmental Control ("DHEC") ordered Phibro-Tech, Inc., a subsidiary
("Phibro-Tech"), to prepare a RCRA Facility Investigation ("RFI") and to prepare
and propose Corrective Action Plans. Phibro-Tech has done so, and such proposed
investigatory activities and Corrective Action Plans are being reviewed by the
State. Additional Corrective Action is also being undertaken by Phibro-Tech
pursuant to prior agreements with DHEC to remedy certain deficiencies in the
plant's hazardous waste closure, storage and management system.
Santa Fe Springs, CA. Phibro-Tech submitted an application for renewal of
the Part B Permit for the Santa Fe Springs, California facility. Such
application is presently under review by the State of California and may require
certain corrective actions including, but not limited to, a pump and treat
system utilizing existing water treatment facilities. Phibro-Tech has submitted
a report to the State recommending that soil be remediated instead of
groundwater. This recommendation is also under review by the State.
9
Joliet, IL. Phibro-Tech has submitted an application for renewal of the Part
B Permit for the Joliet, Illinois facility. In connection with this application,
Phibro-Tech completed an initial investigation and determined that certain minor
corrective action was required. The application for renewal is presently pending
and the corrective action is being done.
Garland, TX. The renewal application for the Part B Permit at the Garland,
Texas facility has been granted effective September 12, 2003. As part of an
earlier site investigation, certain corrective action was required including
upgrading of pollution control equipment and additional site characterization.
Both of these are presently underway.
Powder Springs, Georgia. Phibro-Tech's facility in Powder Springs, Georgia
has been operationally closed since 1985. Phibro-Tech retains environmental
compliance responsibility for this facility and has effected a RCRA closure of
the regulated portion of the facility, a surface impoundment. Post-closure
monitoring and corrective action are required pursuant to a state-issued permit.
As required by the permit, corrective action for groundwater has begun, and
Phibro-Tech has submitted and received approval from the state for a remedial
investigation plan.
Sewaren, NJ. Operations at the Sewaren facility were curtailed on or about
September 30, 1999. In June, 2000, CP Chemicals, Inc., a subsidiary ("CP"),
transferred title to the Sewaren property to Woodbridge Township while, at the
same time, entering into a 10-year lease with the Township providing for lease
payments aggregating $2 million, and covering certain areas of the property,
including those areas of the property relating to the existing hazardous waste
storage, treatment and transfer permit, loading docks and pads, and a building,
as well as access, parking, scale use and office space.
The property is the subject of an Administrative Consent Order executed in
March 1991 between the New Jersey Department of Environmental Protection and CP.
CP has ongoing obligations under that Administrative Consent Order. CP is
required to complete the implementation of the Remedial Action Work Plan
approved by the Department of Environmental Protection. Although some of the
obligations have been assumed by the Township under the Lease, for example, the
maintenance of the groundwater recovery system, CP remains responsible to the
Department of Environmental Protection under the Administrative Consent Order.
CP has posted financial assurance, based on the estimated costs of
implementation, under the Administrative Consent Order.
The property is also regulated under the Corrective Action Program
administered by the United States Environmental Protection Agency pursuant to
the Resource Conservation and Recovery Act. The property has been designated as
a RCRA facility for which achieving the Environmental Indicators is a priority.
Currently, CP is interfacing with the Department of Environmental Protection and
the Environmental Protection Agency to coordinate its efforts under this program
and the Administrative Consent Order discussed above. Much of the effort
required by CP in this program is already being conducted as part of the
requirements of the Administrative Consent Order discussed above.
The hazardous waste facility permit issued to CP for this facility expired
in August 2003. CP has commenced the implementation of its approved closure
plan. Based on a formula established by the Department of Environmental
Protection, those closure costs were estimated at $292,823 and submitted to the
Department in April 2003. CP has also advised the New Jersey Division of Law of
its intent to withdraw from the licensing program governing facilities.
Union City, CA. Closure of the Union City, California facility has been
completed.
Union, IL. The facility in Union, Illinois, has been closed since 1986. A
revised remedial action plan ("RAP") has been submitted to the Illinois
Environmental Protection Agency (the "IEPA") and is presently under review. The
work contemplated in the RAP is the result of negotiations between the IEPA and
Phibro-Tech as part of a resolution of Phibro-Tech's appeal of the IEPA's
initial closure requirements. That appeal is currently pending before the
Illinois Pollution Control Board.
Ramat Hovav, Israel. Koffolk (1949) Ltd's ("Koffolk Israel") Ramat Hovav
plant produces a wide range of organic chemical intermediates for the animal
health, chemical, pharmaceutical and veterinary industries. Israeli legislation
enacted in 1997 amended certain environmental laws by authorizing the relevant
administrative and regulatory agencies to impose certain sanctions, including
issuing an order against any person that violates such environmental laws to
remove the environmental hazard. In addition, this legislation imposes criminal
liability on the officers and directors of a corporation that violates such
environmental laws, and increases the monetary sanctions that such officers,
directors and corporations may be ordered to pay as a result of such violations.
The Ramat Hovav plant operates under the regulation of the Ministry of
Environment of the State of Israel. The sewage system of the plant is connected
to the Ramat Hovav Local Industrial Council's central installation, where
Koffolk Israel's sewage is treated together with sewage of other local plants.
Owners of the plants in the area, including Koffolk Israel, have been required
by the Israeli Ministry of Environment to build facilities for pre-treatment of
their sewage.
Government Regulation
Most of our Animal Health and Nutrition Group products require licensing by
a governmental agency before marketing. In the
10
United States, governmental oversight of animal nutrition and health products is
shared primarily by the United States Department of Agriculture ("USDA") and the
Food and Drug Administration. A third agency, the Environmental Protection
Agency, has jurisdiction over certain products applied topically to animals or
to premises to control external parasites.
The issue of the potential for increased bacterial resistance to certain
antibiotics used in certain food producing animals is the subject of discussions
on a worldwide basis and, in certain instances, has led to government
restrictions on the use of antibiotics in these food producing animals. The sale
of feed additives containing antibiotics is a material portion of our business.
Should regulatory or other developments result in restrictions on the sale of
such products, it could have a material adverse impact on our financial
position, results of operations and cash flows.
The FDA is responsible for the safety and wholesomeness of the human food
supply. It regulates foods intended for human consumption and, through The
Center for Veterinary Medicine, regulates the manufacture and distribution of
animal drugs, including feed additives and drugs that will be given to animals
from which human foods are derived, as well as feed additives and drugs for pet
(or companion) animals.
To protect the food and drug supply for animals, the FDA develops technical
standards for animal drug safety and effectiveness and evaluates data bases
necessary to support approvals of veterinary drugs. The USDA monitors the food
supply for animal drug residues.
FDA approval is based on satisfactory demonstration of safety and efficacy.
Efficacy requirements are based on the desired label claim and encompass all
species for which label indication is desired. Safety requirements include
target animal safety and, in the case of food animals, drug residues and the
safety of those residues must be considered. In addition to the safety and
efficacy requirements for animal drugs used in food producing animals, the
environmental impact must be determined. Depending on the compound, the
environmental studies may be quite extensive and expensive. In many instances
the regulatory hurdles for a drug which will be used in food producing animals
are at least as stringent if not more so than those required for a drug used in
humans. For FDA approval of a new animal drug it is estimated the cost is $100
million to $150 million and time for approval could be 8 to 10 years.
The Office of New Animal Drug Evaluation ("NADE") is responsible for
reviewing information submitted by drug sponsors who wish to obtain approval to
manufacture and sell animal drugs. A new animal drug is deemed unsafe unless
there is an approved new animal drug application ("NADA"). Virtually all animal
drugs are "new animal drugs" within the meaning of the term in the Federal Food,
Drug, and Cosmetic Act. Although the procedures for licensing products by the
FDA are formalized, the acceptance standards of performance for any product are
agreed upon between the manufacturer and the NADE. A NADA in animal health is
analogous to a New Drug Application ("NDA") in human pharmaceuticals. Both are
administered by the FDA. The drug development process for human therapeutics can
be more involved than that for animal drugs. However, for food-producing
animals, food safety residue levels are an issue, making the approval process
longer than for animal drugs for non-food producing animals, such as pets.
The FDA may deny a NADA if applicable regulatory criteria are not satisfied,
require additional testing or information, or require postmarketing testing and
surveillance to monitor the safety or efficacy of a product. There can be no
assurances that FDA approval of any NADA will be granted on a timely basis or at
all. Moreover, if regulatory approval of a product is granted, such approval may
entail limitations on the indicated uses for which it may be marketed. Finally,
product approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. Among the
conditions for NADA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures conform to Current
Good Manufacturing Practice ("cGMP"). The plant must be inspected biannually by
the FDA for determination of compliance with cGMP after an initial preapproval
inspection. After FDA approval, any manufacturing changes that may have an
impact on the safety and/or efficacy must be approved by the FDA prior to
implementation. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to ensure compliance.
For clinical investigation and marketing outside the United States, we are
also subject to foreign regulatory requirements governing investigation,
clinical trials and marketing approval for animal drugs. The foreign regulatory
approval process includes all of the risks associated with FDA approval set
forth above. Currently, in the EU, feed additives which are successfully
sponsored by a manufacturer are assigned to an Annex. Initially, they are
assigned to Annex II. During this period, member states may approve the feed
additive for local use. After five years or earlier, the product passes to Annex
I if no adverse reactions or trends develop over the probationary period.
The EU is in the process of centralizing the regulatory process for animal
drugs for member states. In 1997, the EU drafted new regulations requiring the
re-registration of feed additives, including coccidiostats. Part of these
regulations include a provision for manufacturers to submit quality data for
their own formulation, in effect adopting a Product License procedure similar to
that of the FDA. The provision is known as Brand Specific Approval ("BSA"), and
provides manufacturers with the opportunity to register their own unique brands,
instead of simply the generic compound. The BSA process is being implemented
over time. The new system is more like the U.S. system, where regulatory
approval is for the formulated product or "brand." A number of manufacturers,
including
11
us, have completed dossiers in order to re-register various anticoccidials for
the purpose of obtaining regulatory approval from the European Commission. As a
result of its review of said dossiers, the Commission withdrew marketing
authorization of a number of anticoccidials, including nicarbazin, as the
Commission did not consider the submissions to be in full compliance with its
new regulations. We have subsequently completed the necessary data and
resubmitted its nicarbazin dossier. Feasibility and timetable for new
registration will depend on the nature of demands and remarks from the
Commission. Notwithstanding the Commission's actions with respect to our
nicarbazin dossier, we are able to sell, and do sell, nicarbazin as an active
ingredient for another MFA marketer's product which has obtained a BSA and is
sold in the EU.
Miscellaneous
Market Share, Ranking And Other Industry Data
The market share, ranking and other industry data contained in this Report,
including our position and the position of our competitors within these markets,
are based either on our management's knowledge of, and experience in, the
markets in which we operate, or derived from industry data or third-party
sources and, in each case, we believe these estimates are reasonable as of the
date of this Report or, if an earlier date is specified, as of such earlier
date. However, this information may prove to be inaccurate because of the method
by which we obtained some of the data for our estimates or because this
information is subject to change and cannot always be verified due to limits on
the availability and reliability of independent sources, the voluntary nature of
the data gathering process and other limitations and uncertainties inherent in
any statistical survey of market shares. In addition, purchasing patterns and
consumer preferences can and do change. As a result, market share, ranking and
other similar data set forth herein, and estimates and beliefs based on such
data, may not be reliable.
12
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that could
affect our Israeli subsidiary, Koffolk Israel. As of June 30, 2004 and for the
year then ended, Israeli operations (excluding Koffolk Israel's non-Israeli
subsidiaries) accounted for approximately 14% of our consolidated assets and
approximately 12% of our consolidated net sales. We are, therefore, directly
affected by the political, military and economic conditions in Israel.
Political and Military Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with certain Arab countries and the Palestinian Authority,
since October 2000 there has been a significant increase in violence and
terrorist activity in Israel. In April 2002, and from time to time thereafter,
Israel undertook military operations in several Palestinian cities and towns. We
cannot predict whether the current violence and unrest will continue and to what
extent it will have an adverse impact on Israel's economic development or on
Koffolk Israel's or our results of operations. We also cannot predict whether or
not any further hostilities will erupt in Israel and the Middle East and to what
extent such hostilities, if they do occur, will have an adverse impact on
Israel's economic development or on Koffolk Israel's or our results of
operations.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and other companies doing business in Israel or with
Israel companies. We do not believe that the boycott has had a material adverse
effect on us, but we can not provide assurance that restrictive laws, policies
or practices directed toward Israel or Israeli businesses will not have an
adverse impact on our operations or expansion of the our business.
Generally, male adult citizens who are permanent residents of Israel under
the age of 45 are, unless exempt, obligated to perform certain military duty
annually. Additionally, all such residents are subject to being called to active
duty at any time under emergency circumstances and since April 2002 some
reservists have been called to active duty. Some of the employees of Koffolk
Israel currently are obligated to perform annual reserve duty. While Koffolk
Israel has operated effectively under these and similar requirements in the
past, we cannot assess the full impact of such requirements on Koffolk Israel
and us in the future, particularly if emergency circumstances occur and
employees of Koffolk Israel are called to active duty.
Economic Conditions
Israel is currently experiencing the longest recession since the
establishment of Israel in 1948. Factors affecting Israel's economy include the
Intifada, which began in September 2000, the slowdown in world trade and the
global slump in the high-tech industry. In addition, Israel's economy has been
subject to numerous destabilizing factors, including a period of rampant
inflation in the early to mid-1980's, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and security
incidents. Further disruptions to the Israeli economy as a result of these or
other factors could have a material adverse affect on Koffolk Israel's and our
results of operations.
Koffolk Israel receives a portion of its revenues in U.S. dollars while its
expenses are principally payable in New Israeli Shekels. Dramatic changes in the
currency rates could have an adverse effect on Koffolk Israel's results of
operations.
Investment Incentives
Certain of our Israeli production facilities have been granted Approved
Enterprise status pursuant to the Law for the Encouragement of Capital
Investments, 1959, and consequently may enjoy certain tax benefits and
investment grants. Taxable income of Koffolk Israel derived from these
production facilities is subject to a lower rate of company tax than the normal
rate applicable in Israel. Dividends distributed by Koffolk Israel out of the
same income are subject to lower rates of withholding tax than the rate normally
applicable to dividends distributed by an Israeli company to a non-resident
corporate shareholder. The grant available to newly Approved Enterprises was
decreased throughout recent years. Certain of our Israeli production facilities
further enjoyed accelerated depreciation under regulation extended from time to
time and other deductions. We cannot provide assurance that we will, in the
future, be eligible for or receive such or similar grants.
13
Item 2 Properties
We maintain our principal executive offices and a sales office in 23,500
square feet of leased space in Fort Lee, New Jersey. We operate company-owned
manufacturing facilities and utilize third party toll manufacturers. The chart
below sets forth the locations and sizes of the principal manufacturing and
other facilities operated by us and uses of such facilities, all of which are
owned, except as noted.
Approximate
Location Square Footage Uses
- -------------------------------------- -------------- ----------------------------------
Animal Health and Nutrition
Bangkok, Thailand(a).................. 500 Sales
Braganca Paulista, Brazil............. 35,000 Sales, Manufacturing and
Administrative
Bremen, Indiana....................... 50,000 Sales, Premixing and Warehouse
Buenos Aires, Argentina(a)............ 900 Sales and Administrative
Fairfield, New Jersey(a).............. 9,600 Administrative
Guarulhos, Brazil(b).................. 1,234,000 Sales, Premixing, Manufacturing and
Administrative
Hong Kong, China(a)................... 750 Sales and Administrative
Kuala Lumpur, Malaysia(a)............. 7,300 Sales, Premixing and Warehouse
Ladora, Iowa.......................... 9,500 Warehouse
Lee's Summit, Missouri(a)............. 1,500 Sales
Marion, Iowa.......................... 32,500 Premixing and Warehouse
Petach Tikva, Israel.................. 60,000 Sales, Premixing, Warehouse and
Administrative
Pretoria, South Africa(a)............. 3,200 Sales and Administrative
Quincy, Illinois(c)................... 50,000 Sales, Warehouse, Research and
Administrative
Rixensart, Belgium(d)................. 865,000 Sales, Manufacturing, Research and
Administrative
Ramat Hovav, Israel................... 140,000 Manufacturing and Research
Regina, Canada(a)..................... 1,000 Sales and Administrative
Queretaro, Mexico(a).................. 3,500 Sales and Administrative
Santiago, Chile(a).................... 6,500 Sales and Administrative
Sydney, Australia(a).................. 3,500 Sales and Administrative
Valencia, Venezuela(a)................ 1,100 Sales and Administrative
Specialty Chemicals
Garland, Texas........................ 20,000 Manufacturing
Joliet, Illinois...................... 34,500 Manufacturing
Reading, United Kingdom(a)............ 3,100 Sales and Administrative
Santa Fe Springs, California(e)....... 90,000 Manufacturing
Stradishall, United Kingdom........... 20,000 Sales, Manufacturing and Administrative
Sumter, South Carolina................ 123,000 Manufacturing and Research
- ----------
(a) This facility is leased. Our leases expire through 2027. For information
concerning our rental obligations, see Note 15 to our Consolidated Financial
Statements included herein.
(b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the
active ingredients semduramicin-mycelial and salinomycin. The plant also
produces Aviax(R), Terramycin(R), Stafac(R) and Coxistac(R) Granular
formulations. The plant is cGMP compliant and is FDA approved.
(c) Comprises three facilities, including a warehouse, laboratory and office
facility.
(d) Our Rixensart, Belgium plant utilizes fermentation processes to produce the
active ingredients semduramicin-crystalline and virginiamycin. The plant
also produces Stafac(R) formulations and is responsible for all of our
fermentation development activities. The plant has been approved by the FDA
and is cGMP compliant.
(e) We lease the land under this facility from a partnership owned by Jack
Bendheim, Marvin Sussman and James Herlands. See "Certain Relationships and
Related Transactions."
Our subsidiary, CP Chemicals, Inc., leases portions of a previously owned
inactive, former manufacturing facility in Sewaren, New Jersey, and another of
our subsidiaries owns inactive, former manufacturing facilities in Powder
Springs, Georgia, Union, Illinois, Union City, California and Wilmington,
Illinois.
14
We believe that our existing and planned facilities are and will be adequate
for the conduct of our business as currently conducted and as currently
contemplated to be conducted.
We and our subsidiaries are subject to extensive regulation by numerous
governmental authorities, including the FDA and corresponding state and foreign
agencies, and to various domestic and foreign safety standards. Our
manufacturing facilities in Ramat Hovav, Israel, Rixensart, Belgium and
Guarulhos, Brazil manufacture products that conform to the FDA's cGMP
regulations. Three domestic facilities involved with recycling have final RCRA
Part B hazardous waste storage and treatment permits. Our regulatory compliance
programs include plans to achieve compliance with international quality
standards known as ISO 9000 standards, which became mandatory in Europe in 1999
and environmental standards known as ISO 14000. The FDA is in the process of
adopting the ISO 9000 standards as regulatory standards for the United States,
and it is anticipated that these standards will be phased in for U.S.
manufacturers over a period of time. Our plant in Petach Tikva, Israel has
achieved ISO 9000 certification. We do not believe that adoption of the ISO 9000
standards by the FDA will have a material effect on our financial condition,
results of operations or cash flows.
Item 3. Legal Proceedings
Reference is made to the discussion above under "Item 1. Business -
Environmental Matters" for information as to various environmental investigation
and remediation obligations of our subsidiaries associated principally with
their recycling and production facilities and to certain legal proceedings
associated with such facilities.
In addition to such matters, we or certain of our subsidiaries are subject
to certain litigation described below.
On or about April 17, 1997, CP and we were served with a complaint filed by
Chevron U.S.A. Inc. ("Chevron") in the United States District Court for the
District of New Jersey, alleging that the operations of CP at its Sewaren plant
affected adjoining property owned by Chevron and alleging that we, as the parent
of CP, are also responsible to Chevron. In July 2002, a phased settlement
agreement was reached and a Consent Order entered by the Court. That settlement
is in the process of being implemented. Our portion of the settlement for past
costs and expenses through the entry of the Consent Order was $495,000 and is
included in selling, general and administrative expenses in the June 30, 2002
statement of operations and comprehensive income. Such amount was paid in July
2002. The Consent Order then provides for a period of due diligence
investigation of the property owned by Chevron. The investigation has been
conducted and the results are under review. The investigation costs are being
split with one other defendant, Vulcan Materials Company. Upon completion of the
review of the results of the investigation, a decision will be made whether to
opt out of the settlement or proceed. If no party opts out of the settlement,
Phibro Animal Health Corporation and CP will take title to the adjoining Chevron
property, probably through the use of a three-member New Jersey limited
liability company. In preparation to move forward, a limited liability company
has been formed, with Vulcan Materials Company as the third member. We also have
commenced negotiations with Chevron regarding its allocation of responsibility
and associated costs under the Consent Order. While the costs cannot be
estimated with any degree of certainty at this time, we believe that insurance
recoveries will be available to offset some of those costs.
The Company's Phibro-Tech subsidiary was named in 1993 as a potentially
responsible party ("PRP") in connection with an action commenced under CERCLA by
the EPA, involving a former third-party fertilizer manufacturing site in
Jericho, South Carolina. An agreement has been reached under which we have
agreed to contribute up to $900,000 of which $634,596 has been paid as of June
30, 2004. Some recovery from insurance and other sources is expected. We have
also accrued our best estimate of any future costs.
Phibro-Tech, Inc. has resolved certain alleged technical permit violations
with the California Department of Toxic Substance Control ("DTSC") and has
reached an agreement to pay $425,000 over six (6) years as a result. The annual
payments required under this agreement are not expected to have any material
adverse impact on us.
In February 2000, the EPA notified numerous parties of potential liability
for waste disposed of at a licensed Casmalia, California disposal site,
including a business, assets of which were originally acquired by a subsidiary
of ours in 1984. A settlement has been reached in this matter and we have paid
$171,103 in full settlement.
On or about April 5, 2002, the Company was served, as a potentially
responsible party, with an information request from the EPA relating to a
third-party superfund site in Rhode Island. The Company is investigating the
matter, which relates to events in the 1950's and 1960's, but management does
not believe that the Company has any liability in this matter.
On or about August 13, 2004 the Company was served with a Request for
Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating
to possible discharges into Turkey Creek in Sumter, South Carolina. The Company
is preparing its response to the Request for Information and believes that,
because its Sumter, South Carolina facility is distant from Turkey Creek and
does not discharge into Turkey Creek, there is a low probability of liability
associated with this matter.
15
We and our subsidiaries are party to a number of claims and lawsuits arising
out of the normal course of business including product liabilities and
governmental regulation. Certain of these actions seek damages in various
amounts. In most cases, such claims are covered by insurance. We believe that
none of the claims or pending lawsuits, either individually or in the aggregate,
will have a material adverse effect on our financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended June 30, 2004.
16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Repurchases of Equity Securities
(a) Market Information. There is no public trading market for our common
equity securities.
(b) Holders. As of June 30, 2004, there was one holder of our Class A
Common Stock and two holders of our Class B Common Stock.
(c) Dividends. We did not declare dividends on any of our common stock
during the two years ended June 30, 2004.
Item 6. Selected Financial Data
The following selected consolidated financial data as of and for fiscal
years ended June 30, 2000, 2001, 2002, 2003 and 2004 have been derived from our
audited consolidated financial statements. The selected consolidated financial
data reflect our Odda, Carbide, MRT and La Cornubia businesses as discontinued
operations for all periods presented. You should read the information set forth
below in conjunction with our "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this Report.
Fiscal Years Ended June 30,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(Dollars in thousands, except ratios)
Results of Operations:
Net sales $ 261,769 $ 302,328 $ 328,676 $ 341,746 $ 358,274
Cost of goods sold 201,320 234,784 247,411 251,200 267,871
--------- --------- --------- --------- ---------
Gross profit 60,449 67,544 81,265 90,546 90,403
Selling, general and administrative
expenses 47,528 61,624 70,636 65,050 66,128
Curtailment of operations at manufacturing
facility (1,481) -- -- -- --
Costs of non-completed transaction -- -- -- -- 5,261
--------- --------- --------- --------- ---------
Operating income 14,402 5,920 10,629 25,496 19,014
Interest expense 14,520 17,919 18,070 16,281 18,618
Interest (income) (600) (566) (346) (85) (130)
Other expense (income), net (1,452) (1,463) 3,349 1,539 (781)
Net (gain) on extinguishment of debt -- -- -- -- (23,226)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 1,934 (9,970) (10,444) 7,761 24,533
Provision (benefit) for income taxes 1,143 (24) 14,767 10,060 7,969
--------- --------- --------- --------- ---------
Income (loss) from continuing operations 791 (9,946) (25,211) (2,299) 16,564
Income (loss) from discontinued operations 9,262 (4,949) (26,559) (14,577) (1,625)
(Loss) on disposal of discontinued
operations -- -- -- (683) (2,089)
--------- --------- --------- --------- ---------
Net income (loss) 10,053 (14,895) (51,770) (17,559) 12,850
Change in derivative instruments -- -- 1,062 (981) (72)
Change in foreign currency translation
adjustment 55 (5,146) (6,125) 7,377 (776)
--------- --------- --------- --------- ---------
Comprehensive income (loss) $ 10,108 $ (20,041) $ (56,833) $ (11,163) $ 12,002
========= ========= ========= ========= =========
17
Fiscal Years Ended June 30,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
Net income (loss) $ 10,053 $ (14,895) $ (51,770) $ (17,559) $ 12,850
Excess of the reduction of redeemable
preferred stock over total assets
divested and costs and liabilities
incurred on the Prince Transactions -- -- -- -- 20,138
Dividends and equity value accreted on Series
B and C redeemable preferred stock -- (8,172) (7,623) (12,278) (11,463)
--------- --------- --------- --------- ---------
Net income (loss) available to common shareholders $ 10,053 $ (23,067) $ (59,393) $ (29,837) $ 21,525
========= ========= ========= ========= =========
Balance Sheet Data:
Cash and cash equivalents $ 2,403 $ 14,845 $ 6,419 $ 11,179 $ 5,568
Total assets 258,450 330,019 296,444 274,347 241,369
Long-term debt 139,685 139,455 136,641 102,263 158,018
Series B and C redeemable preferred stock -- 48,980 56,602 68,881 24,678
Total stockholders' equity (deficit) 31,618 3,405 (61,189) (84,510) (63,833)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information should be read in conjunction with the consolidated
financial statements and related notes contained in this Report. The Company's
Odda, Carbide, MRT and LaCornubia businesses have been classified as
discontinued operations. This discussion presents information only for
continuing operations, unless otherwise indicated. The Company presents its
consolidated financial statements on the basis of its fiscal year ending June
30. All references to years 2004, 2003, and 2002 in this discussion refer to the
fiscal year ended June 30 of that year.
General
The Company is a leading diversified global manufacturer and marketer of a
broad range of animal health and nutrition products, specifically medicated feed
additives (MFAs) and nutritional feed additives (NFAs), which are sold
throughout the world predominantly to the poultry, swine and cattle markets.
MFAs are used preventatively and therapeutically in animal feeds to produce
healthy livestock. The Company believes it is the third largest manufacturer and
marketer of MFAs in the world, and that certain of its MFA products have leading
positions in the marketplace. The Company is also a specialty chemicals
manufacturer and marketer, serving primarily the United States pressure-treated
wood and chemical industries. The Company has several proprietary products, and
many of the Company's products provide critical performance attributes to
customers' products, while representing a relatively small percentage of total
end-product cost.
In August 2003, the Company completed the sale of MRT for net proceeds after
transaction costs of approximately $13.8 million. In December 2003, the Company
completed the divestiture of substantially all of the assets of The Prince
Manufacturing Company (see discussion below under "Prince Transactions").
On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA
("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The
Company believes that, as a result of the bankruptcy filing by La Cornubia, it
is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding
Company with no assets except for its investment in La Cornubia, may also file
for bankruptcy in France. The Company does not believe that La Cornubia's
bankruptcy filing, nor the possible bankruptcy filing by LC Holding, will have a
material adverse effect on its financial condition or results of operations.
During 2004, the Company incurred $5.3 million of costs in connection with a
potential acquisition transaction that was not completed. The Company has
charged the costs to expense in its 2004 results. The costs primarily consisted
of professional fees for services in connection with the transaction.
The Company's ability to fund its operating plan relies upon 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 amended
senior credit facility based on its forecasted operating plan. In the event of
adverse operating results and/or violation of covenants under this facility,
there can be no assurance that the Company would be able to obtain waivers or
amendments on favorable terms, if at all. The Company's 2005 operating plan
projects adequate liquidity throughout the year, with periods of reduced
availability around the dates of the semi-annual interest payments due November
1, 2004 and June 1, 2005. The Company is pursuing additional cost reduction
activities, working capital improvement plans, and sales of non-strategic assets
to ensure additional liquidity. The Company also has availability under foreign
credit lines that would be available as needed. The Company also has undertaken
a strategic review of its manufacturing capabilities, and is currently
increasing inventory levels of certain products to enhance future flexibility
and reduce cost. There can be no assurance the Company will be successful in any
of the above-noted actions.
18
Refinancing
On October 21, 2003, the Company issued 105,000 units consisting of $85.0
million of its 13% Senior Secured Notes due 2007 (the "US Senior Notes") and
$20.0 million 13% of Senior Secured Notes due 2007 of Philipp Brothers
Netherlands III B.V. (the "Dutch Senior Notes" and, together with the US Senior
Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiary of the
Company (the "Dutch issuer"). The Company used the proceeds from the issuance
to: (i) repurchase $52.0 million of its 9 7/8% Senior Subordinated Notes due
2008 at a price equal to 60% of the principal amount thereof, plus accrued and
unpaid interest; (ii) repay its senior credit facility of $34.9 million
outstanding at the repayment date; (iii) satisfy, for a payment of approximately
$29.3 million certain of its outstanding obligations to Pfizer Inc., including:
(a) $20.1 million aggregate principal amount of its promissory note plus accrued
and unpaid interest, (b) $9.7 million of accounts payable, (c) $9.0 million of
accrued expenses, and (d) future contingent purchase price obligations under its
agreements with Pfizer Inc. by which the Company acquired Pfizer's medicated
feed additive business; and (iv) pay fees and expenses relating to the above
transactions.
A net gain on extinguishment of debt is included in the Company's condensed
consolidated statement of operations, calculated as follows (amounts in
thousands):
Net Gain on Repurchase of 9 7/8% Senior Subordinated Notes due 2008:
Principal amount of repurchased notes $ 51,971
Repurchased at 60% of principal amount (31,183)
Transaction costs (4,107)
--------
Net gain on repurchase of notes 16,681
--------
Loss on repayment of senior credit facility (1,018)
--------
Net Gain on Payment of Pfizer Obligations:
Obligations paid:
-promissory note 20,075
-accrued interest on promissory note 1,015
-accounts payable and accrued expenses 18,788
--------
Total obligations paid 39,878
Cash payment to Pfizer (29,315)
Transaction costs (3,000)
--------
Net gain on payment of Pfizer obligations 7,563
--------
Net gain on extinguishment of debt $ 23,226
========
The US Senior Notes and the Dutch Senior Notes are senior secured
obligations of each of the Company (the "US Issuer") and the Dutch issuer,
respectively. The US Senior Notes and the Dutch Senior Notes are guaranteed on a
senior secured basis by all the US Issuer's domestic restricted subsidiaries,
and the Dutch Senior Notes are guaranteed on a senior secured basis by the US
Issuer and by the restricted subsidiaries of the Dutch issuer, presently
consisting of Phibro Animal Health SA. The US Senior Notes and related
guarantees are collateralized by substantially all of the US Issuer's assets and
the assets of its domestic restricted subsidiaries, other than real property and
interests therein, including a pledge of all the capital stock of such domestic
restricted subsidiaries. The Dutch Senior Notes and related guarantees are
collateralized by a pledge of all the accounts receivable, a security interest
or floating charge on the inventory to the extent permitted by applicable law,
and a mortgage on substantially all of the real property of the Dutch issuer and
each of its restricted subsidiaries, a pledge of 100% of the capital stock of
each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by
the Dutch issuer to its restricted subsidiaries and substantially all of the
assets of the U.S. guarantors, other than real property and interests therein.
The indenture governing the Senior Secured Notes provides for optional
make-whole redemptions at any time prior to June 1, 2005, optional redemption on
or after June 1, 2005, and requires the Company to make certain offers to
purchase Senior Secured Notes upon a change of control, upon certain asset sales
and from fifty percent (50%) of excess cash flow (as such terms are defined in
the indenture).
The Company timely filed a registration statement with the SEC on Form S-4
with respect to an exchange offer for the Senior Secured Notes, but due to
pending confidential acquisition negotiations, such registration statement has
not become effective.
19
Also, on October 21, 2003, the Company entered into a new replacement
domestic senior credit facility ("senior credit facility") with Wells Fargo
Foothill, Inc., providing for a working capital facility plus a letter of credit
facility. The aggregate amount of borrowings under such working capital and
letter of credit facilities initially could not exceed $25.0 million including
aggregate borrowings under the working capital facility up to $15.0 million. On
April 29, 2004, the Company amended the senior credit facility to increase the
aggregate amount of borrowings available under such working capital and letter
of credit facilities from $25.0 million to $27.5 million and to increase the
amount of aggregate borrowings available under the working capital facility from
$15.0 million to $17.5 million. As of September 24, 2004, the Company amended
the senior credit facility to: (i) increase the aggregate amount of borrowings
available under such working capital and letter of credit facilities from $27.5
million to $32.5 million; the amount of aggregate borrowings available under the
working capital facility remained unchanged at $17.5 million; (ii) amend the
EBITDA definition to exclude charges and expenses related to unsuccessful
acquisitions and related financings in an aggregate amount not to exceed $5.3
million for the period beginning January 1, 2004 and ending June 30, 2004; (iii)
amend the definition of Additional Indebtedness to exclude advances under the
working capital facility; (iv) amend the definition of Permitted Investments to
allow other investments made during the period from January 1, 2004 through June
30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish
covenant EBITDA levels for the periods ending after June 30, 2004. The amendment
was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1,
2004 for item (iv); and effective September 24, 2004 for all other items.
Borrowings 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.
Prince Transactions
Effective December 26, 2003 (the "Closing Date"), the Company completed the
divestiture of substantially all of the business and assets of The Prince
Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity
Partners II, LP and certain of its affiliates (the "Palladium Investors"), and
the related reduction of the Company's preferred stock held by the Palladium
Investors (collectively the "Prince Transactions").
Pursuant to definitive purchase and other agreements executed on and
effective as of the Closing Date, the Prince Transactions included the following
elements: (i) the transfer of substantially all of the business and assets of
PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock
owned by the Palladium Investors from $72.2 million to $16.5 million (accreted
through the Closing Date) by means of the redemption of all of its shares of
Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii)
the termination of $2.2 million in annual management advisory fees payable by
the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium
Investors in respect of the portion of the Company's Preferred Stock not
exchanged in consideration of the business and assets of PMC; (v) the agreement
of the Buyer to pay the Company for advisory fees for the next three years of
$1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid
at closing by the Buyer and satisfied for $1.3 million, the net present value of
such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron
oxide products and to provide certain mineral blending services to the Company's
Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue
to provide the Buyer with certain laboratory, MIS and telephone services, all on
terms substantially consistent with the historic relationship between Prince
Agri and PMC, and to lease to Buyer office space used by PMC in Quincy,
Illinois. The Company has an agreement to receive certain treasury services from
Palladium for $0.1 million per year. Pursuant to definitive agreements, the
Company made customary representations, warranties and environmental and other
indemnities, agreed to a post-closing working capital adjustment, paid $4.0
million in full satisfaction of all intercompany debt owed to PMC, paid a
closing fee to Palladium of $0.5 million, made certain capital expenditure
adjustments included as part of the intercompany settlement amount, and agreed
to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million
of its accounts receivable. The Company established a $1.0 million letter of
credit escrow for two years to secure its working capital adjustment and certain
indemnification obligations. The Company agreed to indemnify the Palladium
Investors for a portion, at the rate of $0.65 for every dollar, of the amount
they receive in respect of the disposition of Buyer for less than $21.0 million
up to a maximum payment by the Company of $4.0 million (the "Backstop
Indemnification Amount"). The Backstop Indemnification Amount would be payable
on the earlier to occur of July 1, 2008 or six months after the redemption date
of all of the Company's Senior Secured Notes due 2007 if such a disposition
closes prior to such redemption and six months after the closing of any such
disposition if the disposition closes after any such redemption. The Company's
obligations with respect to the Backstop Indemnification Amount will cease if
the Palladium Investors do not close the disposition of Buyer by January 1,
2009. The definition of "Equity Value" in the Company's Certificate of
20
Incorporation was amended to reduce the multiple of trailing EBITDA payable in
connection with any future redemption of Series C Preferred to 6.0 from 7.5. The
amount of consideration paid and payable in connection with the Prince
Transactions and all matters in connection therewith were determined pursuant to
arm's length negotiations.
The excess of the reduction in redeemable preferred stock over total assets
divested and costs and liabilities incurred on the Prince Transactions was
recorded as a decrease to accumulated deficit on the Company's condensed
consolidated balance sheet at December 31, 2003, and was calculated as follows
(amounts in thousands):
Series B & C Redeemable Preferred Stock:
Accreted value pre-transaction $72,184
Accreted value post-transaction 16,517
-------
Reduction in redeemable preferred stock 55,667
-------
Assets Divested and Costs Incurred:
PMC net assets divested 7,430
Cash paid to Palladium Investors for:
-reduction of redeemable preferred stock 10,000
-settlement of PMC intercompany debt 3,958
-working capital adjustment 1,331
-closing fee 500
Transaction costs 8,310
Contingent Backstop Indemnification Amount accrued 4,000
-------
Total assets divested and costs and liabilities incurred 35,529
-------
Excess amount recorded as a decrease to accumulated deficit $20,138
=======
PMC is included in the Company's Industrial Chemicals segment. The divestiture
of PMC has not been reflected as a discontinued operation due to the existence
of the Backstop Indemnification and continuing supply and service agreements.
Other Risks and Uncertainties
The use of antibiotics in medicated feed additives is a subject of
legislative and regulatory interest. The issue of potential for increased
bacterial resistance to certain antibiotics used in certain food-producing
animals is the subject of discussions on a worldwide basis and, in certain
instances, has led to government restrictions on the use of antibiotics in
food-producing animals. The sale of feed additives containing antibiotics is a
material portion of the Company's business. Should regulatory or other
developments result in further restrictions on the sale of such products, it
could have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The testing, manufacturing, and marketing of certain products are subject
to extensive regulation by numerous government authorities in the United States
and other countries.
The Company has significant assets located outside of the United States,
and a significant portion of the Company's sales and earnings are attributable
to operations conducted abroad.
The Company has assets located in Israel and a portion of its sales and
earnings are attributable to operations conducted in Israel. The Company is
affected by social, political and economic conditions affecting Israel, and any
major hostilities involving Israel as well as the Middle East or curtailment of
trade between Israel and its current trading partners, either as a result of
hostilities or otherwise, could have a material adverse effect on the Company.
The Company's operations, properties and subsidiaries are subject to a wide
variety of complex and stringent federal, state, local and foreign environmental
laws and regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of certain
materials and wastes, the remediation of contaminated soil and groundwater, the
manufacture, sale and use of pesticides and the health and safety of employees.
As such, the nature of the Company's current and former operations and those of
its subsidiaries exposes the Company and its subsidiaries to the risk of claims
with respect to such matters.
21
Summary Consolidated Results of Continuing Operations
Year Ended June 30,
------------------------------
2004 2003 2002
---- ---- ----
(Thousands)
Net sales $ 358,274 $ 341,746 $ 328,676
Gross margin 90,403 90,546 81,265
Selling, general and administrative expenses 66,128 65,050 70,636
Costs of non-completed transaction 5,261 -- --
Operating income 19,014 25,496 10,629
Interest expense, net 18,488 16,196 17,724
Other expense (income), net (781) 1,539 3,349
Net (gain) on extinguishment of debt (23,226) -- --
Income (loss) from continuing operations $ 24,533 $ 7,761 $ (10,444)
2004 Compared with 2003
Net Sales of $358.3 million increased $16.5 million, or 5%. Animal Health
and Nutrition sales of $265.4 million grew $14.7 million, or 6%, due to volume
increases. Specialty Chemical group sales (comprised of the Industrial
Chemicals, Distribution and All Other segments) of $92.9 million increased $1.8
million, or 2%, primarily due to volume increases in all segments, offset by a
decrease in PMC sales. The Specialty Chemical group included PMC sales of $11.1
million and $22.3 million for 2004 and 2003, respectively.
Gross Profit of $90.4 million decreased $0.1 million to 25.2% of net sales,
compared with 26.5% in 2003. Animal Health and Nutrition gross profit decreased
due to lower average selling prices and unfavorable currency related to the
effect of the Euro on Belgium manufacturing costs. Improvements in the Specialty
Chemical group partially offset the Animal Health and Nutrition decline. The
Specialty Chemical group included PMC gross profit of $3.6 million and $6.2
million, respectively, for the fiscal 2004 and 2003 periods.
Gross profit increased $2.0 million in the fourth quarter of 2004 due to an
agreement related to the production and sale of amprolium, an anticoccidial MFA.
The Company acquired the rights to sell amprolium in most international markets.
In payment for the acquired rights, the Company relinquished its claims against
the seller for certain purchase order commitments, and will make $2.1
22
million of cash payments to the seller over the next five years. The present
value of these payments is $1.9 million and was recorded as a liability. The
$2.4 million value of the purchase order commitments was recorded as a reduction
in cost of goods sold and inventory, and an intangible asset of $4.3 million was
recorded representing the fair value of the acquired rights and is included on
the Company's balance sheet at June 30, 2004. The Company will amortize this
intangible over a 10 year period. No amortization was recorded in 2004.
Amortization expense for each of the next five years from 2005 to 2009 is
expected to be $0.4 million per year.
Selling, General and Administrative Expenses of $66.1 million increased $1.1
million. Expenses in the operating segments, excluding PMC, approximated the
prior year primarily due to lower environmental and severance accruals offset in
part by unfavorable foreign exchange rates. Corporate expenses in the current
fiscal year reflect the elimination of the Palladium annual management fee of
$2.25 million as of December 31, 2003 and income of $0.5 million from the PMC
Advisory fee. Corporate expenses increased in fiscal 2004 due to higher
depreciation and amortization charges and insurance costs offset by lower
benefit charges. Corporate expenses in fiscal 2003 included vitamin settlement
income of $3.0 million. PMC expenses were $1.3 million and $2.6 million for 2004
and 2003, respectively.
Costs of non-completed transaction. During 2004, the Company incurred $5.3
million of costs in connection with a potential acquisition transaction that was
not completed. The Company has charged the costs to expense in its 2004 results.
The costs primarily consisted of professional fees for services in connection
with the transaction.
Net gain on extinguishment of debt. The Company recorded a net gain on the
extinguishment of debt of $23.2 million due to the repurchase of senior
subordinated notes ($16.7 million), and the repayment of Pfizer obligations
($7.6 million) offset in part by a loss on repayment of the senior credit
facility ($1.0 million).
Operating Income of $19.0 million decreased $6.5 million to 5.3% of sales.
The decrease was primarily due to the non-completed transaction costs described
above. In addition, gross profit declined in the Animal Health and Nutrition
segment but was offset in part by improved operating performance of the
Specialty Chemical group. PMC contributed $2.3 million and $3.6 million for 2004
and 2003, respectively.
Interest Expense, Net of $18.5 million increased $2.3 million from the prior
year, primarily due to higher borrowing levels and also higher average interest
rates associated with the issuance of the Company's Senior Secured Notes.
Other (Income) Expense, Net of